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Activist Seventh Circuit panel helps out payday lender by re-writing arbitration clause picking corrupt firm

Activist Seventh Circuit panel helps out payday lender by re-writing arbitration clause picking corrupt firm

By Paul Bland, Senior Attorney 

In the race to the bottom to insulate corporations from wrongdoing using forced arbitration, two judges in the Seventh Circuit just made a bid for one of the most anti-consumer decisions of the year.

payday loans

For many years, the National Arbitration Forum was handling far more consumer arbitrations than any other arbitration company in America. There’s no way to sugarcoat it — the NAF was a deeply corrupt organization that sucked up to lenders and made all kinds of friendly little promises to lenders that it would favor them over consumers, and a host of information came to light over the years about the NAF’s outrageous behavior. In 2009, Lori Swanson, the Attorney General of Minnesota, sued the NAF because her office had discovered that an investor had both a $40 million ownership interest in the NAF (faintly camouflaged through a shell company) AND simultaneously owned the three largest debt collection law firms in the U.S. who were prosecuting tens of thousands of cases before the non-neutral arbitrators of NAF.

After the NAF was driven out of business, it was still named in a bunch of arbitration clauses. There was a great deal of litigation about what courts should do with the arbitration clauses picking the NAF: should the courts refuse to enforce the corporations’ efforts to compel arbitration, or should the courts re-write the clauses to pick some other corporation? Most of the courts around the country (including the reliably conservative U.S. Court of Appeals for the Fifth Circuit, the Illinois Supreme Court, the New Mexico Supreme Court, and the federal district courts in Seattle) had held that arbitration clauses naming the NAF could not be re-written to name another arbitrator.

Public Justice took the lead in the case in briefing and arguing this issue in the New Mexico Supreme Court. There were courts that re-wrote the clauses, most notably the U.S. Court of Appeals for the Third Circuit in a case with a biting dissent from the brilliant Judge Sloviter, but the clear majority of courts around the U.S. had found that because of the way the contracts were written (often saying that the NAF had to be the “exclusive” arbitration company), and because of the way the NAF’s rules were written (which, unlike the rules of the American Arbitration Association or other arbitration forums began with a Rule 1 insisting that only its hand-picked people could be arbitrators of cases handled under their rules), the selection of the NAF was an “integral term” of the arbitration clause. The idea was that if the parties had agreed (to the extent any consumer actually can be said to “agree” to forced arbitration clauses, which involves a leap of faith and the application of 18th-century ideas of consent to a modern setting where they don’t make much sense) to a contract where the identification of a particular arbitrator was a core, basic part of the deal, courts shouldn’t re-work the deal to create a new one.

And then yesterday brought new bad news for consumers. Joyce Green, a senior citizen living on social security, took out a loan a few years ago of $1,650 that was listed as having a 36 percent interest rate. She alleges that when certain “account maintenance fees” were considered, the actual interest rate was over 200 percent, which she argues is usurious under Illinois law. She also alleges that U.S. Cash Advance Illinois, LLC, which operated under the more exciting name of The Loan Machine, didn’t provide her with monthly statements for the first few months (what kind of lender won’t provide monthly statements?), but that when she did finally get a statement, after making three payments totaling almost $1,000, her principal balance had been reduced only from $1,650 to $1,517.

Ultimately, in an appeal of the case she filed, Green v. Cash Advance, famously outspoken conservative Judge Frank Easterbrook weighed in for helping out corporations who selected NAF, to ensure that they can still use their arbitration clauses to protect themselves from lawsuits. Rather than deciding what the parties to the contract meant by focusing solely on the language of the contract and the Rules of the NAF incorporated into the contract, as the Fifth Circuit or the various state supreme courts had done, Judge Easterbrook looked to “evidence” that he inferred from the world at large.

Tossing the “read the contract” approach overboard, Judge Easterbrook took sort of ad hoc judicial notice of his impression of the business world to guess that most corporations who had written contracts specifying that only the NAF and no one else could arbitrate cases really meant that they’d like pretty much anyone to arbitrate their cases. He inferred that the payday lender that had selected the corrupt NAF, now, in the wake of subsequent U.S. Supreme Court decisions that make arbitration clauses far more effective at wiping away any liability for corporations, would probably prefer to have some other arbitration company rather than actually face the consumer laws of any state. Based on this assumption, Judge Easterbrook re-wrote the contract and ruled for the payday lender. As Judge Hamilton’s vigorous dissent in the Green case notes, Judge Easterbrook’s opinion “made an extraordinary effort to rescue the payday lender defendant from its own folly, or perhaps its own fraud.”

Another day, another corporation that ignores consumer protection laws and walks away free due to mandatory arbitration. And even in this case, where the payday lender had drafted an arbitration clause that relied upon a corrupt organization that was shut down by a state law enforcement investigation, a Court jumped to help out the hapless predator. People who spend a lot of time listening to corporate lawyers explain how forced arbitration is supposedly terrific for consumers (“this hurts us more than it hurts you”) often hear them natter on about how courts just enforce arbitration contracts “as written.” 

Except in this case, one of the most conservative judges didn’t enforce the clause “as written,” when that would have ended up helping out consumers and hurting a predatory lender. So the next time I hear some libertarian-type explain about the importance of everyone consenting to the fine print of contracts they don’t read and courts blindly enforcing the terms, I’ll try not to roll my eyes (hey, I’m all about courtesy), but I won’t exactly take their words at face value either.