Arbitration Clauses: What Works, What Doesn’t, and How Creditors Can Help

One litigation defense tool that may be available to debt collectors in Fair Debt Collection Practices Act (FDCPA) cases is moving to compel the arbitration clause and class waiver in the underlying credit agreement. Litigation defense is expensive (as we've discussed with the litigation dilemma); arbitration clauses allow debt collectors to limit this exposure and liability.

However, the question of whether a debt collector may enforce such a clause largely depends on the language used by the original creditor in the underlying credit agreement. Below we will explore some examples of when debt collectors were successful and not successful in enforcing the arbitration clause, as well as one way creditors can help in this regard.

When It Works: The Gold Standard of Abritration Clauses

The most recent example of a debt collector successfully compelling arbitration is also the best example of arbitration clause language that supports debt collectors. In George v. Midland Funding, LLC, et al. (D.N.J. 2019), the court granted defendant’s motion to compel arbitration despite plaintiff’s opposition. The language in the underlying credit agreement specifically discussed arbitration in the context of debt collection efforts. The agreement states:

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 such as… [an] affiliated company, predecessor or successor, heir, [or] assignee…

What about debt collections? We and anyone to whom we assign your debt will not initiate an arbitration proceeding to collect a debt from you unless you assert a Claim against us or our assignee. We and any assignee may seek arbitration on an individual basis of any Claim asserted by you, whether in arbitration or any proceeding, including in a proceeding to collect a debt…

The court found this language to be clear cut, concluding:

[T]he Agreement broadly incorporates any claim related to the Agreement, including claims asserted against debt collectors or assignees like Defendants. The Agreement further contains a class action waiver and requires any questions related to arbitrability and the enforceability of the arbitration agreement must be resolved in arbitration. The Court is satisfied that there is a valid agreement to arbitrate and that it covers the claims alleged in the complaint.

Folks, this agreement language is the gold standard when it comes to debt collectors compelling arbitration. The one addition that would make it better is if it included agents as well as assignees.

Other examples of where the court found the arbitration clause applies to debt collectors include:

• Correa v. N. Am. Recovery (N.D. Ill. 2019): The agreement states that the right to arbitrate governs disputes with the bank and any of its assignees. Since defendant was an assignee, the right to arbitrate transferred with the assignment. Since the agreement stated that the arbitration clause covers "any disputes arising from the collection of amounts you owe," the FDCPA suit falls within the scope of the agreement.
• Brooks v. N.A.R., Inc. (N.D. Ohio 2019): Where the arbitration clause covered creditor and its assignees, and the court found the debt collector to be an assignee of the debt.
• Christensen v. Barclays Bank Del. (D. Mass. 2019): The Court found that the arbitration clause was mandatory and applied to the bank and its "agents," which the collections law firm qualified as.

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When It Doesn’t Work: Lack of Clarity Regarding Applicability to Debt Collectors

Unfortunately, most underlying credit agreements are not so clear-cut and hit a roadblock when debt collectors attempt to compel the arbitration in court. This usually occurs when the agreement is limited in its description of who the agreement applies to. Many arbitration agreements use the term “assignee,” which is a term that has a specific meaning in the legal context. To put it in non-legalese, assignment involves passing on a certain task and its benefit to another.

Ramirez v. Midland Funding, LLC, et al. (N.D. Ill. 2019) considered this issue. The court here found that while there was a true assignment of rights between the original creditor and debt buyer, the same did not exist between the debt buyer (now the current creditor) and the debt collector. Instead, the court found that this relationship was more reflective of an agency--where the task is assigned by the benefit goes back to the principal company.

But wait, didn’t we say in the above section that in Brooks v. N.A.R. the court found a debt collector to be an assignee? That is where the problem lies: different courts seem to reach different conclusions on whether a debt collector is an assignee. This leads to the next section.

How Creditors Can Help: Clarify Arbitration Clause Language in Credit Agreements

This is easier said than done, but something creditors can do to solve this dilemma is to clarify the language of the arbitration clause in their credit agreements. Simply stating that the clause applies to “assignees” may not be enough. Predicting whether a court will or will not consider a debt collector an assignee is as good as a coin toss. What works? Clearly stating in the underlying credit agreement that the arbitration clause and class waiver apply to debt collectors.

Another thing for creditors to keep in mind if they want to help their debt collectors out is this: timing is everything. Debt collectors will usually require an affidavit from the creditor in order to file a complete motion to compel, and the longer the debt collector has to wait for this, the more likely it becomes that the court will consider the arbitration clause waived.

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