E.D.N.Y.: Collection Agency Can Enforce Arbitration Clause of Underlying Credit Agreement

The Eastern District of New York just provided some relief for agencies embattled with class action lawsuits. In its decision in Clarke v. Alltran Financial, LP f/k/a United Recovery Systems, LP, 2018 WL 1036951 (E.D.N.Y. Feb. 22, 2018), the court found that a collection agency can enforce the arbitration clause of an underlying credit agreement that the consumer entered into with the original creditor. 

Read the decision here. 

Factual and Procedural Background 

Donovan Clarke entered into a credit agreement with Citibank.  The credit agreement contained an arbitration clause that states in pertinent part: 

Either you or we may, without the other’s consent, elect mandatory, binding arbitration for any claim, dispute, or controversy between you and us (called “Claims”). 

…

Whose Claims are subject to arbitration?  Not only ours and yours, but also Claims made by or against anyone connected with us or you or claiming through us or you, such as a co-applicant, authorized user of your account, an employee, agent, representative, affiliated company, predecessor or successor, heir assignee, or trustee in bankruptcy. 

After Clarke failed to make payments on this account, Citibank “retained and authorized” Alltran to collect the balance due on behalf of Citibank. While attempting to collect this debt, Alltran sent a letter to Clarke. 

Clarke, through his counsel at the Law Offices of Gus Michael Farinella, P.C., filed a putative class action claiming that Alltran’s letter violates the FDCPA by misstating the amount due. Alltran filed a motion to compel the arbitration clause in the underlying credit agreement, which Clarke opposed. 

The Decision

The court found that Alltran can compel the arbitration clause of the underlying agreement under two theories.  

First, following the well-established principles of contract interpretation, the plain language of the underlying agreement allows Alltran to compel the arbitration clause. The court looked to state law to determine the interpretation of the arbitration agreement. Here, the choice of law in the contract was South Dakota. When interpreting contractual terms, South Dakota instructs courts to look at the parties’ intent, to examine the contract as a whole, and to “give words their plain and ordinary meaning” (internal citation omitted). Using these principles as a guide, the court found that the underlying agreement allowed Alltran to compel arbitration. 

Clarke unsuccessfully argued that the contract excludes a third-party like Alltran from enforcing the clause since the provision only states that either “you” (Clarke) or “we” (Citibank) can compel arbitration. The court discarded this argument, finding that such an interpretation looks at a sentence in isolation rather than looking at the contract as a whole. The “Whose Claims are subject to arbitration?” section plainly states that the right to enforce binding arbitration extends to parties other than just Clarke and Citibank. 

Second, the court found that Alltran, which Citibank “retained and authorized” to collect Clarke’s balance, was acting as Citibank’s agent and thus was entitled to enforce the arbitration clause of the underlying credit agreement.  

Clarke attempted to argue that case law, including White v. Sunoco, Inc., 870 F.3d 257 (3rd Cir. 2017) precludes Alltran from compelling arbitration since Sunoco was unable to do so for the same underlying credit agreement. The court, however, found Sunoco distinguishable from the instant case. In Sunoco, the plaintiff claimed that Sunoco fraudulently induced him to obtain a Sunoco rewards card through marketing materials. The Third Circuit ultimately precluded Sunoco from compelling the arbitration clause because the claims of the suit were “governed by an entirely separate agreement between [plaintiff] and Sunoco” and had nothing to do with the terms of the underlying agreement. In the present case, Clarke’s underlying claims are related to the collection of the balance due on the account, which is the subject of the underlying agreement.

Taking all of this into consideration, the court found that Alltran had the right to compel the arbitration clause and referred the case to arbitration. 

Analysis 

Many plaintiffs’ attorneys file suits against collection agencies as putative class actions. Many believe this is a tactic to secure a larger settlement amount since a class action puts more at stake for the agency, thus justifying a higher dollar value of a settlement. Class actions cost more to defend and have higher liability for agencies than individual suits. When weighing whether to settle a claim, these are all items that agencies take into consideration. 

With this decision, plaintiffs’ counsel in Eastern District of New York just lost this bargaining tactic, at least against agencies who collect on behalf of creditors that have arbitration clauses in their credit agreements. Arbitration clauses typically contain a class waiver provision, where the consumer agrees to waive the right to participate as a representative or member of a class. Since an agency can compel the arbitration clause, they compel the class waiver provision along with it.

Compelling the arbitration clause is a great way to get a case resolved out of court without the formalities involved in a lawsuit. While arbitration makes the dispute and its outcome non-public, the other side of this coin is that arbitration is expensive. The agency will likely be required to pay the cost associated with the arbitration, which can cost several thousand dollars depending on the arbitrator used. Arbitrators are also known to “split the baby” when it comes to deciding the dollar value of any award. This means the agency will likely have to pay the arbitration costs and, at the very least, some sort of amount to plaintiff.

In the end, this decision allows agencies to add another tool to their litigation defense toolbox.  Especially in a litigious jurisdiction like the Eastern District of New York, this tool is happily accepted.