Petition for Writ of Certiorari — Johnson v. Tele-Cash, Inc.
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Bupreme Court, U.8 :
PILED
00-846 NOV 27 a9
No.
QERICE OF THE CLERK
In The
Supreme Court of the United States
¢
TERRY JOHNSON,
Petitioner,
WEST SUBURBAN BANK,
COUNTY BANK OF REHOBOTH BEACH,
DELAWARE, TELE-CASH, INC., ,
Respondents.
*
On Petition For Writ Of Certiorari
To The United States Court Of Appeals
For The Third Circuit
*
PETITION FOR WRIT OF CERTIORARI
¢
Danie. A. EDELMAN
Counsel of Record
CATHLEEN M. Comes
James O. LATTURNER
JOHN M. Broperick
EDELMAN, Comss, & LATTURNER
120 S. LaSalle Street
18th Floor
Chicago, IL 60603
(312) 739-4200
Attorneys for Petitioner
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
IZ0 PP
QUESTION PRESENTED FOR REVIEW
Is there an inherent conflict between compelling arbi-
tration pursuant to 9 U.S.C. § 1 et seq. and the Truth in
Lending Act, 15 U.S.C. § 1601 et seq. the Electronic Fund
Transfer Act, 15 U.S.C. § 1693 et seq., and other consumer
protection statutes because these statutes specifically pro-
vide for class action relief as a method of enforcement
and class actions cannot be brought in arbitration?
ii
PARTIES TO THE PROCEEDINGS
This petition involves an appeal from the United
States Court of Appeals for the Third Circuit in Johnson v.
West Suburban Bank, 99-cv-00104. The following is a list of
all parties to the proceeding whose judgment is sought to
be reviewed:
Terry Johnson, Plaintiff-Petitioner
West Suburban Bank, Defendant-Respondent
County Bank of Rehoboth Beach, Delaware, Defendant-
Respondent
Tele-Cash, Inc., Defendant-Respondent
iii
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED FOR REVIEW ........... i
PARTIES TO THE PROCEEDINGS. ................. ii
TABLE OF AUTHORITIES .......ccccscccccccccccee v
a jy 8) Be. | 0 Seer reer rrr 1
STATEMENT OF JURISDICTION.................+-- 1
STATUTORY PROVISIONS INVOLVED............. 2
EEE GO BE Giiec cccscescccccscesessss 2
A, DEATEGIINE OF BACT... cccccccccccccccces 2
B. PROCEEDINGS BELOW ...........-.-.-----. 4
REASONS FOR GRANTING THE PETITION ....... 5
I. THIS CASE PRESENTS AN IMPORTANT BUT
UNRESOLVED QUESTION OF LAW........... 5
A. THE PAYDAY LOAN INDUSTRY .......... 7
B. THE PERVASIVENESS OF ARBITRATION
I Tine cua qésacebobsseshesenes 7
C. JOHNSON IS AN AMICUS IN GREEN TREE
a cc cea iecdedus deveendduxess 8
Il. THE DECISION OF THE COURT OF APPEALS
Ee acca ce boiNnesh esq anaperccers 9
A. IF COMPELLING ARBITRATION CREATES
AN “INHERENT CONFLICT” WITH
ANOTHER STATUTE, THE STATUTORY
CLAIM SHOULD NOT BE ARBITRATED.. 9
B. THE PURPOSE OF THE CLASS ACTION IN
CONSUMER PROTECTION LAWS......... 14
1. THE PURPOSE OF TILA............... 15
iv
TABLE OF CONTENTS - Continued
Page
C. TILA’S PRIVATE ATTORNEY GENERALS.... 24
D. EFTA INCLUDES SIMILAR STATUTORY
LANGUAGE ENCOURAGING CLASS
PRE MUE nt S55 eis eade as se bard habs eAdaabo tn 27
CEI 665 6S enn cenecivantdadhiacnecsdenenun 29
Appendix A Third Circuit Opinion................. Al
Appendix B_ District Court Opinion................ Bl
Appendix C Federal Arbitration Act, 9 U.S.C. 1
et seq., Truth in Lending Act, 15
U.S.C. § 1610(a), and the Electronic
Fund Transfer Act, 15 U.S.C.
