Newton v. Am. Debt Servs., Inc.

854 F.Supp.2d 712

Heather NEWTON, Plaintiff,

v.AMERICAN DEBT SERVICES, INC., et al., Defendants.

No. C–11–3228 EMC.

United States District Court, N.D. California.

Feb. 22, 2012.

Tavy Alice Dumont, Law Office of Tavy Alice Dumont, Campbell, CA, for Plaintiff.

ORDER DENYING DEFENDANTS' MOTIONS TO COMPEL ARBITRATION

EDWARD M. CHEN, District Judge.

Defendants' motions to compel arbitration came on before the Court on January 27, 2012. Docket Nos. 36, 39. For the reasons set forth below, the Court DENIES Defendants' motions to compel arbitration.

I. FACTUAL & PROCEDURAL HISTORY

In August 2009, Plaintiff Heather L. Newton responded to an advertisement by Defendant American Debt Services, Inc. (“ADS”), and spoke to a salesman who stated that ADS could settle her credit card debt for half of the balance owed. Docket No. 11 ¶¶ 31, 32 (“FAC”). While speaking to the salesman, Plaintiff was directed to a website where the salesman instructed her to submit information about herself. FAC ¶ 33. Shortly after, Plaintiff received a “Welcome Packet” purportedly from Defendant ADS, but allegedly from Defendant Quality Support Services, LLC (“QSS”). FAC ¶¶ 34, 35. The Welcome Packet stated that Defendants would help settle Plaintiff's debt and provide assistance should a creditor file suit. FAC ¶ 36.

The Welcome Packet also contained a “Special Purpose Account Application” and “Account Agreement and Disclosure Statement.” FAC ¶ 34. The Special Purpose Account Application incorporated by reference the Account Agreement and Disclosure Statement, which contained on its back side an arbitration clause. Docket No. 37–2. Plaintiff filled out the Application, establishing a “Special Purpose Account” with Defendant Rocky Mountain Bank & Trust (“RMBT”). FAC ¶ 37. Defendant RMBT, through its agent Global Client Solutions, LLC (“GCS”), was authorized to debit Plaintiff's bank account at Golden One Credit Union to fund the Special Purpose Account. FAC ¶ 38. Defendant GCS would then transfer Plaintiff's first three payments to Defendants as nonrefundable fees. FAC ¶ 39. The remainder was to be used to fund settlements with Plaintiff's creditors. FAC ¶ 40.

Following Defendants' instructions, Plaintiff stopped communicating with her creditors. FAC ¶ 41. In March 2010, Bank of America contacted Plaintiff because her account was past due. FAC ¶ 42. When Plaintiff explained about her payment plan with Defendants, she was informed that Defendants never contacted Bank of America and that Bank of America did not work with debt settlement companies. FAC ¶¶ 42–44. Plaintiff agreed to make four payments to Bank of America of $550. FAC ¶ 45.

To make these payments, Plaintiff sought to use the funds from her Special Purpose Account. By this point, Plaintiff had made payments of $2,806.05 into the Special Purpose Account; however, only $1,200 remained after Defendants' fees were deducted. FAC ¶ 46. When Plaintiff tried to use pay this $1,200 to Bank of America, Defendants refused to release the funds until Plaintiff promised to make her remaining payments to Bank of America through the Special Purpose Account. FAC ¶ 49. This permitted Defendants to keep 25% of the deposited funds as non-refundable fees, even though Defendants had no role in negotiating the settlement with Bank of America. FAC ¶ 50.

In April 2010, Chase brought suit against Plaintiff based on her failure to satisfy her account. FAC ¶ 51. When Plaintiff requested help from Defendants, Defendants informed her that they could not help her. FAC ¶¶ 52–53. Plaintiff eventually settled the suit with Chase with the help of a pro bono legal clinic. FAC ¶ 56.

Plaintiff eventually discovered that Defendants had not contacted any of her creditors in the eight months she had been in the program. FAC ¶ 54. Plaintiff then terminated Defendant ADS's services, requesting a refund of her money in the Special Purpose Account. FAC ¶ 57. Defendants eventually refunded $70.04 to Plaintiff. FAC ¶ 59. In total, Plaintiff paid $4,206.50 into the Special Purpose Account. Of that, $70.04 was refunded, $2,200 went to Bank of America, and $1,936.46 was kept by Defendants. FAC ¶ 60.

