Multi-Office Team Compels Putative Class Action to Arbitration in Pennsylvania Consumer Discount Company Act Case

October 2021

On September 8, 2021, following an initial motion to compel arbitration and arbitration-related discovery, Pittsburgh partner Jessica Lucas, New Jersey partner Peter Siachos, and Reno partner Sean Flynn, successfully compelled to arbitration a putative class action filed against their client, a debt buyer in the accounts receivable management industry. The plaintiff is unable to bring his class claims in arbitration.

The plaintiff’s claims arise from a debt obligation related to a personal loan, which was issued by the original creditor.  To obtain the loan, the plaintiff was required to create an account and consent to the terms of an agreement, which included an arbitration clause.  After making a few payments, the plaintiff defaulted on the account.  Ultimately, the original creditor charged off and assigned the account to the firm's client.  In his complaint, the plaintiff alleged that following his default on the account, the client filed a lawsuit against him to attempt to collect on the account.  He further alleged that the client did not have the authority to collect on the account because the client was not licensed under Pennsylvania’s Consumer Discount Company Act ("CDCA"), 7 Pa. Stat. §§6201 et seq. (“CDCA”), which prohibits entities in the business of negotiating or making loans in the amount of $25,000 or less from charging or collecting interest or fees which are in excess of 6 percent. 

The plaintiff also challenged the validity of the assignment of the account from the original creditor (an entity licensed under the CDCA) to the client (an entity not licensed under the CDCA), as such transfer was prohibited by the CDCA without approval from the Department of Banking.  In short, the plaintiff asserted that the client violated the Fair Debt Collections Practices Act ("FDCPA"), 15 U.S.C. §§1692-1692p, the Fair Credit Extension Uniformity Act ("FCEUA"), 73 Pa. Stat. §§2270 et seq., and the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. Stat. §§201-1 et seq. by attempting to collect on the account without a CDCA license and without obtaining written approval from the Department of Banking.

In compelling the plaintiff’s claims to arbitration, the court stated that based upon applicable Supreme Court severability principles, any problem under the CDCA with respect to the assignment of the plaintiff’s account from the original creditor to the client is insufficient to bar enforcement of the subject agreement.  The court further noted that an arbitration clause is severable and independently enforceable from the rest of the contract in which it is contained, such that a party cannot avoid arbitration by attacking the contract containing the arbitration clause – they must attack the arbitration clause itself. 

Although the underlying severability principles on which the court based its ruling are well-established, the only other Pennsylvania case that had considered the novel issue of whether alleged violations of the CDCA could render an assignment invalid based on the CDCA’s express language prohibiting the sale of an account from a licensed entity to a non-licensed entity, held that the CDCA did, in fact, render the assignment invalid.  See Zirpoli v. Midland Funding LLC, Civil No. 1:19-cv-01428, ECF 44 (M.D. Pa. Jul. 7, 2021).  Zirpoli is currently on appeal in the Third Circuit.