The National Arbitration Forum, a private arbitration company that is used extensively by the debt collection industry to circumvent the court process, was sued yesterday by Lori Swanson, the Minnesota Attorney General. The allegations in the lawsuit, if true, will confirm consumer advocates’ worst suspicions about the NAF.
The NAF has long been the bane of consumer advocates because of a suspected bias against consumers. The forum has denied these allegations and repeatedly maintained that it is a neutral decision maker. But the new lawsuit alleges that NAF is financially tied to a New York hedge fund group that owns one of the nation’s largest debt collection operations:
- “The consumer also does not know—and the Forum hides from the public—that the Forum is financially affiliated with a New York hedge fund group that owns one of the country’s major debt collection enterprises. Beginning in 2006 and through 2007, Accretive, LLC (a family of New York hedge funds under the control of an investment manager named J. Michael Cline and his associates), engineered two transactions. In the first transaction, Accretive formed several private equity funds under the name “Agora” (meaning “Forum” in Greek), which in turn invested $42 million in the National Arbitration Forum and obtained governance rights in it. In the second transaction, three of the country’s largest debt collection law firms (Mann Bracken of Georgia, Wolpoff & Abramson of the District of Columbia, and Eskanos & Adler of California) merged into one large national law firm called Mann Bracken, LLP. Accretive then formed and funded (partly using federal money from the U.S. Small Business Administration) a debt collection agency called Axiant, LLC, which acquired the assets and collections operations of Mann Bracken.”
- “Through these transactions, the Accretive hedge fund group simultaneously took control of one of the country’s largest debt collectors and became affiliated with the Forum, the country’s largest debt collection arbitration company. In 2006, the Forum processed 214,000 consumer debt collection arbitration claims, of which 125,000—or nearly 60 percent—were filed by the law firms listed above. The Forum conceals its affiliations with the collections industry through extensive affirmative representations, material omissions, and layers of complex and opaque corporate structuring.”
The lawsuit goes into great detail about the murky corporate web that has been created to hide this obvious conflict of interest from the public. The lawsuit further alleges that NAF, through a secret marketing campaign, encourages debt collectors to use arbitration to collect debts. One such marketing campaign, revealed in the lawsuit, lists the following benefits for debt collectors using NAF:
- “[t]he customer does not know what to expect from Arbitration and is more willing to pay;”
- “[t]hey [customers] ask you to explain what Arbitration is then basically hand you the money;” and
- “You have all the leverage and the customer really has little choice but to take care of this account.”
The lawsuit further alleges the NAF encourages debt collectors to include mandatory binding arbitration clauses in their contracts, and in some cases, provides sample arbitration clauses to certain debt collectors. There are also allegations about the creation of “talking points” to deflect questions about the NAF’s financial ties to the debt collection industry and allegations of the forum giving deliberately misleading answers to a reporter that questioned the forum’s ties with the hedge fund.
You can read the full text of the lawsuit here. Its long, but well worth the read if you’re interested in the gory details.
7/20/09 update: That didn’t take long. The Star-Tribune reports that Lori Swanson and the NAF have agreed to settle the lawsuit. And its a big win for Swanson. The NAF agreed to stop accepting any new consumer arbitration or taking part in processing or administrating any new consumer arbitration nationwide. The company must stop administering arbitration involving consumer debt including credit cards, consumer loans, utilities, telecommunications, health care and consumer leases. The forum will be allowed to continue to arbitrate internet domain name disputes and other business to business matters. The settlement takes effect on July 24, 2009. Under the terms of the NAF, the forum did not concede any liability for the accusations in Swanson’s lawsuit. My take on the situation: good riddance, NAF.
On the first day of the Sotomayor confirmation hearings, it seems appropriate to post this report on Judge Sotomayor’s record in consumer interest cases. The report contains discussion of Sotomayor’s rulings on debt collection, consumer arbitration, and unfair and deceptive trade practices, among other issues. Also, click here for a list of Judge Sotomayor’s consumer protection rulings.
(photo: Wikimedia Commons)
I’ve written in the past about how forced arbitration is bad for consumers in the context of debt collection. Virtually all consumer credit contracts give the debt collector the power to choose the arbitration forum. Predictably, debt collectors choose forums that rule in their favor the overwhelming majority of the time. In addition, a private arbitrator is not accountable to the public like a judge, is not required to explain his decision, and his decision cannot be appealed in a meaningful way.
But the Obama administration has taken a huge step in reforming this unfair system. The President has proposed the creation of a new agency to serve as a watch-dog for consumers. Under the current proposal, the Consumer Financial Protection Agency could prohibit forced arbitration if such a prohibition is in the public interest or would protect consumers. Obviously the proposed agency is a long way from being finalized, and the proposal is sure to face stiff opposition from the financial industry. But if the proposal is enacted in its current form, it will have the potential to put an end to the unfair way that debt collectors are currently using arbitration against consumers.
If you live in Minnesota and are facing an arbitration proceeding, feel free to contact me.
Many consumer contracts, including credit cards, contain mandatory binding arbitration clauses buried in the fine print of the terms and conditions. The clauses are very broad and encompass virtually any dispute between the consumer and the company. Increasingly, creditors are invoking mandatory binding arbitration clauses to collect debts. Rather than sue consumers and pursue a court judgment, credit card companies are forcing consumers into arbitration.
Arbitration is a dispute resolution process that, according to supporters, produces a resolution in less time and for less money than litigating a case in court. Sounds great, right? But unlike a judge, who is publicly elected and accountable, an arbitrator is chosen by a private arbitration company. The arbitrator is not required to issue a written decision, so the parties rarely get an explanation about the arbitrator’s ruling. And unlike a court ruling, arbitration rulings are final and not subject to appeal. The arbitration clause usually mandates what arbitration company will hear any disputes. Predictably, creditors choose arbitration companies that pander to their interests. Since credit card companies provide the arbitration companies with thousands of cases, which generate huge sums of money for the arbitration companies, its not surprising that they rule against consumers the overwhelming majority of the time. There are even stories of arbitrators being blacklisted by arbitration companies for ruling in favor of a consumer.
Arbitration may indeed resolve a consumer dispute faster and cheaper than a court proceeding. But the arbitrator is chosen by your opponent, rules in favor of your opponent the vast majority of the time, is not required to explain his decision, and his decision cannot be appealed. Sounds like kangaroo court to me.
If a credit card company is forcing you to arbitration or is trying to confirm an arbitration award against you, please contact me immediately to discuss your case.
Minnesota Lawyer recently published an article about the increased need for consumer lawyers in the current economic climate. The article discussed the rise in debt collection lawsuits being initiated and some of the problems this has caused for consumers.
I was quoted several times in the article, which also featured quotes from fellow consumer lawyers Nick Slade and Sam Glover:
Minneapolis consumer attorney Todd Murray is fielding a lot of calls as well, many relating to issues surrounding garnishment. “There are a lot of people out there who the economy has hit pretty hard and who are having problems with debt collection.”
According to Murray, garnishment statutes tend to favor creditors, particularly the statutes involving exemptions. “A lot of times exempt funds are seized…and the process to resolve it is sort of this ping-pong process,” he said. “This often can take weeks to resolve and meanwhile the account is frozen and overdraft fees pile up.”
Murray added that while creditors are pushing hard to keep the arbitration process in place, many consumer advocate groups have targeted mandatory arbitration as “No. 1″ on their list of things to change.
If you’re in Minnesota and have been sued or garnished by a debt collector and need help defending yourself, please contact me.
Michelle Lore, Consumer lawyers keep busy as creditors push for payment, Minnesota Lawyer, April 13, 2009, at 3.