Johnson v. Tele-Cash, Inc., CIV. A. 99-104-GMS.
| Decision Date | 29 December 1999 |
| Docket Number | No. CIV. A. 99-104-GMS.,CIV. A. 99-104-GMS. |
| Citation | 82 F.Supp.2d 264 |
| Parties | Terry JOHNSON, Plaintiff, v. TELE-CASH, INC., and County Bank of Rehoboth Beach, Delaware, Defendants. |
| Court | U.S. District Court — District of Delaware |
William L. O'Day, Jr., of Law Offices of William L. O'Day, Jr., Wilmington, Delaware, Daniel A. Edelman, Kathleen M. Combs, James O. Latturner, Sheila A. O'Laughlin, Heather C. Sullivan of Edelman & Combs, Chicago, Illinois, for Plaintiff.
James D. Griffin, David R. Hackett, Griffin & Hackett, P.A. Georgetown, Delaware, Walter Weir, Weir & Partners, LLP, Philadelphia, PA, for Defendants.
On February 25, 1999, Terry Johnson filed a class action lawsuit with this court. In it, he alleges that Tele-Cash, Inc. and the County Bank of Rehoboth Beach, Delaware (the "defendants")1 have violated both the Truth In Lending Act ("TILA"), 15 U.S.C. § 1601 et seq. (1994), and the Electronic Funds Transfer Act ("EFTA"), 15 U.S.C. § 1693 et seq. (1994), by failing to properly disclose the excessively high rates of interest which they charge for their short-term loans and by requiring borrowers to consent to a complicated electronic fund transfer scheme in order to obtain these loans.2
On May 5, 1999, the defendants moved to stay these proceedings pending the outcome of arbitration.3 In their motion, the defendants point out that Johnson's loan application contains an arbitration clause which prohibits him from filing suit and, instead, requires him to vindicate any claim that he may have against the defendants through binding arbitration. In opposition to the motion, Johnson claims that the arbitration clause is unenforceable as unconscionable since it would effectively eviscerate the purpose of the TILA by eliminating the possibility of class relief.
The court agrees. The intended purpose of the TILA was "to encourage class actions in the truth-in-lending context because of the apparent inadequacy of the Federal Trade Commission's enforcement resources and because of a continuing problem of minimum compliance with the Act on the part of creditors." See Watkins v. Simmons & Clark, Inc., 618 F.2d 398, 400 (6th Cir.1980) (citing Sen. Rept. No. 93-278, at 14-15 (1973)). As a result, a ruling which compels arbitration seems contrary to the underlying purpose of the TILA. The court reaches the same conclusion with respect to Johnson's EFTA claims. For these reasons, the court will deny the defendants' motion to compel arbitration. It will also deny the defendants' motion to dismiss as it relates to Johnson's claims under the TILA, the EFTA, and for a declaratory judgment that the rate of interest charged by the defendants was unconscionable. The following sections explain the court's reasoning more thoroughly.
On July 10, 1998, Johnson applied for and received a short-term loan in the amount of $250 from the County Bank of Rehoboth Beach. The one-page loan agreement set forth an annual percentage rate of 917 percent and a finance charge of $88. As a result, Johnson was required to repay his $250 loan by making one payment of $338 on July 24, 1998 — two weeks after he submitted his loan application and received the $250.
These terms were disclosed in a table located at the top of the loan agreement which looks something like this:
ANNUAL PERCENTAGE RATE % Payment Schedule
The cost of your credit as a yearly rate 917.71 You must make one payment of $338 on
7/24/98
FINANCE CHARGE $
The dollar amount the credit will cost you 88 Security Interest The Loan is unsecured
AMOUNT FINANCED $ Late Charges You must pay a late charge of 5% of the
The amount of credit provided to you on 250.00 late payment if your Loan is not paid within 10 day of
your behalf the due date
TOTAL OF PAYMENTS $ Prepayment If you pay your Loan in advance, you will
The amount you will have paid after you 338 not be entitled to a refund of part of the finance charge
have made all payments as scheduled
See below for addition information about nonpayment, default, any required payment in full before the scheduled date, and prepayment refunds and penalties
While this table is not an exact representation of the information since the margins of the original are slightly different, it is in all other respects a fairly accurate portrayal of the information available to Johnson at the time that he entered into the loan agreement.
