A lawsuit seeking to void a pair of credit card debts on the theory that the debt buyers who acquired them were never licensed under New Jersey’s Consumer Finance Licensing Act has been ordered into arbitration, including the question of whether the contract is even valid.
The background: The case grew out of two charged-off credit card accounts and a state licensing argument that the plaintiffs hoped would erase the balances.
- The plaintiffs each opened a credit card account with a lender a few years ago and agreed to the card terms by using the accounts.
- After the plaintiffs stopped paying, the lender charged off the balances and sold each account down a chain of five debt buyers, with every transfer passing along all rights relating to the account.
- The last buyer in the chain filed small claims collection actions against the plaintiffs in state court.
- The plaintiffs then sued the debt buyers, arguing that because the defendants never held the license required by the New Jersey Consumer Finance Licensing Act, the accounts became void and unenforceable the moment the defendants took assignment of them. They also brought claims under the Fair Debt Collection Practices Act.
- After the collection cases were folded into the lawsuit and the defendants moved the matter to federal court, the defendants asked the judge to send everything to arbitration under the card agreements.
The ruling: Judge Evelyn Padin of the District Court for the District of New Jersey granted the defendants’ motion to compel arbitration and dismissed the complaint without prejudice.
- The card agreements warned cardholders in capital letters that they “GIVE UP YOUR RIGHT TO GO TO COURT,” and a survival clause kept the agreement alive through any “transfer or sale of your Account.” Neither plaintiff used the 45-day window to reject it.
- Because the agreement defined the lender to include its “successors,” the buyers that took the full accounts stepped into the lender’s shoes and could enforce arbitration. The one defendant that received only the receivables, not the full account, could still compel arbitration as a co-defendant, which the agreement separately covered.
- Judge Padin rejected the claim that the last buyer waived arbitration by filing the small claims suits, noting the agreement carved small claims court out of the disputes subject to arbitration, so suing there was not inconsistent with later demanding it.
- Most consequentially, the agreement’s delegation clause handed the arbitrator, not the court, the power to decide threshold questions about the contract’s validity. Because the plaintiffs never specifically attacked that clause, the judge held she could not reach their core argument. Even their claim that the licensing violations rendered the whole contract “void and unenforceable” is now for the arbitrator to decide.
