Fifth Circuit Holds Payday Lender Waived Right to Arbitration

Originally published by Beth Graham.

In a 2-1 decision, the nation’s Fifth Circuit Court of Appeals has ruled a payday loan lending company that sought criminal charges against customers who failed to repay their loans waived its right to arbitration by substantially invoking the judicial process.  In Lucinda Vine, et al. v. PLS Financial Services, Inc., No. 16-50847 (5th Cir., May 19, 2017), a Texas payday lender, PLS, provided short-term loans to two customers, Vine and Pond, in exchange for a fee.  Before the loan was provided, each customer signed a credit services agreement that included an arbitration provision.   As part of the loan process, the customers also provided PLS with post-dated checks.

Both customers later defaulted on their payday loans and PLS unsuccessfully attempted to cash the post-dated checks.  After the checks were returned for insufficient funds, PLS submitted a worthless check affidavit for each customer to the local district attorney’s office.  Next, the district attorney’s office advised the customers via letter that they would face criminal prosecution if they did not pay restitution to PLS.

In response to PLS’s worthless check affidavit, Vine and Pond filed a class-action lawsuit against the payday lender.  According to the customers, PLS violated Section 392.301 of the Texas Finance Code and certain provisions of the Texas Deceptive Trade Practices Act.  In their complaint, the customers also accused PLS of engaging in malicious prosecution and fraud.

PLS responded to the class-action lawsuit by filing a motion to compel the dispute to arbitration based on the credit services agreement that was signed by each customer.  A district court found that PLS waived its right to arbitration by substantially invoking the judicial process when the company filed the worthless check affidavits.  As a result, the court denied PLS’s motion.

On appeal to the United States Court of Appeals for the Fifth Circuit, PLS argued the district court committed error by:

(1) deciding whether PLS waived its right to compel arbitration by participating in litigation conduct;

(2) ignoring the parties’ express agreement to arbitrate all disputes, including any litigation-conduct waiver claims; and

(3) concluding that PLS waived its right to arbitrate by submitting worthless check affidavits.

The appellate court first ruled “the district court did not err by deciding the litigation-conduct waiver.”  The Fifth Circuit stated:

In Tristar Fin. Ins. Agency v. Equicredit Corp. of Am., 97 F. App’x 465, 464 (5th Cir. 2004), we recognized that when “waiver . . . depends on the conduct of the parties before the district court,” “the court, not the arbitrator, is in the best position to decide whether the conduct amounts to a waiver under applicable law.” Here, the district court’s waiver decision depended on the conduct of PLS—a party to the litigation. Consequently, the district court was “in the best position” to decide the litigation-conduct waiver. Id.

Next, the Court of Appeals found that “the parties’ express agreement does not address litigation-conduct waiver.”  After stating PLS waived the issue by failing to bring it up when the payday lender filed its motion for reconsideration with the district court, the appellate court added:

While the language of an arbitration agreement can displace the presumption that a court should decide an issue, “[a]n issue that is presumptively for the court to decide will be referred to the arbitrator for determination only where the parties’ arbitration agreement contains `clear and unmistakable evidence’ of such an intent.” See Ehleiter, 482 F.3d at 221 (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).

Here, we do not find “clear and unmistakable evidence” that the parties intended to arbitrate litigation-conduct waiver. Id. Though the parties’ agreement requires arbitration of “any claim or attempt to set aside this Arbitration Provision,” it does not explicitly mention litigation-conduct waiver. See Principal Investments, Inc. v. Cassandra Harrison, 366 P.3d 688, 696 (Nev. 2016) (“Had Rapid Cash intended to delegate litigation-conduct waiver to the arbitrator, rather than the court, the agreements could and should have been written to say that explicitly.”). Furthermore, we “cannot interpret the Agreement’s silence regarding who decides the waiver issue here `as giving the arbitrators that power for doing so . . . [would] force [an] unwilling part[y] to arbitrate a matter he reasonably would have thought a judge, not an arbitrator, would decide.’” Ehleiter, 482 F.3d at 222 (quoting First Options, 514 U.S. at 945). Because the Agreement does not contain “clear and unmistakable evidence” of an intent to arbitrate the instant litigation-conduct waiver issue, the district court did not err. Id. at 221.

With regard to PLS’s third argument, the Fifth Circuit held “the district court correctly found that Vine and Pond plausibly alleged that PLS waived arbitration when it submitted false worthless check affidavits.”  According to the court:

“The question of what constitutes a waiver of the right of arbitration depends on the facts of each case.” Tenneco Resins, Inc. v. Davy Int’l AG, 770 F.2d 416, 420 (5th Cir. 1985). “Waiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.” Subway Equipment Leasing Corp., 169 F.3d at 326 (quoting Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986)).

Next, the appellate court distinguished the Fourth Court of Appeals’ recent decision in Cash Biz, LP v. Henry et al., (Tex. App.-San Antonio 2016, pet. filed) from the case at hand.  (You may read more about the Cash Biz case in a prior blog post.) After that, the Fifth Circuit stated:

Therefore, by allegedly submitting false worthless check affidavits, PLS “invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate.” See Subway Equip. Leasing Corp., 169 F.3d at 328. As the district court made clear, “Defendants have initiated a process that invites Texas district attorneys’ offices to address issues that are at stake in the instant action.” Most obviously, all claims involve whether PLS misled or threatened Vine, Pond, and the class of PLS customers they purport to represent in order to obtain outstanding debt owed to PLS.

Finally, the appeals court ruled the customers successfully demonstrated that they were prejudiced by PLS’s actions when the company filed worthless check affidavits with the district attorney’s office.  The court said:

Vine and Pond have also demonstrated detriment or prejudice from PLS’s submission of worthless check affidavits. “Prejudice in the context of arbitration waiver refers to delay, expense, and damage to a party’s legal position.” Nicholas v. KBR, Inc., 565 F.3d 904, 910 (5th Cir. 2009). Here, Vine and Pond would have borne the costs of defending against any theft by check prosecution. In addition, they would have suffered the preclusive effect of a conviction in any subsequent litigation. Consequently, they have sufficiently shown detriment or prejudice. See Subway Equip. Leasing Corp., 169 F.3d at 327.

Because PLS waived its right to arbitration, the U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s order denying the company’s motion to compel arbitration.

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