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Fair Debt Collection: 11.3.3 Debt Buyer’s Right to Enforce the Creditor’s Arbitration Agreement

When a debt buyer seeks to force a consumer’s debt collection claim into arbitration, the debt buyer has initial hurdles to overcome. The debt buyer must produce the credit agreement binding on the consumer that contains an arbitration requirement, the debt buyer must prove that it has been assigned the credit agreement,103 and it must prove it has rights to enforce the creditor’s arbitration agreement.

Fair Debt Collection: 11.3.4.1 Generally

Third-party collectors and collection attorneys typically do not enter into contracts with the consumer, and thus there will be no arbitration agreement between these parties. Instead, the collector or attorney will seek to piggy-back onto an arbitration agreement between the creditor and consumer.

Fair Debt Collection: 11.3.4.2 Primacy of the Arbitration Agreement’s Language

Courts first look to the plain language of the contract and the relationship between the collection agency or attorney and the original creditor to see whether the arbitration agreement extends to cover parties with that relationship to the original creditor.116 For example, one version of the GE Money Bank arbitration clause stated that it applied to disputes between the consumer and “us,” defined as the creditor’s parents, subsidiaries, predecessors, successors, assigns, employees, officers, and directors.

Fair Debt Collection: 11.3.4.3 Is the Collector an Agent?

A collection agency or collection attorney can only enforce an arbitration agreement as the agent of the creditor or the creditor’s assignee if there is an agency relationship. To shield themselves from liability for a debt collector’s misconduct, creditors and debt buyers often state in their contracts with debt collectors that the debt collectors are independent contractors and not agents. In that case, a debt collector should not be able to take advantage of language that an agreement applies to the creditor’s agents.135

Fair Debt Collection: 11.3.5.1 Waiting Too Long to Enforce Arbitration Agreement

A defendant debt buyer, debt collector, or collection attorney can waive the right to enforce an arbitration agreement by waiting too long in the court litigation to raise the arbitration requirement. By acting inconsistently with a known right, to the consumer’s prejudice, the defendant has waived the arbitration requirement.148 Such may be the case when the defendant first raises the arbitration requirement after extensive discovery, motions to dismiss or summary judgment, or other litigation activity.

Fair Debt Collection: 11.3.5.2 Refusing to Cooperate in the Arbitration Proceeding

The two major arbitration forums, the American Arbitration Association and JAMS (formerly known as Judicial Arbitration and Mediation Services, Inc.), require that the defendant business pay almost all of the arbitration fees and costs for consumer arbitrations (which can run into many thousands of dollars), with the consumer paying only $200 or $250. When the consumer proceeds to arbitration, the defendant may balk at the high arbitration fees and refuse to pay them or otherwise participate in the arbitration, which may result in AAA or JAMS refusing to proceed to arbitration.

Fair Debt Collection: 11.3.5.3 Waiver Based on Prior Collection Lawsuit

Where a collector first avails itself of the court system by bringing a collection action in state court, this may act as a waiver of the collector’s right to enforce an arbitration requirement where the consumer later sues the collector. The consumer will have a difficult time arguing for waiver where the consumer’s debt collection abuse claims are entirely distinct from the issues in the collector’s lawsuit.150

Fair Debt Collection: 11.3.6 Does the Consumer and the Nature of Consumer’s Claims Fall Under the Arbitration Agreement?

Because arbitration is a matter of contract, only disputes that the parties agree must go to arbitration must then go to arbitration. If a claim is outside the scope of disputes covered by the arbitration agreement, the consumer can bring that claim in court. In close cases, courts tend to favor finding that an arbitration agreement must be read carefully to determine what disputes it covers.

Fair Debt Collection: 11.3.7 Effect of Judgment in Prior Collection Action

The merger doctrine generally provides that, upon entry of a judgment, a plaintiff’s claims against a defendant are merged into the judgment. This means that when there is a judgment in a breach of contract collection action, at least certain of the collector’s rights under the contract cease. But courts generally find that the arbitration provision in the contract survives, even though other aspects of the contract (such as the obligation to pay money) is merged into the judgment.162

Fair Debt Collection: 11.3.9 Federal Law Prohibits Mandatory Arbitration in Mortgage Loans

The Truth in Lending Act (TILA) prohibits contract terms requiring the arbitration of disputes involving closed-end loans secured by a dwelling and open-end loans secured by a consumer’s principal dwelling.171 This TILA provision also provides that no other provision of such loans shall “bar a consumer from bringing an action” in court.172 TILA’s Regulation Z implements this provision, effective June 1, 2013.173 Because federal law limits a credito

