Third Circuit Refuses to Enforce CashCall Arbitration Clause
The Third Circuit this week affirmed a district court ruling that found an arbitration clause in a loan agreement for Western Sky/CashCall was unenforceable, due to the fact the clause disavowed federal and state law in favor of tribal law. The lawsuit was initiated after a consumer paid more than $15,000 on a $5,000 loan and found a putative class to file a racketeering claim against the loan servicer. After the district court refused to compel arbitration, CashCall appealed.
The class argued that the arbitration procedure provided in the loan agreement was illusory, including an impermissible waiver of federal and state rights. The arbitration clause required the dispute resolution to take place through an authorized representative of the Cheyenne River Sioux Nation with the tribe’s consumer dispute rules. However, the tribe lacked a consumer dispute forum and had no interest in the business.
The business model relied upon by CashCall originated loans through a private lending operation located on Cheyenne River Sioux tribal lands called Western Sky. Shortly after funding the loans, Western Sky would transfer the loans to CashCall for servicing. Last month, a federal court ordered CashCall to pay a $10 million fine to the Consumer Financial Protection Bureau (CFPB) for acting as the “true lender” of the Western Sky operations.
The Third Circuit’s opinion closely mirrors a decision last year in the Fourth Circuit wherein BMO Harris Bank attempted to rely upon a tribal choice of law provision and arbitration clause in a lending contract. That court held the clauses were unenforceable because portions of the contract contained language that specifically excluded the application of Federal law to disputes.
In light of the decision, an attorney for the class said, “we are gratified that the Third Circuit, like every other court of appeals, has refused to allow these payday lenders to avoid being held accountable through the use of a sham arbitration clause.”
