Score One for Class-Action Arbitration

The following was reprinted from www.kansascity.com.

Payday lender loses appeal in Missouri cases

By DAN MARGOLIES

The Kansas City Star
An Overland Park-based payday lender’s attempt to bar borrowers from pursuing class-action lawsuits is “unconscionable,” a Missouri appeals court has ruled.

In a sweeping decision handed down last week, the Missouri Court of Appeals in St. Louis found that part of a mandatory arbitration clause in QC Financial Services Inc.’s loan contracts was both “procedurally” and “substantively” unconscionable.

The company’s in-house attorney, Matt Wiltanger, said QC was “obviously disappointed with the result” and would “more than likely” appeal to the Missouri Supreme Court.

QC Financial is a subsidiary of publicly traded QC Holdings Inc. and does business in Missouri as Quik Cash. Through its 596 branches in 24 states, QC Holdings originated 3.6 million loans totaling $1.35 billion in 2007 and posted revenues of $213.6 million.

Since 2002, Quik Cash has made loans to about 400,000 Missouri residents. Due to the arbitration clause in its loan contracts, however, Quik Cash had never been sued in the state until DeQuae Woods, a single mother of two in Florrisant, Mo., filed her claim in mid-2007.

Woods, who wound up paying $1,800 in interest on an initial Quik Cash loan of $450, alleged that the company had violated Missouri’s payday lending law and sought class-action status on behalf of similarly situated borrowers.

Quik Cash moved to have the suit dismissed, pointing to the mandatory arbitration clause in the loan contract. Among other things, the clause waived Woods’ right to participate in a class-action lawsuit or class arbitration against Quik Cash.

On Dec. 31, 2007, a St. Louis County judge ruled that the class-waiver provision created a chilling effect on legal disputes over the contract.

“If a clause immunizes a defendant and paralyzes consumers, it is unconscionable,” Circuit Judge Richard C. Bresnahan wrote. “Here there is overwhelming evidence this has occurred.”

QC appealed the decision, and last Tuesday the Missouri Court of Appeals-Eastern District upheld it. Citing a 1999 decision by a Florida appeals court, the Missouri court said that QC, by denying Woods the right to class arbitration, “has precluded the possibility that a group of its customers might join together to seek relief that would be impractical for any of them to obtain alone…”

That’s because few attorneys are willing to take on small, individual claims that are likely to cost more to pursue than they are to pay in damages and legal fees. Class actions, on the other hand, allow plaintiffs to pursue claims that, taken individually, aren’t worth much but in the aggregate may be worth a lot.

“The court has given the people the right to join together in a class arbitration and let us take a close look at the practices of Quik Cash and see if they comply with Missouri’s payday lending law,” said Woods’ attorney, John Campbell of The Simon Law Firm in St. Louis. “Of course, we’ve alleged they don’t. But up until now, we couldn’t pursue such a case.”

Woods hopes to show that Quik Cash charges more than state law permits. Missouri’s payday lending law allows payday lenders to charge up to 75 percent of the amount they lend. “Our allegation is that, through a series of different maneuvers, QC attempts to keep people in loans longer than the law allows and, as a result, people pay many times the amount they borrowed,” Campbell said.

Class waivers in consumer agreements have become a major legal issue throughout the country. Some courts have upheld them; others have struck them down. Earlier this year, for example, the 8th U.S. Circuit Court of Appeals, a federal court based in St. Louis, held that a class-waiver provision in an American Express credit-card contract — one very similar to Quik Cash’s provision — was not unconscionable under Missouri law.

By contrast, the Missouri Court of Appeals found that the terms of Quik Cash’s class-waiver provision left consumers like Woods “with no meaningful avenue of redress through the courts.”

Quoting from a decision it handed down earlier this year, it said that letting Quik Cash’s class waiver provision stand would allow the company “to continue imposing ‘its improper and deceptive charges ad infinitum since none of its customers would have a practical remedy to bring about a stop to the conduct.’

“As such,” it continued, citing a 2002 California case, “this would allow (Quik Cash) to grant itself a ‘get out of jail free card while compromising important consumer rights.’”

Unless Quik Cash chooses not to appeal, the Woods case now goes to an arbitration panel, which will decide whether to certify it as a class action. In theory, the class could include all 400,000 of Quik Cash’s customers in Missouri.

Shares in QC closed Tuesday at $3.90, down 21 cents.

To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.

~ by ebragg on January 6, 2009.