Buy a cell phone, apply for a credit card, sign a lease, or borrow money, and invariably you’re confronted with a block of text that requires you to waive all liability. In those rare circumstances under which you can sue, you must agree to do so on the seller’s terms and according to the state laws of its choosing. These “take-it-or-leave-it” adhesion provisions are usually printed in a font so small you almost need a magnifying glass to read them, and in language so obtuse you practically need a law degree to understand it.
Actually, having a law degree may not help. That’s what Joshua Fensterstock learned after consolidating three private loans he’d taken out to attend Hofstra Law School in Hempstead, New York. “When I graduated, I had over $100,000 worth of student loans,” says Fensterstock, who graduated in 2003 and worked as a real estate lawyer at New York – based real estate, corporate, and litigation boutique Isaac & Associates for five years before opening his own New York practice last July. His debt load was hardly unusual: The American Bar Association estimates that law students attending private law schools took out, on average, more than $90,000 in loans during the period when Fensterstock was enrolled.
In 2006, Fensterstock decided to merge the remaining balances on the three private loans. The lender he chose — Education Finance Partners, a student loan company serviced by California-based Affiliated Computer Services, Inc. — gave him a 30-year loan of $52,915.49 at a fixed interest rate of 9.32 percent. “They e-mailed me a complete package of documents, and in order to be approved, I had to sign a promissory note that came with the application.” He read the fine print and agreed to the note’s terms.
Fensterstock soon noticed that though he was making regular payments, the balance on his monthly statements was rising, not falling. When he contacted ACS to report the problem in August 2007, he was told that if he didn’t pay precisely on the fourteenth of each month, his payment would apply only to the interest due on the loan, not toward reducing the principal. “That wasn’t in the agreement,” he says.
Fensterstock filed suit against ACS and EFP on behalf of himself and any other affected borrowers, claiming the two entities had engaged in fraudulent and deceptive practices. One catch: Filing suit violated a provision of the promissory note he signed under which he waived the right to pursue class actions or other representative claims and agreed that arbitration decide all individual claims. Fensterstock challenged that provision in his suit as well.
“We alleged that this class waiver would discourage people from standing up for their rights,” says his lawyer, Orin Kurtz of New York – based law firm Abbey Spanier Rodd & Abrams, noting that Fensterstock claims ACS and EFP have cheated a large number of borrowers out of small sums. “After all, how many individuals would bother going to arbitration for a few hundred dollars? A class action is the opportunity for many individuals banding together to take on a big corporation. That raises the stakes and may encourage the defendant to address the issue more squarely.”
Edward Lenci of Hinshaw & Culbertson, a Chicago-based firm that represents ACS, is unsympathetic. “There’s a big difference between an 18-year-old kid who signs a cell phone agreement because he doesn’t know any better and he’s under pressure from a salesman, and a 35-year-old lawyer,” Lenci says. “He should have known what he was signing.”
So far, the courts have disagreed. In July, the U.S. Court of Appeals for the Second Circuit upheld a lower court ruling that the promissory note’s class waiver and arbitration clauses were “unconscionable” under California law (the disputed promissory note specified the laws of ACS’s home state as the ultimate authority), rejecting the defendants’ argument that, as a lawyer, Fensterstock should have known better. “We have seen nothing in his education, experience, or expertise to suggest that he had any meaningful opportunity to negotiate that clause out of the contract,” Judge Amalya Kearse wrote on behalf of a unanimous three-judge panel.
Many lawyers don’t understand their loan terms, says Heather Jarvis, senior program manager at Equal Justice Works, a Washington, D.C. – based nonprofit organization that encourages lawyers to pursue public service careers. “They’re sophisticated people, and even they have a very difficult time understanding their loans and their options,” she says. “Certainly, when they were students, they did not understand what they were getting into.”
In its ruling, the Second Circuit found that arbitration was an inadequate remedy because it didn’t give Fensterstock enough of a chance to negotiate with the lender, and created a disincentive for individuals to sue.
Lenci, who has filed a petition asking the Second Circuit to rehear the case, is adamant that, in line with the Federal Arbitration Act (FAA), the disputed clauses should be upheld. “Hopefully, the Second Circuit will grant rehearing and decide that the FAA preempts California law on its own,” Lenci says. “Otherwise, we would have to petition the Supreme Court for certiorari.” Lenci notes that the Court is set to decide whether the arbitration act does indeed preempt state unconscionability laws like the one at issue in Fensterstock’s suit when it considers AT&T Mobility LLC v. Concepcion in the upcoming term. “The Second Circuit might decide to wait and see what the Supreme Court does in Concepcion,” says Lenci. “It’s unlikely but possible.”
As for Fensterstock, he’s preparing for the discovery phase of what he hopes will be certified as a class action suit — and making regular loan payments, though not always on the fourteenth. “Some months they apply it to the principal, some months they don’t,” he says. “The problem is when you send a payment either through mail or electronically, you have no control over when they post the payment. I don’t understand what they’re doing. Hopefully, we’ll clear it up once we start discovery.”