Plaintiff then brought the instant class action suit against Defendants, alleging: (1) violations of California Civil Code § 1750 et seq., (2) violations of 15 U.S.C. § 1679 et seq., (3) violations of California Business & Professions Code § 17200 et seq., (4) interference with contractual relations, and (5) negligence. Defendants now move to compel arbitration. Docket Nos. 36 (“GCS Motion”), Docket No. 39 (“ADS Motion”).

II. DISCUSSION

A. Standard of Review

The central purpose of the Federal Arbitration Act (“FAA”) “is to ensure that private agreements to arbitrate are enforced according to their terms.” Momot v. Mastro, 652 F.3d 982, 986 (9th Cir.2011). In order to enforce an arbitration agreement, a court shall issue an affirmative order to proceed in arbitration if the court is satisfied “that the making of the agreement for arbitration or the failure to comply therewith is not in issue.” 9 U.S.C. § 4 (2006). If the making of the arbitration agreement or the failure to perform the agreement is at issue, the court will proceed to trial on the issue. Id. When deciding a petition to compel arbitration, the Court's role is “limited to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., 207 F.3d 1126, 1130 (9th Cir.2000).

Arbitration is a matter of contract. AT & T Techs., Inc. v. Commc'ns Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986). Thus, “[a]lthough ‘courts may not invalidate arbitration agreements under state laws applicable only to arbitration provisions,’ general contract defenses such as fraud, duress, or unconscionability, grounded in state contract law, may operate to invalidate arbitration agreements.” Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.2002) (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). However, even generally applicable doctrines such as duress or unconscionability cannot be applied in a way that disfavors and undermines arbitration. AT & T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 1747, 179 L.Ed.2d 742 (2011). Thus, a rule that would “interfere with fundamental attributes of arbitration” cannot be applied to invalidate an arbitration agreement, as such rules would disserve the overarching purpose of the FAA “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” Id. at 1748.

B. Defendants GCS's and RMBT's Motion to Compel Arbitration

Defendants GCS and RMBT move to compel arbitration based on Plaintiff's signing the Special Purpose Account Application, which incorporated by reference the terms contained in the Account Agreement and Disclosure Statement (“Agreement”). GCS Motion at 3. The Agreement's arbitration clause, located on the back side of the Agreement, states:

In the event of a dispute or claim relating in any way to this Agreement or our services, you agree that such dispute shall be resolved by binding arbitration in Tulsa[,] Oklahoma utilizing a qualified independent arbitrator of Global's choosing. The decision of an arbitrator will be final and subject to enforcement in a court of competent jurisdiction.

Docket No. 37–2.

Plaintiff raises two challenges to the arbitration clause: (1) there was no agreement to arbitrate, and (2) the arbitration clause is unconscionable. Docket No. 44 at 1 (“Opp. to GCS”).

1. Plaintiff's Ability to Challenge the Arbitration Clause

As an initial matter, Defendants GCS and RMBT argue that because Plaintiff's complaint challenges the validity of the Agreement as a whole, rather than the specific arbitration clause, Plaintiff's challenge must be submitted to arbitration. GCS Motion at 6. In Buckeye Check Cashing, Inc. v. Cardegna, the U.S. Supreme Court held that unless “the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance.” 546 U.S. 440, 445–46, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006). Thus, “the material question is whether the challenge to the arbitration provision is severable from the challenge to the contract as a whole.” Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1001 (9th Cir.2010).

In the Ninth Circuit, the plaintiff is not required to specifically challenge the validity of an arbitration clause in the complaint. Id. at 1002. This rule is justified because:

in cases in which the arbitration clause's invalidity is an entirely distinct issue from the contract claims in the case ... we would not generally expect the plaintiff to raise claims against the validity of the arbitration clause in the complaint, because such claims generally would be unrelated to plaintiff's principle prayer for relief. An independent challenge to the arbitration would became relevant only at the point plaintiff is required to oppose a motion to compel. In such a case ... the challenge to the validity of the arbitration provision would usually appear not in the complaint, but in the pleadings resisting a motion to compel arbitration.... Accordingly, we look not only to the complaint, but to Plaintiffs' motion papers, to determine if Plaintiffs' objections to the arbitration clause are severable from Plaintiffs' challenge to the validity of the franchise agreement as a whole.

Id. at 1001–02 (emphasis added). Applying this rule, the Ninth Circuit found that the plaintiffs' challenge to a franchise agreement was based on fraudulent inducement, whereas the plaintiffs' challenge to the arbitration provision was based on unconscionability.¹Id. at 1002. Thus, the challenge to the franchise agreement was distinct from the challenge to the arbitration...