Appendix D Sample Arbitration Clauses in
ee FOR LOGIE cos icesccessccas D1
Vv
TABLE OF AUTHORITIES
Page(s)
CASEs:
Baltimore & Ohio Chicago Terminal R. Co. v. Wiscon-
sin Central Ltd., 154 F.3d 404 (7th Cir. 1998)
cknaddcaweceknstseeunas $akeaneaheaee ae 11, 14, 20, 21
Bantolina v. Aloha Motors, Inc., 419 F. Supp. 1116
(D. Haw. 1976) oo cscccvccocasscecessstace 15, 16, 18
Bizier v. Globe Fin. Services, Inc., 654 F.2d 1 (1st Cir.
Brooklyn Savings Bank v. O'Neil, 324 U.S. 697 (1945) .... 22
Broughton v. Cigna Healthplans of California, 21 Cal.
4th 1066 (Cal. 1999) .....cccccccccscscesssccess 23, 23
Buford v. American Finance Co., 333 F. Supp. 1243
CPETRGGR. WITT) oc vciciciecn tun svcasnnesvscasaavsuas es 22
Cole v. Burns Int'l Security Services, 105 F.3d 1465
CDS. Cit, WON i cid cn cccs conntavnanssnasebacess 12, 13
Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir.
SODOD. ccvcnddccatawsd svete cd ceasdedussadencages 11, 19
Crawford v. Equifax Payment Services, 201 F.3d 877
t, As Sy Serer mer Pree Tern rt 20
Davis v. Werne, 673 F.2d 866 (5th Cir. 1982) ......... 27
FDA v. Brown & Williamson Tobacco Corp., 2000 U.S.
LEXIS 2195, No. 98-1152, 2000 WL 289576
(Dagchs 21, DOOD) 25 cc cess ncdccscccsncssvcscssssces 9
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20
og | ie Poe ee ee eee oimt Serer ey ey ert Cor passim
Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244
(Sth Cir. 1994)........ ccc cece cccnccwsccsccscovcces 13
vi
TABLE OF AUTHORITIES - Continued
Page(s)
Healthcare v. Watson Pharmaceuticals, Inc., 2000 U.S.
App. LEXIS 6200 (2d Cir. April 4, 2000) ........... 9
Hooters of America, Inc. v. Phillips, 39 F. Supp. 2d
SES GABA. TOGGD cc cccccccccscccccsesceustasdes 11, 22
In re General Motors Corp. Pick-Up Truck Fuel Tank
Products Liability Litigation, 55 F.3d 768 (3d Cir.
RODE). cccccccccscnccescescssssscnasssssassdebaseud 20
In re Johnson, 787 F.2d 1179 (7th Cir. 1986)........... 9
James v. Home Construction Co., 689 F.2d 1357 (11th
Fr ee ee 25
Mace v. Van Ru Credit Corp., 109 F.3d 338 (7th Cir.
ROGT). ccnccccvccecsesedecsevesvcsessenatensnaaeens 20
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614 (1985) .............. 5, 9, 12, 15, 23
Moseley v. Electronic & Missile Facilities, Inc., 374
US. 167 (ROG) oa cccccccccccccccnciccecensanseteses 3
Mourning v. Family Publications Service, Inc., 411
OS. TES CRIED oc ccvcscecncesccsctacuaneceneseueves 26
Paladino v. Avnet Computer Technologies, Inc., 134
RS 2656 (REG Chk, BORE oc cccccccccecccesscsecss 10
Parker v. DeKalb Chrysler Plymouth, 673 F.2d 1178
(RR Cie, TEs cc cccsccedccsctdsbtaveubens 21, 22, 24
Postow v. OBA Federal S. & L. Ass'n., 627 F.2d 1370
COL. Cle. BIGGER. co cccccccnvecvecccscsnvaccncbacaees 27
Powertel, Inc. v. Bexley, 743 So.2d 570 (Fla. App. Ct.
