(AUSTIN) – Did a payday lender waive its right to arbitration by pursuing criminal charges against some of its customers?
The Texas Supreme Court Friday heard arguments at the University of Houston Law Center in the case involving Cash Biz, a provider of short-term consumer loans known as “payday loans.” In exchange for the often small loans, Cash Biz required borrowers to agree to binding arbitration for any disputes and to provide a post-dated personal check in the amount of the loan plus finance charges.
After Hiawatha Henry and 400 other borrowers defaulted on their loans, Cash Biz attempted to deposit the post-dated checks, which bounced due to insufficient funds. The lender in 2012 contacted the Harris County District Attorney’s Office and submitted criminal complaints, resulting in hundreds of bad check charges. Although charges were eventually dismissed, some borrowers were fined, arrested and detained.
The Texas Office of Consumer Credit Commissioner investigated and ordered Cash Biz to pay $10,000 in fines for improperly subjecting its customers to criminal prosecution.
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 filed 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 the active engagement in litigation that Texas courts have held to be inconsistent with a right to arbitrate.
“Cash Biz’s actions, though presumably vindictive, do not evince a desire to achieve repayment of any loans through the criminal process,” said Justice Jason Pulliam in the majority opinion.
Debt Collection or Not?
Daniel Dutko, an associate at Houston’s Hanszen Laporte, argued for the borrowers. He focused on Cash Biz’s attempt 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 disagreed with a suggestion by Justice Jeffrey Boyd that the post-dated checks were collateral on the loans. He said Cash Biz told customers that the checks were used as proof of a bank account and would not be cashed.
“It sounds like debt collection,” Boyd said, asking why the criminal complaint would invoke the judicial process on the later class action suit.
“When they filed the criminal charges they went completely against their arbitration provision,” which required claims for the collection of money be determined through arbitration, Dutko said.
Edward Hubbard, of counsel at Coats Rose in Houston, argued for Cash Biz.
Why didn’t Cash Biz begin with arbitration, asked Justice Debra Lehrmann.
“The dispute we’re seeking to arbitrate didn’t exist at the time our client filed the criminal complaints,” he said.
But didn’t the dispute between Cash Biz and its defaulting customers already exist, asked Justice Eva Guzman.
Hubbard said there might have been various reasons the criminal charges were sought, including underlying fraud by customers obtaining the loans, but that such evidence has not yet been developed.
“We have never gone into any proceeding to seek recovery of money under the contracts,” he said.
When Dutko returned to the podium to finish his argument, he was asked about Hubbard’s suggestion that the charges might have been related to fraud or other criminal conduct.
“There is absolutely no evidence that anybody committed fraud. They were all worthless check cases,” Dutko said. “They say they never sought civil relief. The problem with that is they didn’t have to. They had the DA file charges, then called and threatened, ‘Ha, ha, we’re going to put you in jail.’”
Federal Appeals Court Ruling Cited
Dutko discussed a May ruling by the U.S. Fifth Circuit Court of Appeals in one of his lawsuits against another lender involving similar facts. In that case, Lucinda Vine v. PLS Financial Services, the federal court declined to follow the state appeals court ruling in the Cash Biz case.
“If PLS attempted to ‘game the system’ by initiating theft by check proceedings in place of submitting collection actions to an arbitrator, PLS should not be allowed ‘a second bite at the apple through arbitration’ to resolve related issues,” said the panel in a per curiam opinion.
Fifth Circuit Judge Stephen Higginson dissented, saying that although PLS may have been trying to collect its debt while avoiding the costs of arbitration, federal case law requires “something more than the actions here.”
Hubbard told the Supreme Court that it did not need to follow the federal ruling, saying: “When the U.S. Supreme Court has not ruled, you are on equal footing in evaluating the federal arbitration act.”
The case is Hiawatha Henry et al v. Cash Biz L.P. et al, No. 16-0854. Watch the oral argument video here.