The Advisory Committee on Bankruptcy Rules (and forms) has been quite active and successful over the past decade in improving the practice of law in the Bankruptcy Courts. Some of their major innovations such as the overhaul of the process for appealing a decision of the bankruptcy court have engendered little comment and have been deemed important contributions to justice. Others, such as the responses to changes in the consumer credit and consumer mortgage industries have engendered very active comment from both the creditor and debtor communities and the Committee has endeavored to evaluate carefully all such comments to make certain the proposed rules and forms are not only well written and thought through but also fair to both sides. In the business bankruptcy realm the proposed rules governing Informal Committees (2019) engendered significant comment from the claims buying industry and the Committee made numerous changes in response to those comments.
Category: Consumer Arbitration
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Dear NY Times: Thank You For Letting Me Sue Only 500 Miles From My Home
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So the New York Times has just finished a three-part series on arbitration. For such lengthy coverage, the Times reveals almost nothing that will be new to those who have been following debates over the use of pre-dispute arbitration agreements. But if you haven't been following the issue, the Times series is a good place to start. It highlights some pressing recent issues, such as the use of arbitration to eliminate class action liability, while also touching on issues that often escape attention, such as judicial enforcement of contracts requiring religious arbitration.
Discussions about arbitration can be frustrating. For one thing, it is hard to have them without sending (often unintended) ideological signals. Those who highlight flaws in anti-arbitration arguments–even if simultaneously supporting greater regulation–are often characterized as "defenders" of "forced arbitration," as if the only valid choice is to justify or oppose (rather than investigate) the practice. Meanwhile, lawyers for large business interests have the irritating habit of presenting themselves as defenders of the common good, rather than as zealous advocates for corporate clients.
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DIRECTV v. Imburgia
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Yesterday, the Supreme Court heard arguments in yet another arbitration case, DIRECTV v. Imburgia. Here's the transcript. The issue is esoteric even by the standards of the Supreme Court's arbitration docket, but it has a certain practical significance. In a series of recent cases, the Court has mandated the enforcement of arbitration clauses that require claimants to proceed on an individual basis rather than as part of a class action. Many of these cases involve small-dollar consumer claims, so the likely effect is to eliminate, or at least substantially reduce, the potential liability of the business. The opinions can be baffling to read. Even when I agree with the results, it can be hard to accept the Court's application of seemingly-settled arbitration law. The common theme, though, is fairly clear: A small majority of justices view arbitration clauses as a permissible means to avoid class action liability.
Below the jump, more discussion of the specific issue in Imburgia.
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Are Some Banks Using Credit Reports to Help Collect Discharged Debts?
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Last week, Adam pointed us to a NYT's story on "zombie debt" after bankruptcy. I did a bit more research into the story because I had a hard time understanding the problem from the article.
There are a few lawsuits that have been filed about this (I found ones against GE Capital/Synchrony, Bank of America/FIA Card Svcs, Citigroup, and Chase). The GE complaint alleges that the banks have a systematic practice of "selling and attempting to collect discharged debts and … failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy." You can download the complaint in the GE case here.
More specifically, the allegations are that after a discharge, some creditors do not update their tradelines to a status of "in bankruptcy" and instead leave them as "charged-off." The credit report of a person in this situation would then say they have filed bankruptcy and obtained a discharge but you could not tell whether any individual debt has been discharged in that bankruptcy. The (non-binding) credit bureau reporting guidelines (METRO 2) specify that creditors should report accounts as "included in bankruptcy" once they receive a notice of discharge.
The complaint characterizes GE's argument as being that the FCRA does not require it to make this change, perhaps especially in particular after a debt has been sold and they no longer have an interest in it. (GE has not filed an answer yet, but it seems like this is one argument they might make from reading their other filings). That seems to me to be a wrong interpretation of the FCRA and the FTC's Furnisher Rule. It should also be a violation of the discharge injunction. As Judge Drain put it in an opinion denying a motion to compel arbitration:
One could argue that the reporting of a discharged debt as still outstanding when the credit report also shows that the debtor has been in bankruptcy is even a worse result, indicating to those who are considering providing credit in the future that the debtor has fallen into the category of the dishonest debtor who did not receive a discharge.
I am told that NPR's On Point will be doing a segment on this on Thursday at 10AM EST with one of the attorneys filing these cases. You can listen to the podcast here.
Note: post has been edited to correct the timing of the NPR program and to add the link to the podcast.
