ATLANTA (Legal Newsline) – An arbitration clause in a payday loan contract came under scrutiny recently when a banking institution appealed a previous court’s ruling that found the provision unenforceable because it required parties to arbitrate in an unavailable forum.
The U.S. Court of Appeals for the 11th Circuit refused Aug. 29 to dismiss a class action lawsuit filed in December 2014 by plaintiff Jessica Parm in the U.S. District Court for the Northern District of Georgia. The appeal was brought by National Bank of California NA, which wanted the circuit court to compel the plaintiff to arbitrate her claims individually with the bank.
The circuit court, however, found the payday loan contract’s arbitration clause failed to clearly indicate the arbitration setting.
According to court documents, Parm had a checking account with National Bank. She filed a class action lawsuit in the district court against the financial institution, alleging the bank illegally authorized a payday lender she signed a 2013 contract with to auto-debit her account.
Parm had taken out a $1,000 loan over the internet with Western Sky Financial LLC, a South Dakota company owned by a member of the Cheyenne River Sioux Tribe. The loan was subject to certain fees and an annual interest rate of 233.71 percent, which totaled $4,831. The contract agreement contained a clause that required the parties to arbitrate disputes before the Cheyenne River Sioux Tribe.
In addition to alleging National Bank illegally allowed Western Sky to withdraw funds from her account, the plaintiff challenged the enforceability of the loan contract’s arbitration provision, alleging the tribe did not have an arbitral forum and that governing rules did not exist.
According to Western Sky’s lending contract, Parm had the right to select the arbitration organizations American Arbitration Association, Judicial Arbitration and Mediation Services, or other organization both parties could agree upon.
The contract also stipulated that the chosen arbitration organization’s rules and procedures would only be followed to the extent that those regulations would not contradict the law of the Cheyenne River Sioux Tribe. However, a Sioux arbitration panel was never established.
The Northern District Court of Georgia agreed with Parm and ruled that Western Sky’s arbitration clause was invalid. The subsequent ruling by the appellant court affirmed the decision but noted that unavailability would not have been reason enough to invalidate the arbitration clause if the parties’ selection of the Sioux Tribe as arbiter had not been essential to the contract.
Arbitration is common in the payday lender industry, attorney George Schneider told Legal Newsline. Schneider practices financial services dispute resolution for the Goodwin law firm. The law firm operates 10 offices internationally.
Despite the recent scrutiny, Schneider said, public policy favors arbitration because it is a more cost-effective method for resolving claims. Also, compared to litigating in federal and state courts, arbitration is a less formal, more streamlined and faster way to resolve claims.
“Arbitration not only allows both consumers and businesses to achieve results without tying matters up in litigation for a year but also helps relieve already overburdened federal and state court dockets,” Schneider said.
“In fact, arbitration clauses are usually presumed by courts to be enforceable, unless there is some reason not to do so.”
Schneider said he doesn’t know the company’s motivation for choosing a Sioux arbitration panel to settle disputes. It is possible, he said, Western Sky wanted to be consistent by choosing both Sioux law and a Sioux panel because its base of operation was in Sioux territory. Schneider said it is also unclear why a Sioux arbitration panel was never set up.
“Western Sky may have intended to do so and never followed through – perhaps thinking that its reference to the American Arbitration Association or the Judicial Arbitration and Mediation Services would be sufficient to save the clause,” he said.
“It is also not entirely clear that the court had full information about the capability of a Sioux arbitration panel and, thus, based its ruling on a general sense that tribal law is not sufficiently developed to accommodate arbitration, which is not necessarily true.”
In Western Sky’s case, Schneider said there are two takeaways for other lenders to consider. First, arbitration clauses should make it clear that U.S. federal law applies to contracts.
Second, arbitration clauses should explicitly provide an alternate method to arbitrate disputes if the chosen arbitration forum or arbitration rules become unavailable.
Western Sky is no longer issuing loans. That doesn’t mean other entities haven’t taken over the company’s contracted loans.
Those entities, however, might avoid using arbitration clauses in the jurisdictions Western Sky arbitration clauses have been found unenforceable. Schneider also thinks challenges to the lender’s arbitration clauses could pop up in other court jurisdictions. And, he said, those courts could reach different conclusions.