RODD). wc cvcccesccecccsecessuancsssnuscesnecaeasues 20
Pritzker v. Merrill Lynch, 7 F.3d 1110 (3d Cir. 1993). .18, 23
vii
TABLE OF AUTHORITIES - Continued
Page(s)
Randolph v, Green Tree Financial Corp., 178 F.3d
1149 (11th Cir. 1999), cert. granted, Green Tree
Financial Corp. v. Randolph, _. U.S. __, 120
S. Ct. 1952 (2000). .....ccccrccccccccccccccccccsces 10
Ratner v. Chemical Bank of New York Trust Co., 54
F.R.D. 412 (S.D.N.Y. 1972) .......---2eeeeee 16, 24, 25
Riggs v. Government Employees Financial Corp., 623
F.2d 68 (9th Cir. 1980)...........2 2c cece cece ee eeee 27
Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir.
BOTs cnccencoccecbcascasceosensccsscsboasedens 22, 27
Shankle v. B-G Maintenance Management of Colorado,
Inc., 163 F.3d 1230 (10th Cir. 1999)............-.--- 10
Shearson/American Express v. McMahon, 482 U.S.
TAD CBGEI) 0 oc cccccccccccccccccoccscesecces 5, 9, 14, 15
Sosa v. Fite, 498 F.2d 114 (Sth, Cle. 1974).....cccccees 25
Sues v. John Nuveen & Co., Inc., 146 F.3d 175 (3d
Ge, FRED cic cncacdicccccevetccnccontsgecvetes< 19, 21
Sunshine Health Systems v. Bowen, 842 F.2d 1097
is GRE: BIG ic ccccccescccccccccccccccvenssccecses 9
Thomas v. Myers-Dickson Furniture Co., 479 F.2d 740
Cs Ge, FIGs occ cnccccceccccéccctccnessasecesces 25
Tran v. Tran, 54 F.3d 115 (2d Cir. 1995).............. 22
Watkins v. Simmons & Clark, 618 F.2d 398 (6th Cir.
GR cc vccccescsscascctnancesscecess 15, 16, 17, 18, 27
STATUTES:
DAE. B Bio cccvccicnccccccccccdcnsccesepecsceedun 2, 3
IN OE os cu dcscsncarssnssoeasan 3, 4
viii
TABLE OF AUTHORITIES —- Continued
Page(s)
SP Win te EE he odie acid eeceticsekbocdabieeccudsoe 4
Se a ED 0. b.cnt is naansecsibaesesvd batacnad 26
Se es OE I odin sdb ede nesdacccdneds heads dasetie 3
Be ese do) 68660 db0dccncdsedevesssinbaessecel 3
Se Ses Te ND 563 do 5p cadenkdnceuessanibedniean 27
Be as Te ED bane cnadeccecddessacunasaneouian 26
OP as Ae I ca ddeedadcectwabass sanccecesas 26
Be ae sr badeseresectdkcsedaccabaaces 11, 15, 16
Sp es A EE Sa Sicbnnsbis ase cdencusasensceees 2, 27
Se Giese IIE wb cscccnssncdccodnenduane 20
Be Se BF Dn 6 oc ccccncsccnesccessnascsoeeel 21
Be ie Be ad oo wanes ubcadssscvkevacesenean 4, 27
ee Ss Oe he ke kbs Keoecnscacsddndensecneseeuees 3
Be es Oe NS ccc acdicndescscndwenncncsan 2, 11, 27
ee ane ED wkd bw cdedcdsncdsannadehacepbsbaaed 2
Se as Oe au dcccnnsedsacsecdnes deahsasbeteaats 11
RULEs:
Sep. CR: Ble BOG sic cdasevevsand seins ssiadivcesnes 5
We SU Se aS ck eae a balk Ste cacnaesi sdanen 11
REGULATIONS:
Se ee Ue Th dbn bed cdbcnscdabunctsdivisigeudnses 3
Se See te ys cicodensbaudbedbussanekcuues 26
12 C.ER. § 226.18. .........-. 2 eecceeceeeceecceees 3, 26
————-™~™”~—~S-~—S~-—Sh htt
ix
TABLE OF AUTHORITIES - Continued
Page(s)
MISCELLANEOUS:
Report to the 101st General Assembly on the
Deferred Presentment Services Act Department
of Financial Institutions for the State of Tennes-
Report of the Committee on Banking, Housing &
Urban Affairs, United States Senate Report No.
