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Class Action Defense Cases-Hollins v. Debt Relief: Nebraska Federal Court Denies Defense Motion To Compel Arbitration Of RICO Class Action Holding Arbitration Clause Unenforceable

Class Action Defense Effort to Compel Arbitration Based on Provision in Contract Executed by Plaintiff Rejected by District Court because Arbitration Clause Held to be Unconscionable

Plaintiffs filed a putative class action against Debt Relief of America (DRA) in Nebraska federal court alleging that DRA – a company that offers “to help consumers eliminate their debt by negotiating reduced payoffs in settlement of the debts” – engaged in acts of fraud and charged excessive and undisclosed fees in violation of Racketeer Influenced and Corrupt Organizations Act (RICO) and Nebraska’s Consumer Protection Act and Deceptive Trade Practices Act. Hollins v. Debt Relief of Am., 479 F.Supp.2d 1099, 1103 (D. Neb. 2007). Defense attorneys moved to compel arbitration under a Client Negotiation Agreement executed by plaintiff in Nebraska; the Agreement includes an arbitration clause and a Texas choice-of-law provision. Id. The district court denied the defense motion, holding that the arbitration clause was procedurally and substantively unconscionable.

Plaintiff responded to an advertisement by DRA to assist in reducing debt; he admits signing the Agreement but claims that he did not notice the arbitration clause, that it was “buried in the fine print of an illegible fax,” and that DRA did not point out the arbitration provision before he executed the Agreement. Hollins, at 1103. The class action complaint alleged that plaintiff paid DRA almost $5000 based on its “promise[] to manage his debts,” but that the company “never took any action to assist [him] or contact his creditors.” Id. The complaint further alleged DRA advised him to “ignore[] his creditors,” that his accounts were sent to collection, and that “he filed bankruptcy because of DRA’s alleged misrepresentations.” Id. Plaintiff’s purported class action seeks to represent “all Nebraska residents who paid any amount for DRA’s debt relief services,” id.

Defense attorneys urged that the class action complaint must be dismissed and plaintiff’s claims referred to arbitration pursuant to the contract plaintiff executed. Hollins, at 1104. Defendant argued that the arbitration clause in the Agreement was governed by the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., “which preempts any inconsistent state statute,” and that Texas law governs the determination as to the enforceability of the arbitration clause. Id. With respect to its validity, the defense asserted that the arbitration clause was not substantively or procedurally unconscionable, that arbitration would not be prohibitively expensive, and that “pursuant to National Arbitration Foundation (‘NAF’) rules, all types of remedies and relief available in court are available in arbitration,” id.

Plaintiff countered that Nebraska law should govern the dispute, and that the arbitration clause was unconscionable because (1) it was part of a form contract “of poor quality, with small, illegible print that is difficult to read,” (2) he “did not knowingly or voluntarily agree to the arbitration clause,” (3) arbitration would be cost prohibitive, and (4) NAF rules preclude class action proceedings, necessitating the need for putative class members interested in the litigation to file motions to intervene. Plaintiff additionally argued that even if the arbitration clause was enforceable his state-law claims are not subject to arbitration and so would need to be carved out of the arbitration. Hollins, at 1104-05.

The district court began its analysis with the legislative history behind the Federal Arbitration Act – i.e., “to reverse judicial hostility to arbitration agreements and place arbitration agreements on equal footing with other contracts” – and recognized that plaintiff as “[the] party seeking to invalidate the arbitration agreement bears the burden of demonstrating that Congress intended to foreclose arbitration of the claims at issue.” Hollins, at 1105 (citing Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 92 (2000)). However, prerequisite to compelling arbitration, the court first determines the validity of the arbitration clause, and if so whether the dispute falls within the scope of the arbitration provision. Id. (citations omitted). The district court held that the arbitration clause was unenforceable under either Texas or Nebraska law. The federal court explained at pages 1107 and 1008:

The arbitration provision forcing [plaintiff] Hollins, a Nebraska resident, to arbitrate potential disputes with DRA, a Texas corporation, is harsh and one-sided. If this court upheld the validity of a standard, boilerplate arbitration clause in an otherwise standard, pre-printed contract of adhesion, this court would, in effect, permit DRA to establish minimum contacts in the state of Nebraska, conduct business with financially impaired Nebraska residents, take their money, and then force those residents to resolve litigious matters in Dallas, Texas. Hollins is not a sophisticated businessman with any kind of commercial background; the court is unwilling to conclude that at the time of entering into a contract with DRA, Hollins could negotiate the inclusion of the arbitration clause. The court further finds that the combination of Hollins’ ignorance and inexperience with contract negotiation together with DRA’s alleged “take it or leave it” overreaching demonstrates unconscionability. A provision requiring a then potentially bankrupt Nebraska resident to travel to Texas to arbitrate a dispute that allegedly caused him to claim bankruptcy is arguably a calculated decision by the defendant to insulate itself from its malfeasance. Such an agreement, in the court’s opinion, is unconscionable. Therefore, applying both Texas and Nebraska law, the court concludes the arbitration provision at issue is both procedurally and substantively unconscionable, rendering the arbitration provision invalid and unenforceable. (Italics added.)

Because the arbitration provision was unconscionable, the district court concluded that it had “no choice but to strike the arbitration provision in its entirety.” Hollins, at 1108. The court therefore denied the defense motion to compel arbitration or to dismiss the class action complaint. Id.

NOTE: The arbitration provision read as follows: “Arbitration or Dispute: Client agrees that any claim or dispute by either Client or DRA against the other, or against the employees, agents, or assigns of the other arising from or relating in any way to this Agreement shall be resolved by binding arbitration under the auspices of the National Arbitration Forum (NAF) under the Code Procedure in effect at the time the claim is filed. If the NAF is unable, or unwilling to act as arbitrator, another independent arbitration organization may be substituted at DRA’s discretion. Client understands that the result of this arbitration clause is that claims cannot be litigated in court. Venue for such arbitration will be held in the county and city of Dallas, Texas. [¶] This agreement is entered into at Dallas, Texas and venue of all disputes concerning this agreement shall be in Dallas, Dallas County, Texas. The parties agree that Texas law shall apply to the interpretation of this agreement. If any portion of this agreement shall be held to be contrary to law or unenforceable, the remaining portions of this agreement shall not be affected.” Hollins, at 1103.

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