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Consumer Protection – Payday Loan Arbitration Order Reversed

Hayes v. Delbert Services Corp. (Lawyers Weekly No. 001-021-16, 23 pp.) (Wilkinson, J.) No. 15-1170, Feb. 2, 2016; USDC at Richmond, Va. (Gibney, J.) 4th Cir.

Holding: A payday lender’s loan servicing agent cannot enforce an arbitration clause in this putative class action filed by a payday-loan borrower, and the 4th Circuit reverses the district court order compelling arbitration; the servicing agent seeks to deploy arbitration to avoid state and federal law and game the entire system.

The agreement here purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law. The Federal Arbitration Act does not protect the sort of arbitration agreement that unambiguously forbids an arbitrator from even applying the applicable law.

This case originates with the lending practices of Western Sky, an online lender owned by Martin Webb. Webb was a member of the Cheyenne River Sioux Tribe and Western Sky’s officers were located on the Cheyenne River Reservation in South Dakota. From that base, Western Sky issued payday loans to consumers across the country.

Plaintiff James Hayes’ loan typifies Western Sky’s lending scheme; ultimately, he was set to pay $14,093.12 for a loan of $2,525.00. The loan of one plaintiff in this suit carried an annual interest rate of 233.84 percent. Western Sky’s loans stated they were “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe.” Defendant Delbert Services Corporation became the servicing agent for Hayes’ loan. The district court held that Delbert could enforce the loan agreement’s arbitration clause.

This arbitration agreement fails for the fundamental reason that it purports to renounce wholesale the application of any federal law to plaintiffs’ federal claims. While Western Sky was a tribal-owned entity, Delbert is not. Delbert seeks to avoid federal law through the prospective waiver-of-federal-law provision found in the arbitration agreement. But that provision is simply unenforceable.

A party may not underhandedly convert a choice of law clause into a choice of no law clause – it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject. Because the arbitration agreement in this case takes this plainly forbidden step, we hold it invalid and unenforceable. Moreover, we do not believe the arbitration agreement’s errant provisions are severable.

The order compelling arbitration is reversed, and the case is remanded.

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