AUSTIN – Proponents of binding mandatory arbitration scored two huge victories this past week in the Texas appellate courts.
In two separate and unrelated rulings, the Texas Supreme Court and the Dallas Court of Appeals ordered plaintiffs in two cases – a group of customers alleging they were illegally victimized by a payday lender and an exotic dancer suing a strip club for gross negligence – to litigate their claims through private arbitration instead of the public court system.
Payday Lender Case
In the first case, the state’s highest court ruled that Ohio-based Cash Biz, a provider of short-term consumer loans known as “payday loans,” did not substantially invoke the judicial process when it referred hundreds of borrows for criminal charges.
Texas courts previously have held that a company’s active engagement in litigation was inconsistent with its right to arbitrate disputes. The state Supreme Court opinion also appears to directly conflict with a decision issued last year by the U.S. Court of Appeals for the Fifth Circuit, which ruled that a lender’s proactive cooperation with prosecutors meant that the company’s waived their ability to compel disputes to arbitration.
It will now be up to an arbitrator to hear the borrowers’ claims that they were illegally arrested, jailed and fined after Cash Biz used the criminal justice system to try and punish them for defaulting on their short-term consumer loans.
Ed Hubbard, who represents Cash Biz, said he believes the central issue in front of the arbitrator will be whether Cash Biz used an improper method of debt collection.
The facts of the case outraged some consumer groups but Hubbard said the Supreme Court’s ruling isn’t controversial when it comes to enforcing arbitration law.
“What you have to keep in perspective here is the criminal and civil systems are completely different,” said Hubbard, who is a lawyer at Coats Rose in Houston. “There are parallel civil and criminal proceedings that go on all of the time in this country and if the civil dispute is arbitrable — if it’s subject to an arbitration agreement — it is arbitrable.”
Cash Biz had required borrowers to provide a post-dated check in the amount of the loan plus finance charges. After Hiawatha Henry about 400 others defaulted on their loans, Cash Biz attempted to deposit the checks, which bounced due to insufficient funds.
The lender in 2012 submitted criminal complaints to the Harris County District Attorney’s Office, resulting in hundreds of bad check charges. Although charges were eventually dismissed, some borrowers were arrested, detained and fined.
In 2015 Henry and others filed a class action lawsuit against Cash Biz, alleging malicious prosecution, deceptive trade practices, fraud and violations of the Texas Finance Code. Cash Biz moved to compel arbitration but State District Judge Laura Salinas of Bexar County concluded that the company had waived its right to arbitration by substantially invoking the judicial process when it pursued the criminal charges.
San Antonio’s Fourth Court of Appeals in 2016 reversed Salinas and remanded the case for arbitration. With one of the three-judge panel dissenting, the court found that Cash Biz’s filing of a criminal complaint did not rise to the extent of active engagement in litigation.
When the Supreme Court heard arguments last September Daniel Dutko, said that Cash Biz attempted to use the post-dated checks to initiate criminal charges against its customers when Texas law requires contemporaneous checks for theft by check cases. Dutko is associate at Houston’s Hanszen Laporte.
Writing for the Supreme Court, Justice Phil Johnson said the borrowers did not present evidence that Cash Biz went beyond providing truthful information to the district attorney in hopes “that the falling chips would result in the borrowers paying their loans.”
“But even so, it is not more than initiating litigation, which we have held does not substantially invoke the judicial process and waive the right to arbitration,” Johnson said, citing a 2008 case, Perry Homes v. Cull.
Justice James Blacklock did not participate in the decision.
The court noted that it declines to follow the Fifth U.S. Circuit Court of Appeals’ decision in a case similar to the Cash Biz dispute. In 2017, the federal court concluded in Vine v. PLS Financial Services Inc. that the lender’s actions in submitting affidavits to prosecuting attorneys waived its right to enforce an arbitration agreement.
Buck’s Cabaret
In a separate decision, the Fifth Court of Appeals in Dallas ruled that an exotic dancer’s claims that a strip clubs actions caused her to have a car crash that led to serious physical injuries must be litigated in arbitration.
Joy Lantrip signed an agreement when she went to work at Buck’s Cabaret in 2016 that any dispute she had with the company would be decided by an arbitrator and that she “waive any right to litigation in a curt of law and waive the right to trial by jury.”
The very next day, according to court documents, Lantrip worked at the club, where she claims the managers “served her an excessive number of alcoholic beverages … even though it was apparent she was obviously intoxicated to the extent she presented a clear danger to herself and others.”
Lantrip also alleges that club officials forced her to buy alcohol, which made her a customer as well as a contract worker, and then allowed her to drive home. She was involved in a single car crash, where she lost her leg. She sued for gross negligence and violations of the Texas Dram Shop Act.
Lawyers for Buck’s argued that Lantrip and the club signed a binding mandatory arbitration agreement, but the trial court ruled that he would allow the case to proceed so that the plaintiff could conduct additional discovery.
In a six-page decision, the Dallas Court of Appeals used Lantrip’s contention that the club forced her to buy alcohol as its reasoning to compel arbitration and reverse the trial court decision. “
“Although Lantrip urges that she was a patron because Buck’s sold her alcoholic beverages, the fact that she purchased drinks is not necessarily inconsistent with her working under the terms of the Lease at the time,” Justice Ada Brown wrote for the unanimous three-judge panel. “Indeed, Buck’s could not require Lantrip to purchase drinks if she was merely a patron.
“Focusing not on her causes of action but the petition’s factual allegations, including an allegation that Buck’s required her to drink alcoholic beverages, and resolving any doubts in favor of arbitration, we conclude her claims fall squarely within the scope of the Lease’s arbitration provision,” Justice Ada wrote. “Doing so, we decline Lantrip’s request to remand this case to the trial court for discovery on her status as an employee, lessee, or invitee when she was served the alcoholic beverages.”
Mark Curriden contributed to this report.