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In a major victory for banks, a federal appeals court has ruled that borrowers can be compelled to submit their claims to arbitration even if they wanted to bring a class action under the Truth in Lending Act and the Electronic Fund Transfer Act. “While it may be true that the benefits of proceeding as a class are unavailable in arbitration, neither statute confers upon plaintiffs the right to proceed as a class,” Chief U.S. Circuit Judge Edward R. Becker wrote in Johnson v. West Suburban Bank. Instead, Becker said, the right to pursue a class action “is merely a procedural one” that arises under federal court rules and that “may be waived by agreeing to an arbitration clause.” The ruling reverses a decision by U.S. District Judge Gregory M. Sleet of the District of Delaware, who held that there was an “inherent conflict” between compelling arbitration and the TILA and the EFTA. Becker found no such conflict. “Though there may be some tension between the purposes of the debtor-protection statutes and arbitration, we are not persuaded that the two are so at odds as to preclude arbitration,” Becker wrote in an opinion joined by U.S. Circuit Judges Dolores K. Sloviter and Richard L. Nygaard. Becker said the Supreme Court “has made clear that the presumption in favor of arbitration established by the Federal Arbitration Act is a powerful one.” Since neither TILA nor EFTA explicitly precludes the selection of arbitration instead of litigation, he said, “a party who agrees to arbitrate, but then asserts that his or her statutory claim cannot be vindicated in an arbitral forum, faces a heavy burden. That burden has not been met here.” Plaintiffs’ attorneys Cathleen M. Combs and John M. Broderick of Edelman Combs & Latturner in Chicago, along with William L. O’Day Jr. of Wilmington, Del., argued that Congress has encouraged the use of class actions to enforce the two laws and that compelling arbitration will frustrate that intent. But Becker said he found nothing in the legislative history that suggested Congress wanted to prohibit the use of arbitration. “Because we can discern no congressional intent to preclude the enforcement of arbitration clauses in either statute’s text, legislative history, or purpose, we hold that such clauses are effective even though they may render class actions to pursue statutory claims under the TILA or the EFTA unavailable,” Becker wrote. The decision is one of first impression in the federal appeals courts, but several other circuits are currently pondering the same question. And the U.S. Supreme Court could take up the issue as early as this fall in a TILA case from the 11th Circuit that was decided on other grounds but also includes arbitration as an issue. The banking industry clearly considered the case important because two friend-of-the-court briefs were filed by some of the industry’s heavyweights. Philadelphia-based Pepper Hamilton filed one on behalf of the American Bankers Association, American Financial Services Association, Consumer Bankers Association and Delaware Bankers Association; and D.C.-based Wilmer Cutler & Pickering filed one on behalf of the Delaware Retail Council, the New Jersey Retail Merchants Association and the Pennsylvania Retailers Association. In the suit, plaintiff Terry Johnson said he entered into a short-term loan agreement with County Bank of Rehoboth Beach to borrow $250 for two weeks at the astonishing rate of 917 percent, meaning that he was required to pay back $338 in one payment at the end of the two weeks. Johnson claimed that the finance charges of $88 were unfairly high and that the bank and Tele-Cash Inc., which acted as the bank’s agent for the loan, had violated the truth-in-lending laws. He filed the suit as a class action, alleging that the bank and its agent violated both TILA and EFTA by failing to properly disclose the high rate of interest, and by requiring loan applicants to open accounts from which they were required to irrevocably preauthorize electronic fund transfers to pay the loan. Defense attorneys Walter Weir Jr. and Susan Verbonitz of Weir & Partners in Philadelphia, along with James D. Griffin of Griffin & Hackett in Georgetown, Del., immediately moved to stay the proceedings and compel arbitration. But Judge Sleet concluded that arbitration was at odds with the purposes of TILA and EFTA, and he refused to dismiss the case. Although Sleet’s refusal to compel arbitration was interlocutory, Becker said that “such refusals are immediately appealable” under the Federal Arbitration Act. On appeal, Johnson’s lawyers argued that Congress inserted language into the statutes with the intent of encouraging district court judges to certify class actions and that the legislative history of amendments to TILA evince Congress’ belief that class action remedies play a central role in the enforcement of the laws. Class actions, they said, don’t simply provide restitution but also serve public policy goals through plaintiffs who act as private attorneys general. But Becker said, “the public interest purposes behind the civil penalty provisions of the statutes are not in conflict with arbitration, even if arbitration clauses may prevent the bringing of class actions.” To the extent that class actions serve public interest goals, Becker said, “those goals are also met by other provisions of the laws, which allow for enforcement of the statutes by federal agencies that possess sufficient sanctioning power to provide a meaningful deterrent to creditors who violate the terms of either act.” Becker found that the precise question presented in the appeal — whether a court can compel arbitration of TILA claims when the parties’ loan agreement contains an arbitration clause but the plaintiff seeks to bring claims on behalf of multiple claimants — is a question of first impression. “No other federal appellate court has squarely addressed the issue,” he wrote, although several district courts have ruled on it, with most taking the view that TILA does not preclude arbitration clauses. Becker found that the Supreme Court has taken a hard line on enforcing arbitration, holding Gilmer v. Interstate/Johnson Lane Corp. that in general, nothing prevents contracting parties from including a provision in their agreements that refers statutory claims arising under the contract to arbitration. As a result, Becker said, “arbitration of statutory claims will not be precluded” absent congressional direction. And the burden of proving that Congress meant to preclude arbitration, he said, “rests with the party who seeks to avoid arbitration.” Despite some powerful comments in the legislative history that supported TILA class actions, Becker found that Johnson’s lawyers failed to meet the burden. “Though the statute clearly contemplates class actions, there are no provisions within the law that create a right to bring them, or evince an intent by Congress that claims initiated as class actions be exempt from binding arbitration clauses,” Becker wrote. Johnson’s lawyers insisted that the legislative history demonstrated “the centrality of class actions to the TILA’s effective enforcement.” But Becker found that since nothing in the legislative history or text of TILA clearly expresses congressional intent to preclude arbitration, Johnson would have to show that arbitration “irreconcilably conflicts” with the purposes of the law. On that point, Becker said, Johnson failed. “While Johnson may be correct in arguing that Congress contemplated class actions as a part of the TILA enforcement scheme, and even that class actions were self-consciously promoted by Congress in amending the statute, he falls short of demonstrating irreconcilable conflict between arbitration and the TILA,” Becker wrote. Becker also found there was no need to fear that arbitration would “choke off the supply of lawyers willing to pursue claims on behalf of debtors,” because attorneys’ fees are recoverable under TILA and would also be recoverable in arbitration because arbitrators have the power to grant the same relief as courts. Finally, Becker said that his ruling was not “unfair” because “only those who consent to credit agreements with binding arbitration clauses are forced to abandon this procedural avenue; those who do not consent to arbitration in their contracts have the full selection of forums.”

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