TPAEIOs cnvnccetunvcsenevassciksssabgeesibncess’s passim
“Show Me the Money” Consumer Federation of
PEROUIGR, POREUIEY BAGO vi cent ccnscncccesevcsadcces 7
Truth In Lending Simplification And Reform Act,
Report Of The Committee On Banking, Housing
And Urban Affairs, United States Senate,
PUOPOEE INNO. DG-73 on ccc cc ccscccccecccscrescvcesses 26
PETITION FOR WRIT OF CERTIORARI
Petitioner, Terry Johnson, respectfully petitions this
Court for a writ of certiorari to review the judgment of
the United States Court of Appeals for the Third Circuit.
a
PREVIOUS OPINIONS
The citations of the official and unofficial reports of
the opinions and orders entered in these cases are as
follows:
The United States Court of Appeals for the
Third Circuit reversed and remanded the deci-
sion of the United States District Court for the
District of Delaware. Johnson v. West Suburban
Bank, 225 F.3d 366, 00-5047 (3rd Cir. Aug. 29,
2000) (attached as Appendix A).
The United States District Court for the District
of Delaware denied defendants’ motion to com-
pel arbitration. Johnson v. West Suburban Bank, 82
F. Supp. 2d 264 (D. Del. 1999) (attached as
Appendix B).
.
STATEMENT OF JURISDICTION
The Third Circuit reversed and remanded the deci-
sion of the District Court for the District of Delaware
denying the motion to compel arbitration of respondents
in Johnson v. West Suburban Bank, 99-cv-00104. Johnson v.
West Suburban Bank, 225 F.3d 366, 00-5047 (3rd Cir. Aug.
29, 2000). Petitioners now timely seek a writ of certiorari
with regard to the decision of the Third Circuit. This
Court has jurisdiction to review this case pursuant to 28
U.S.C. § 1254(1).
@
STATUTORY PROVISIONS INVOLVED
The following statutes are set forth in Appendix C to
this Petition: Federal Arbitration Act, 9 U.S.C. § 1 et seq.,
Truth in Lending Act, 15 U.S.C. § 1640(a), and the Elec-
tronic Fund Transfer Act, 15 U.S.C. § 1693m.
*
STATEMENT OF THE CASE
A. Statement of Facts.
On July 10, 1998, Johnson applied for and received a
short-term loan in the amount of $250 from the County
Bank of Rehoboth Beach. The one-page loan agreement
set forth an annual percentage rate of 917.71% and a
finance charge of $88. As a result, Johnson was required
to repay his $250 loan by making one payment of $338 on
July 24, 1998 - two weeks after he submitted his loan
application and received the $250.
In addition, the loan agreement provided a “boiler
plate” arbitration clause which, in relevant part, reads:
ARBITRATION: You and we agree that any
claim, dispute, or controversy between
us ... and any claim arising from or relating to
this Note, no matter by whom or against
whom ..., including the validity of this Note
and of this agreement to arbitrate disputes as
well as claims alleging fraud or misrepresenta-
tion shall be resolved by binding arbitration. . . .
This arbitration agreement is made pursuant to
a transaction involving interstate commerce and
shall be governed by the Federal Arbitration
Act, 9 U.S.C. §§ 1-16. Judgment upon the award
may be entered by any party in any court hav-
ing jurisdiction.