In addition, at the bottom, right above the signature line, the loan agreement provided a "boiler plate" arbitration clause which, in relevant part, reads:
ARBITRATION: You and we agree that any claim, dispute, or controversy between us ... and any claim arising from or relating to this Note, no matter by whom or against whom ..., including the validity of this Note and of this agreement to arbitrate disputes as well as claims alleging fraud or misrepresentation shall be resolved by binding arbitration .... This arbitration agreement is made pursuant to a transaction involving interstate commerce and shall be governed by the Federal Arbitration Act, 9 U.S.C. [§§] 1-16. Judgment upon the award may be entered by any party in any court having jurisdiction.
(emphasis added).
Below this paragraph, the loan agreement provides two others which state:
NOTICE: YOU AND WE WOULD HAVE HAD a RIGHT OR OPPORTUNITY TO LITIGATE DISPUTES THROUGH a COURT BUT HAVE AGREED INSTEAD TO RESOLVE DISPUTES THROUGH BINDING ARBITRATION.
By signing and sealing below, you agree to all of the terms of this Note, including the agreement to arbitrate disputes.
With these facts in mind, this memorandum turns to a discussion of the relevant law.
Given the clear and explicit language of the loan agreement, compelling arbitration seems to be a logical ruling, especially in light of the "congressional declaration of a liberal federal policy favoring arbitration agreements." See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). However, this ruling would contravene the express congressional intent to "encourage the use of class actions as an important tool for enforcing Truth in Lending." See Bantolina v. Aloha Motors, Inc., 419 F.Supp. 1116, 1120 (D.Haw.1976). For this reason the court will deny the defendants' motion.
Originally enacted in 1925, the FAA was adopted in an attempt to place arbitration agreements on the same level as other contracts and, thus, reverse the "longstanding judicial hostility" to these agreements that American courts had inherited from their English ancestors. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991); see also Harris v. Green Tree Fin. Corp., 183 F.3d 173, 178 (3d Cir.1999) (citing Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-26, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987)). In light of the purpose of the FAA, it should come as no surprise to learn that federal law presumptively favors the enforcement of arbitration agreements. See In re Prudential Ins. Co. of Am. Sales Practice Litig., 133 F.3d 225, 231 (3d Cir. 1998) (cited in Harris). For this reason, the FAA authorizes a district court to compel the arbitration of any issue covered by a valid and enforceable arbitration agreement when a party to that agreement commences a legal action without first attempting to arbitrate the dispute. See 9 U.S.C. §§ 3-4 (1994); see also Southland Corp. v. Keating, 465 U.S. 1, 11-12, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (also cited in Harris).
Here, Johnson does not (and probably cannot) argue that his dispute falls outside the scope of the arbitration agreement. In fact, given the breadth of the contractual provision,4 it is impossible to see how Johnson could claim otherwise. As a result, he effectively concedes the point. Thus, the court is left with only one question — namely, is the arbitration clause enforceable?
On this point, Johnson contends that the arbitration clause is not enforceable because (1) Congress expressly intended to preclude the arbitration of claims arising under the TILA by explicitly allowing for the possibility of class relief under the statute and (2) the arbitration agreement itself is unconscionable. Because the court agrees with Johnson's first argument, it need not address the second.
Citing to 15 U.S.C. § 1640 (1994), Johnson argues that Congress expressed a clear intent to guarantee class relief under the TILA by allowing individuals to bring a class action under the statute. Since an arbitrator cannot award this type of class-wide relief, Johnson contends that this court cannot compel the arbitration of this matter.
The most convincing rejection of this argument was expressed in Lopez v. Plaza Fin. Co., No. 95-C-7567, 1996 WL 210073, at *2-3 (N.D.Ill. Apr.26, 1996). There, the district court stated that:
It is true that compelling arbitration ... will eliminate [the] plaintiffs ability to arbitrate his claims on behalf of a class. Nonetheless, this result is required because Congress has not created a statutory right to bring class actions under [the] TILA .... Section 1640, cited by [the] plaintiff in support of the proposition that a statutory right exists, does not establish a right per se; it only sets forth a limit on liability under class actions.... Where an enforceable arbitration clause allows only for individual arbitration, a class will not be certified. Therefore, [the] plaintiff's inability to bring class claims under [the] TILA is of no legal consequence.
Id. at *3 (citing Champ v. Siegel Trading Co.,...
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