Encore Capital Group Wins Motion to Compel Arbitration in Putative FDCPA Class Action

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A federal judge in Michigan has dismissed a proposed class action accusing publicly traded debt buyer Encore Capital Group [ECPG (NASDAQ)] and its affiliated entities of suing consumers over old debts that were no longer legally enforceable.  The Judge ruled that that the case must be decided in arbitration.

The opinion in the case, Hilton v. Midland Funding LLC, et.al. (Case No. 15-10322, U.S. District Court, ED MI, Southern Division) was issued by the Honorable Linda V. Parker on March 31st.

Background

In September 2004, Plaintiff Eric Hilton (Plaintiff) opened a credit account through Dell Financial Services, LLC (DFS) to purchase a computer. The financing for the account was provided by CIT Bank and the servicing of the Account was provided by DFS. Plaintiff made payments on the account but subsequently defaulted. The Account was charged off in 2007, though it appears that Plaintiff made some payments subsequent to charge-off, but those payments stopped sometime in 2008. DFS, subsequently sold Plaintiff’s debt to Midland Funding, LLC. (Midland).

Midland engaged a law firm to attempt collection of the account. In 2014 the law firm sued Plaintiff in state court on behalf of Midland on the debt. The state court action ultimately reached settlement.

On January 23, 2015, Plaintiff filed an action in federal court asserting that Midland, acting through Midland Credit Management, (MCM) and on behalf of Encore Capital Group, Inc. (Encore) impermissibly directed the law firm to file a debt collection lawsuit, suing Plaintiff on the Account after the applicable statute of limitations expired. Plaintiff asserted that, by doing so, the Defendants (including the law firm) engaged in unconscionable collection methods by filing suit on a time barred debt, in violation of the Fair Debt Collection Practices Act (FDCPA). Plaintiff also sought to pursue the claims on behalf of a class of similarly situated individuals.

Defendants collectively moved to compel arbitration, based on the underlying contractual agreement. The sole issue before the court was whether the arbitration provision of the credit agreement requires the court to compel arbitration.

Defendants argued that by using the Account, Plaintiff agreed to the terms and conditions set forth in the credit agreement for the account. Defendants asserted that “one of the terms and conditions Plaintiff agreed to was an arbitration provision that permits Defendants to elect mandatory, binding arbitration of any claim arising between them and Plaintiff. Defendants argued that the Federal Arbitration Act (FAA) requires the court to “stay this action until such arbitration has been had in accordance with the terms of the agreement.”

Plaintiff, in its responsive brief, argued that the motion to compel should be denied for the following reasons: (1) Defendants have waived their right to arbitrate; (2) a trial by jury should be had to determine whether the arbitration agreement can be enforced against Plaintiff; and (3) should the Court compel arbitration, the matter should proceed to arbitration as a class action.

The Underlying Agreement

The critical provisions in the underlying agreement read as follows:

DELL PREFERRED ACCOUNT CREDIT AGREEMENT

Offered by CIT Bank and serviced by Dell Financial Services

Notice: This Credit Agreement contains an arbitration provision. Under this arbitration provision, you may be required to settle any dispute with CIT Bank, Dell Financial Services and others through arbitration and not through a court proceeding.

Use of Your Account. Your use of the open-end credit offered pursuant to this Agreement or its use by anyone you authorize, shall constitute acceptance of the terms of this Agreement and the Arbitration provision contained in this Agreement. Your use of the Account also acknowledges that you are of legal age to enter into a binding agreement with us.

ARBITRATION NOTICE

THIS AGREEMENT CONTAINS AN ARBITRATION CLAUSE.

PLEASE READ THIS PROVISION CAREFULLY. IT PROVIDES THAT ANY CLAIM RELATING TO YOUR ACCOUNT MAY BE RESOLVED BY BINDING ARBITRATION. YOU ARE ENTITLED TO A FAIR HEARING, BUT THE ARBITRATION PROCEDURES ARE SIMPLER AND MORE LIMITED THAN RULES APPLICABLE IN COURT, AND ARBITRATION DECISIONS ARE SUBJECT TO VERY LIMITED REVIEW. CLAIMS MAY BE ARBITRATED ONLY ON AN INDIVIDUAL BASIS. IF EITHER PARTY CHOOSES TO ARBITRATE A CLAIM, NEITHER PARTY WILL HAVE THE RIGHT TO LITIGATE THAT CLAIM IN COURT OR HAVE A JURY TRIAL ON THAT CLAIM, OR TO PARTICIPATE IN A CLASS ACTION OR REPRESENTATIVE ACTION WITH RESPECT TO SUCH CLAIM.

Applicable Law. The laws of the United States of America, including the Federal Arbitration Act, 9 U.S.C. Sections 1-16(the “FAA”, and the laws of the State of Utah apply to govern this Agreement and your use of your Account.

The court decided the case based upon the briefs submitted. There were no oral arguments.

In the opinion that accompanied the Order Judge Parker decided the following:

  1. The parties agreed to arbitrate.
  2. The scope of the arbitration agreement is broad in scope.
  3. Congress did not intend for FDCPA claims to be non-arbitrable.
  4. The remainder of the proceedings should not be stayed.
  5. Defendants did not waive their right to arbitrate this matter.
  6. The matter should not proceed to arbitration as a class action.

The judge granted defendant’s motion to compel arbitration and ordered the parties to proceed with arbitration of Plaintiff’s claims pursuant to the terms of the agreement to arbitrate.

insideARM Perspective

Much has been written about mandatory arbitration provisions in the past 12 months. The CFPB held a field hearing on the issue in OctoberinsideARM wrote about two arbitration cases in February of this year.

The CFPB has begun the rulemaking process on the issue. It is likely that mandatory arbitration provisions will be extinct in consumer contracts in the very near future. However, until that time, the decision in this case is a welcome outcome for the defense of FDCPA class action cases.

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Posted in CFPB, Collection Laws and Regulations, Debt Buying, FDCPA, Featured Post .

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  • avatar SYSM says:

    We’ll see if this stands up on appeal. I think the plaintiff has a pretty good that, by suing him in court, Encore affirmatively and voluntarily waived arbitration.

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