A federal judge in California has denied a prominent debt servicer’s motion to compel arbitration of a class action filed by a California woman who says the company and its affiliates failed to settle her credit card debts as promised.
Plaintiff Heather Newton, representing the class, says defendant American Debt Services committed to settle her debts for half the balance owed.
But, Ms. Newton says, the company and its three affiliates kept a hefty portion of her fees, allowed her to retrieve only about half of the funds to pay a bank, and gave her a $70 refund.
Ms. Newton says she originally contacted American Debt Services, then received a welcome packet from co-defendant Quality Support Services LLC, and account application and debit instructions from co-defendants Global Client Solutions and Rocky Mountain Bank & Trust.
The companies told Ms. Newton to register for a “special purpose account” with Rocky Mountain, and to authorize Global Client Solutions, to withdraw three, non-refundable fees from her banking account, her complaint states.
As it turned out, “Plaintiff eventually discovered that defendants had not contacted any of her creditors [Chase and Bank of America] in the eight months she had been in the program. Plaintiff then terminated defendant ADS’s services, requesting a refund of her money,” the ruling states.
The debt services refunded only $70 of $4,200 that Ms. Newton paid them, she says, and she used $2,200 from her special purpose account to pay Bank of America. The remaining $1,900 was pocketed by the services, she says.
After the filing of the class action in Northern California federal court — which alleges negligence, interference with contractual relations and violations of the California Business & Professions Code — Rocky Mountain and Global Client Solutions moved to compel arbitration based on an arbitration clause in Ms. Newton’s account application.
According to the clause: “In the event of a dispute or claim relating in any way to this agreement or our services, you agree that such dispute shall be resolved by binding arbitration in Tulsa [,] Okla. utilizing a qualified independent arbitrator of Global’s choosing,” the ruling states.
Ms. Newton called the clause unconscionable and asserted that there was no agreement to arbitrate.
In response, Global Client Solutions and Rocky Mountain Bank & Trust argued that because Newton’s complaint challenged the validity of the agreement as a whole, rather than the specific arbitration clause, her challenge must be submitted to arbitration.
U.S. District Judge Edward Chen ruled against the companies’ motion, however, based on three grounds.
“[T]he arbitration clause shortens the statute of limitations…the arbitration clause would prevent a customer from recovering attorney’s fees…[and] the arbitration clause requires arbitration in Orange County, Calif., the home town of defendant ADS,” Judge Chen ruled.
“Taken together, the arbitration clause has three provisions that would impermissibly limit a customer’s ability to bring a claim, whether by shortening the statute of limitations, forcing a customer to bear attorney’s costs they would not have to under the statutes, or requiring the customer to arbitrate in a distant forum,” he added.
“Accordingly, the court finds that the arbitration clause is both procedurally and substantively unconscionable; although the degree of procedural unconscionability is only minimal, the degree of substantive unconscionability is substantial,” Judge Chen continued.