Fair Debt Collection: 11.3.10 No Mandatory Arbitration Where Debt Incurred by Active-Duty Military Personnel or Their Dependents

The Talent-Nelson Military Lending Act prohibits creditors from enforcing mandatory arbitration agreements in certain types of consumer credit contracts against those who, at the time the agreement is made, were active -duty military personnel or their dependents.182 An arbitration requirement is unenforceable, even if the consumer is no longer a servicemember or a dependent of a servicemember, so long as the consumer was covered by the Act when the credit was originated.183 As a result, debt co

Fair Debt Collection: 11.3.11 Unavailability of the Sole Arbitration Provider?

Arbitration clauses in credit agreements typically specify one or two arbitration providers, such as the American Arbitration Association (AAA) or JAMS. Until a law enforcement action ended its ability to conduct consumer arbitrations in 2009, the National Arbitration Forum (NAF) was the preferred provider for many creditors.194

Fair Debt Collection: 11.3.12 Other Grounds to Challenge the Arbitration Clause’s Enforceability

In addition to challenges to an arbitration requirement set out earlier in this section, there are a number of other grounds to attack an arbitration requirement. The Federal Arbitration Act (FAA) finds arbitration clauses to be enforceable “save upon such grounds as exist at law or equity for the revocation of any contract.”197 One such ground to revoke any contract is unconscionability, and hundreds of decisions have found arbitration clauses unenforceable on this ground.198

Fair Debt Collection: 11.3.13 Does the Court or Arbitrator Decide the Challenge to the Arbitration Requirement?

In any challenge to an arbitration agreement, a preliminary issue is who decides the challenge, the court or the arbitrator. The Supreme Court has ruled that issues of enforceability are for the court unless there is a “delegation” clause giving the arbitrator authority to decide issues of enforceability of the arbitration agreement.205 Even if there is such a delegation clause, the issue is still for the court if the consumer’s challenge is whether an arbitration agreement was ever consummated.

Fair Debt Collection: 11.3.14 Bringing an Individual Case in Arbitration

While consumers typically are better off bringing a FDCPA or other debt collection harassment case before a court, rather than an arbitrator, sometimes there is no choice—either the arbitration clause is enforceable, or it is impractical to draw out the litigation by challenging the requirement’s enforceability. In that case, proper client representation may require that the case proceed in arbitration.

Fair Debt Collection: 11.3.15 Punitive Damages in Arbitration

When a debt harassment case is forced into arbitration, and the facts are egregious, a consumer should not shy away from pursuing punitive damages. Typically, neither an arbitration agreement nor the rules of an arbitration service provider will limit the availability of punitive damages. (If there is such a limitation, this may be grounds to find the arbitration requirement unenforceable.)208

Fair Debt Collection: 11.3.16 Class Arbitration

The 2011 Supreme Court decision in Concepcion has made class arbitration much less available to consumers, by allowing businesses to require consumers to give up their right to join in a class action either in court or in arbitration.213 Concepcion holds that the Federal Arbitration Act preempts a state rule that an arbitration clause’s ban on class arbitration is unconscionable.

Fair Debt Collection: 11.3.16a Mass Arbitration

Because of difficulties engaging in class arbitration or individual arbitration on behalf of many individual consumers, an increasingly utilized option is a procedure sometimes called “mass arbitration.” The practice takes its name from “mass torts,” which involves the filing of many individual personal injury complaints, often for product liability, toxic tort, or similar cases that involve factually similar predicates, but do not lend themselves to class treatment. Another name for mass arbitration is an “arbitration swarm.”

Fair Debt Collection: 11.4.1 Overview

The FDCPA’s purpose is to protect consumers from collection misconduct and resulting injuries. If the Act is to continue to accomplish its purpose, counsel and consumers bringing FDCPA claims as private attorneys general should keep in mind the public interest embodied in the statute as well as their own claims. It may be important for counsel to discuss with clients the possible effect of an individual case on the development of the law construing the Act.

Fair Debt Collection: 11.4.2.2 Class Actions Seeking FDCPA Damages

The FDCPA expressly provides for class-wide statutory damages “without regard to a minimum individual recovery”228 and the number of class actions under the FDCPA for both actual and statutory has been growing.229 The increasing numbers of very large interstate debt collection agencies and collection law firms has stimulated an increase in FDCPA class actions for damages, because such firms often have substantial net worth, leading to the possibility of increased recoveries.