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Consumer Arbitration: Taking Stock
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I have an op-ed in today's American Banker on the supposed efficiency and fairness of binding mandatory arbitration. We've given arbitration occasional coverage on the Slips over the years, but it's never been a major focus of our posting, in part because it isn't inherently a credit issue. Instead, the fight over arbitration is another chapter in the fight over whether public services should be privatized. It's worth noting, however, in the time since our coverage began (not to take any credit for it), the needle has moved a bit on binding mandatory arbitration in consumer contracts–both ways.
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Legal Notice. Read Carefully: Your Rights May Be Affected
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In light of General Mills policy of claiming that its binding mandatory arbitration requirement (with class action waiver) applies to anyone who purchases its products, including via third-party vendors, I have decided, to post the following legal notice, applicable to all persons, everywhere:
By permitting, allowing, or suffering me to purchase any of your products or services, whether directly from you or indirectly through dealers, vendors, agents, or other third-parties, you agree to irrevocably surrender all rights to compel me to arbitration or to waive my rights to proceed against you as a member of a class action. In order to make this provision effective and allow effective vindication of my rights, you also agree to irrevocably surrender all rights to compel arbitration and to prevent class actions against all other purchasers of your products and services. You also agree to cover all of my costs associated with bringing an action, including attorneys' fees and any damages awarded against me, irrespective of the outcome of the action.
Is General Mills notice any more effective than mine? I don't see why it would be. Let's get this long-range battle of the forms on!
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An Amicable Separation for Arbitration and the Class Action Waiver
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To follow up on Adam's post about the Dropbox arbitration clause and its class action waiver, I want to highlight two aspects of the clause that may not be apparent on first glance. First, Dropbox's procedures for individual arbitration are actually quite fair. That's worth emphasizing, but so is the likely explanation: that Dropbox views a fair individual process as the cost of getting insulation from class actions. Second, Dropbox's clause suggests that the long-standing link between arbitration and class action avoidance may be breaking down. (This isn't necessarily good news if you value the deterrent effect of class actions.)
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Arbitration Agreements and Class Action Waivers: Dropbox
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It's hardly news that arbitration agreements are used to effectuate class action waivers. The Supreme Court has blessed the comandeering of a federal policy favoring enforcement of forum selection clauses to limit types of proceedings, including those that have nothing to do with forum and are necessary for effective vindication of small value claims.
While arbitration ageements have been a particular problem in consumer finance, they also appear in things like telecom agreements, and now, to my chagrin, for Dropbox, a popular free cloud storage service. Dropbox announced a change in its terms of service that includes an arbitration clause.
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The Access-to-Justice Myth
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Lauren blogged about a new article by Omri Ben-Shahar, who has written a number of interesting and often (deliberately) provocative articles about consumer contracts. This new article certainly fits in that vein. Its basic point is that requiring arbitration is more favorable to weaker (read poorer) consumers than allowing in-court litigation because all litigation has a regressive distributional effect: the well-to-do are more likely to litigate and gain the benefits of litigation, while the costs are borne more generally by all consumers. Open access to courts acts as a regressive litigation tax.
There is a clear implication to Ben-Shahar's argument, namely that binding mandatory arbitration should be the favored method for resolving consumer suits. In fairness to Ben-Shahar, however, he does not make this policy prescription, and he does note that distributional concerns are not the only factor that should be considered in policy-making. Instead, his point is simply to point out that there are distributional effects from permitting access to courts. I do, however, expect to see this paper cited in the future in support of attempts to restrict consumers' access to courts, and that's unfortunate.
I don't have any quibbles with the basic point that it is possible that access to courts could have regressive distributional effects. It's a neat theoretical observation. Still, I don't think Ben-Shahar's observation is likely to hold up as an empirical matter in many, if not most cases, however. And even if it does, I don't think Ben-Shahar has really grappled with the logic of his argument, which proves too much: it is really an argument for banning all consumer litigation. In fact, Ben-Shahar might not disagree: he's proposed as much previously. (I think Ben-Shahar's faith in the market in that article is perhaps naive, but that's another story.)
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Another Myth of Consumer Law?
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As the CFPB gears up to regulate arbitration clauses,
a timely article by Omri Ben-Shahar has been posted on ssrn. Part of
Ben-Shahar’s “Myths of Consumer Law” project (see here, here, and here ), The Myth of Access-to-Justice in Consumer
Law contains some provocative insights, but key blind spots lead the
piece to unwarranted conclusions.The conclusions are that pre-dispute arbitration and class
action waiver clauses in consumer contracts benefit weak consumers. To get
there, Ben-Shahar first notes that consumers are not a homogeneous group and access
to justice in the courts is far from evenly distributed. Because elites are
more likely to sue and are likely to collect higher damages (one of the many
reasons they are more likely to sue), giving all consumers the right to sue is,
in effect, a regressive cross-subsidy from poorer consumers to those elites.