Texas Supreme Court says borrowers must arbitrate with payday lender

Courts State Issues Arbitration Payday Lending

On February 23, the Texas Supreme Court affirmed a state appeals court panel decision which found that borrowers’ claims in a class action alleging a payday lender’s wrongful use of the criminal justice system to collect unpaid debts were subject to an arbitration agreement in their loan contracts with the payday lender. According to the opinion, the borrowers entered into loan contracts with the payday lender and used postdated checks as security for the loans. The payday lender deposited the postdated checks after the borrowers defaulted on their payment obligations, which resulted in the checks being returned for insufficient funds. The borrowers were then charged by the State of Texas for the issuance of bad checks and the charges were ultimately dismissed. The borrowers filed a class action lawsuit against the payday lender alleging the wrongful use of the criminal justice system to collect on their unpaid loans and asserted violations of, among other things, the Deceptive Trade Practices Act and Consumer Protection Act. The trial court denied the payday lender’s motion to compel arbitration because the court found that the class action allegations related to the use of the criminal justice system and not the underlying loan contract, and that the payday lender waived its right to arbitration by invoking the judicial process. Upon appeal, the panel versed the trial court’s decision. In affirming the appeals court panel holding, the Texas Supreme Court agreed that the class action suit was “factually intertwined with the loan contracts” and therefore, the arbitration provision applied and there was insufficient evidence to support the trial court’s holding that the payday lender waived its right to arbitrate.