Fair or Unfair? Should Debtors Be Forced Into Mediation?

by Thomas Brom

In the late 1980s, host Paul Provenza would wade into a live TV audience for Kid's Court, a show on the Nickelodeon children's channel. Viewers mailed in their grievances, issues were defined, and advocates for the opposing sides were selected from the audience. A "Judge-o-meter" then determined the verdict, based on the decibel level of cheers for each side. Provenza's jury instruction?yelled to the audience and to millions of children at home?was simple: "Fair or Unfair?"

If only disputes in real life were resolved like that. Last summer, Minnesota Attorney General Lori Swanson filed a civil complaint against National Arbitration Forum (NAF)?the nation's largest provider of consumer debt-collection arbitrations?alleging consumer fraud, deceptive trade practices, and false advertising. The Minnesota-based NAF?a major promoter of pre-dispute, binding mandatory arbitration clauses?boasts that it has been appointed as arbitrator in "hundreds of millions of contracts," with repeat customers including Bank of America, JPMorgan Chase, and Citigroup. In 2006 alone, NAF processed more than 200,000 consumer collection arbitration claims.

The problem, according to Swanson's complaint, is that NAF "is financially affiliated with a New York hedge fund group that owns one of the country's major debt collection enterprises." In 2007 the hedge fund, Accretive, effectively acquired the non-legal capabilities of three major collection law firms: Mann Bracken, Wolpoff & Abramson, and Concord-based Eskanos & Adler. NAF entities sold the arbitration services to clients, drafted the arbitration clauses, selected the arbitrators, processed the judgments, and collected the debts. The Minnesota AG called that unfair.

Similar allegations against NAF had appeared in a number of reports and lawsuits, but nothing changed. In 2007 Public Citizen released "The Arbitration Trap," a report on NAF's practices based on public data from consumer arbitrations in California. Of the 19,294 NAF arbitrations statewide from 2003 to 2007, for instance, consumers filed and won just 30 cases while businesses filed and won 18,030.

The U.S. Chamber Institute for Legal Reform responded to Public Citizen in 2008 by commissioning a study that extolled the benefits of binding mandatory arbitration. But by then the damage had been done. Using NAF's public data, the San Francisco City Attorney's office sued NAF's various entities under the state's Unfair Competition Law (Cal. Bus. & Prof. Code § 17200?17210), demanding injunctive relief and civil penalties (People v. Nat'l Arbitration Forum, No. 08-473569 (S.F. Super. Ct. filed March 24, 2008)). That litigation remains mired in discovery.

By comparison, the Minnesota AG's lawsuit moved at the speed of light. Three days after Swanson filed the July 14 complaint, NAF signed a consent judgment agreeing to permanently withdraw from all consumer debt-collection arbitrations. But the company admitted no wrongdoing, and it retained the ability to continue arbitrating Internet domain names, personal injury claims, cargo disputes, and matters where NAF is appointed and supervised by a government entity.

Swanson advised the American Arbitration Association?NAF's main competitor?of the settlement and requested that it, too, withdraw from arbitration of credit card and consumer debt claims based on pre-dispute mandatory arbitration clauses. Amazingly, the AAA issued a moratorium on such arbitrations the next day. Within weeks, Bank of America and JPMorgan Chase announced that they would stop requiring credit-card customers to settle disputes in binding mandatory arbitration.

It appeared that the nation's leading consumer debt collectors had abandoned the field overnight. But Public Citizen wasn't convinced. In September it released another report, "Forced Arbitration: Unfair and Everywhere," that documented the continuing use of pre-dispute binding mandatory arbitration in the credit-card, banking, cellphone, computer, CATV and Internet, auto, brokerage, and home-building industries.

"Already, the business press has trotted out the 'bad apple' argument," says Taylor Lincoln, coauthor of the latest report. "Certainly NAF arbitrators were unscrupulous, gratuitously ladling on extra fees and penalties. But there's nothing to stop anyone from doing all this again."

Lincoln contends the consumer debt-collection industry's rapid withdrawal has everything to do with the Arbitration Fairness Act (AFA) of 2009 (HR 1020, S 931), proposed legislation currently before the House and Senate Judiciary committees. The AFA would prohibit pre-dispute arbitration agreements in consumer, employment, franchise, or civil rights disputes?and is thus a prime target of the U.S. Chamber for defeat. "I think the financial industry is waiting for the storm to blow over," says Lincoln. "Now it can protest to Congress, 'Hey, we're not doing that!' while lobbying to defeat the bill."

Richard C. Reuben, a professor of dispute resolution law at the University of Missouri, Columbia, says the AFA "could spell the end of the immediate problem, but I'm not sure it gets you where you want to go." Under provisions of the bill, consumers no longer would have pre-dispute binding arbitration forced upon them, but their options for resolving disputes with creditors would still be extremely limited.

The underlying problem, Lincoln admits, is that "on the whole, debtors owe the money." Congressional debate on the AFA this year can't be separated from the recession, double-digit unemployment, tight credit markets, and a rising tide of mortgage foreclosures. What's really at issue is whether debtors must accept pre-dispute mandatory arbitration, panels selected by their opponents, and a process with limited discovery and transparency.

Adam Levitin, a Georgetown University Law Center professor and author of the Credit Slips blog, finds no panacea in shifting debt-collection cases to small claims court. The imbalance between the parties' power and sophistication would persist, and the amounts in dispute typically aren't large enough for debtors to attract legal counsel. Pro se litigation, Levitin contends, is difficult, time-consuming, and expensive. Class actions can overcome some of these problems, but consumer debt disputes often aren't class issues, and the process itself has drawbacks. "Fortunately," Levitin writes, "we do not live in a binary world of public litigation vs. private ADR." He suggests adopting the model of the Financial Ombudsman Service used in the United Kingdom to resolve consumer insurance claims disputes.

But what if we do live in a binary world? The U.K., after all, has a long tradition of punishing debtors: prison, workhouses, transportation, and quick referral to the factory system. "When you take the problem to its logical conclusion, it's pretty sordid," says Missouri's Reuben. "Sometimes it's easier to identify the problem than the solution."

Identifying solutions may be difficult, but not impossible. The gang at Kid's Court would consider the grievances and then vote: Fair or Unfair?

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