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Banking and Finance

Federal Court Rejects Unconscionability Argument in Forcing Debt Collection Arbitration

 by Brendan H. Connors and David N. Anthony 

On January 20, a Missouri federal judge issued an order granting a debt collector’s Motion to Compel Arbitration in an action under the Fair Debt Collection Practices Act.  Although such motions are frequently granted, the judge here rejected an argument from the plaintiff that her loan agreement – including its arbitration provision – was entirely “unconscionable,” and thus unenforceable, under applicable state law.

The plaintiff had incurred a payday loan and sued the collector under the FDCPA for allegedly making certain misrepresentations to her about her debt.  When the collector cited the arbitration provision in the loan agreement, the plaintiff argued that the whole agreement was unconscionable for five reasons:

  • She was under such economic duress that she had no real bargaining power;
  • The contract was presented in a “take it or leave it” fashion, and, therefore, there was no actual bargained-for exchange;
  • The debt collector and the payday loan company she dealt with did not adequately disclose their relationship;
  • She would be forced to pay attorneys’ fees if she lost in arbitration, a prospect she would not likely confront under the FDCPA; and
  • The arbitration provision did not allow her to conduct proper discovery.

The judge systematically dismissed each of these rejections.  Notably, the judge observed that neither her unequal bargaining power nor the “take it or leave it” nature of her payday loan necessarily revealed unconscionability.

Interestingly, the judge noted in a footnote that, because arbitration provisions are severable from unenforceable contracts, the plaintiff’s argument that the agreement was categorically unenforceable could only be addressed by an arbitrator.  Thus, regardless of whether it had merit, her unconscionability argument could not serve as a basis to deny the defendant’s motion.  This conclusion possibly reveals an argument that debt collectors may offer in their defense when encountering similar contentions against arbitration in future litigation.

The case is Eaton v. Ad Astra Recovery Services, No. 4:14CV1819 (JCH) (E.D. Mo.) [an enhanced version of this opinion is available to lexis.com subscribers].

 Read more at Consumer Financial Services Law Monitor by Troutman Sanders LLP. 

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