“Payday loans” are a modern device intended to avoid interest rate regulations and financial disclosure laws. So-called “salary lenders” who engage in these predatory loan arrangements concentrate on low-income families who live paycheck-to-paycheck. To circumvent state consumer protection legislation, they partner with obscure national banks which are not subject to state law. People who receive the “payday loans” are usually both desperate and unsophisticated. Charlene Jenkins was a good example. Between June 7, 2002, and September 6, 2002, she received eight loans, each for under $500, from First American Cash Advance of Georgia. If a dispute arose, she agreed to arbitrate, and of course she “agreed” not to “serve as a representative, as a private attorney general, or in any other representative capacity… or… participate as a member of a class.” To nail it down completely she “agreed” that “the arbitrator shall not conduct class arbitration.” First American included in these “agreements,” as a co-participant, the First National Bank in Brookings. Brookings, Georgia? No way. Brookings is not in Georgia, not even near Georgia, but in South Dakota. Naturally, Ms. Jenkins’ eight separate promissory notes were all governed by South Dakota law.
By teaming up with this genuinely obscure national bank, First American charged annual percentage rates between 438% to 939%. By teaming up with an arbitration agency, First American figured it would avoid class actions. In fact, without class relief, First American might be lucky enough to avoid litigation altogether, because of the difficulty that a poor person like Ms. Jenkins would have finding an attorney to represent her in an individual capacity only.
The Chief Judge of the Georgia court, however, concluded that “enforcing the arbitration clause… against the payday consumers would lead to an unjust result.” When First American moved for reconsideration, Judge Bowen highlighted the invaluable assistance that “unconscionable mandatory arbitration agreements” offered “to circumvent state laws [and] enable stronger parties to force weaker parties into binding arbitration.”
Judge Bowen probably believed his decision would be affirmed in a heartbeat. Maybe, like me, he thought it was only the Mafia who charged interest rates of 900% or so. The Mafia’s big mistake was to threaten physical violence if the borrower didn’t pay on time. All it really needed was a bit of interstate commerce to get federal jurisdiction, and a mandatory arbitration clause waiving class actions. Now, Mafia Cash Advance Services would be well protected.
Judge Bowen’s decision was reversed. Now, class actions can be precluded, because under the state RICO statute attorney’s fees are recoverable. Supposedly, that would make Ms. Jenkins’ individual case an attractive proposition. Just think, for example, of all the civil RICO cases that have been brought in Connecticut! Why, with only a couple of years of discovery, Ms. Jenkins’ $1,000 usurious interest recovery could be proved to be a product of racketeering, and therefore Ms. Jenkins can vindicate all her individual substantive rights. That is if the arbitrator in his or her discretion will award the hugely disproportionate attorney’s fees required to obtain the evidence to prove a RICO violation. At any rate, since arbitration is generally confidential, we will never know.
If the Mafia is not smart enough to get the case into federal court, however, there was some hope. Florida’s Supreme Court decided that Mr. John Cardegna could bring a class action against Buckeye Check Cashing, Inc. because the contract containing the mandatory arbitration clause was illegal and therefore void from the beginning. The same kind of financial scheme was at issue. Florida’s Supreme Court correctly put the horse before the cart in deciding that a court first had to determine whether the usury laws were violated, because otherwise it would “breathe life into a contract that not only violates state law, but is also criminal in nature, by use of an arbitration provision. This would lead to an absurd result. Legal authorities from the earliest time had unanimously held that no court will lend its assistance in any way towards carrying out the terms of an illegal contract. Illegal promises will not be enforced in cases controlled by federal law.” No contract, no arbitration clause. No public policy exists, in Florida anyway, to let an arbitration clause subvert the usury laws.
The Mafia will be closely watching continued developments.