Many collection agencies and other third-party debt buyers are not aware that they can take advantage of arbitration clauses, often found within the underlying contracts between the consumer and the original creditor. Upon notice of a consumer related lawsuit, collection and debt-buying agencies should contact the original creditor to see if an arbitration clause exists in the underlying contract (after notifying their attorneys, of course).
These clauses can serve to force arbitration of the consumer’s lawsuit and take the matter outside of the court system. These arbitration clauses are enforceable under the Federal Arbitration Act, and the U.S. Supreme Court has established a strong policy favoring arbitration, finding that it serves to streamline litigation and reduce the burden on court dockets across the country.
Assignment of Consumer’s Contract
In order for agencies to take advantage of arbitration clauses, there must be a valid assignment of the consumer’s contract from the original creditor to the collection agency. This means that the agency now possesses the original creditor’s rights with regard to the contract—including the right to enforce the arbitration clause. Usually, arbitration clauses are deliberately broad in scope to encompass any consumer related lawsuits that may arise out of the contract. Many clauses explicitly apply to collection activities relating to the consumer’s account.
Benefit of Arbitration
Upon being sued, if the underlying consumer contract contains an arbitration clause, the collection agency has a choice to make; should the arbitration clause be enforced, or should the case proceed through the regular court system?
The benefits of arbitration are obvious. Arbitration provides a private forum where disputes can be resolved more quickly than standard litigation. Further, many arbitration clauses contain class action waivers—which means consumers are barred from pursuing class-wide litigation and may only seek relief on an individual basis. Therefore, these class action waivers can save expenses by preventing the attorneys from litigating class certification motions and related issues in court.
Additionally, it is common for some plaintiffs’ attorneys to give up their lawsuit altogether when forced to proceed to arbitration. These practitioners simply do not feel that pursuing their lawsuits in a private, less formal forum is worth it, particularly if class claims are stricken.
Detriments Of Arbitration
While the benefits of arbitration can be understood easy enough, the perils and pitfalls are less known. Perhaps most importantly, agencies should not automatically conclude that arbitration clauses will always save money. It is important to remember that these clauses were initially put in place by the original creditor.
In many cases, these original creditors are large financial institutions who do not mind paying more upfront for speedier dispute resolution. In proceedings before the American Arbitration Association, filing and case initiation fees alone can be well over $2,000 just from the start. That figure also is not inclusive of the arbitrator’s fees—which can run anywhere from $1,500 to $2,500 per day for consumer disputes. Combined with standard attorneys’ fees, arbitration of a consumer related dispute could leave agencies with sticker shock.
Quick dispute resolution can also work against cost savings; because an arbitration typically occurs in a shorter time frame, the collection agency’s attorney’s fees will therefore be compressed in a condensed period. Standard litigation typically results in attorney’s fees accruing modestly over a longer period. Thus, decision-makers should think hard and consult their accounts payable departments when making arbitration related decisions, as cash flow issues can naturally arise.
The existence of an arbitration clause in an underlying consumer contract does not necessarily mean that standard litigation is off the table—even if the agency wishes to arbitrate. Initially, many plaintiffs’ attorneys are unwilling to concede that the arbitration clause should even be enforced, and thus attorneys often have to draft, file, and litigate a motion to compel arbitration.
Sometimes there are disputed issues as to whether the arbitration clause even applies to the consumer’s lawsuit. Some consumers are successful in getting courts to grant discovery on this issue, and thus limited discovery must take place even before the court may later compel arbitration. Furthermore, even where a motion to compel arbitration is granted outright, many courts refuse to dismiss the case and issue a stay instead—which pauses the litigation in court while the arbitration proceeds.
While collectors can derive real benefits from arbitration, it is not a panacea to cure all litigation ills. Collection agencies need to make informed decisions with their attorneys as to the practical realities of underlying arbitration clauses while weighing the burdens and benefits of arbitration.
Richard J. Perr is a partner with Fineman Krekstein & Harris, P.C., and is the immediate past president of ACA International. He was assisted on this article by Matthew Selmasska, an associate with Fineman Krekstein & Harris.