* * »
NOTICE: YOU AND WE WOULD HAVE HAD
A RIGHT OR OPPORTUNITY TO LITIGATE
DISPUTES THROUGH A COURT BUT HAVE
AGREED INSTEAD TO RESOLVE DISPUTES
THROUGH BINDING ARBITRATION.
By signing and sealing below, you agree to all of
the terms of this Note, including the agreement
to arbitrate disputes.
In connection with the transaction at issue, plaintiff
received and/or signed standard printed forms, includ-
ing a combination note, TILA disclosure statement and
Loan Payment Instruction Form. By using such docu-
ments, defendants conditioned the extension of credit on
its repayment by means of an electronic funds transfer.
The loans would be repeatedly rolled over and only
payments for interest are wired. Compulsory repayment
by electronic funds transfer is essential to making this
long-distance loan. The EFTA prohibits such require-
ments. 15 U.S.C. § 1693k. Thus, defendant’s entire
method of doing business is inherently unlawful. See
Moseley v. Electronic & Missile Facilities, Inc., 374 U.S.167
(1963).
In addition, these standard form documents fail to
comply with the requirements of TILA, 15 U.S.C. §§ 1632
& 1630 and 12 C.E.R. §§ 226.17 and 226.18 because the
annual percentage rate and finance charge are not more
conspicuous than any other terms. Plaintiff further
alleges that defendants’ loan transactions are unconscion-
able.
B. Proceedings Below.
Petitioner Terry Johnson filed this suit as a class
action against respondents Tele-Cash, Inc. (“Tele-Cash”),
and County Bank of Rehoboth Beach, Delaware (“County
Bank”) under the Electronic Fund Transfer Act, 15 U.S.C.
§ 1693 et seq. (“EFTA”), and the Truth in Lending Act, 15
U.S.C. § 1601 et seq. (“TILA”). The parties voluntarily
dismissed defendant West Suburban Bank.
Respondents Tele-Cash and County Bank moved to
stay the proceedings and to compel arbitration pursuant
to the above quoted arbitration clause. The District Court
for the District of Delaware denied respondents’ motion
concluding that there was an “inherent conflict” between
compelling arbitration and the TILA and EFTA statutes.
The respondents appealed this order to the Third Circuit
Court of Appeals pursuant to 9 U.S.C. § 16(a).
As the Third Circuit stated, no-other federal appellate
court has squarely addressed whether a court can compel
arbitration of TILA and EFTA claims when the parties’
loan agreement contains an arbitration clause but the
plaintiff seeks to bring his claims as a class action. Peti-
tioner’s argument focused on the ability of a class action
award to act as a penalty against lenders who violate the
TILA. The Third Circuit acknowledged that “[t]his focus
is logical.” 225 F.3d at 373. Although the court recognized
that this argument, and the argument that Congress
5
meant to encourage private attorneys general to enforce
compliance through the use of class actions carry force
and are supported by the legislative history of the stat-
utes, the Third Circuit held that compelling arbitration
would not conflict with the TILA or EFTA, even though
petitioner’s claims could not be brought as a class action
and certain substantive remedies would not be available
in arbitration.
_ This Court granted Johnson leave to file an amicus
curiae brief in Green Tree v. Randolph, 99-1235.
&
v
REASONS FOR GRANTING THE PETITION
I.
THIS CASE PRESENTS AN IMPORTANT, UNRE-
SOLVED QUESTION OF LAW
Supreme Court Rule 10(c) provides that a factor
favoring certiorari is that “a United States court of
appeals has decided an important question of federal law
that has not been, but should be, settled by this Court, or
has decided an important federal question in a way that
conflicts with relevant decisions of this Court.”
The Johnson decision involves questions of excep-
tional importance in that the Third Circuit has held in
effect that a creditor may avoid TILA and EFTA statutory
penalties in class action suits by means of an arbitration
clause. The District Court held, pursuant to the analysis
set forth in Mitsubishi Motors Corp. v. Soler Chrysler-Plym-
outh, Inc., 473 U.S. 614 (1985) and Shearson/American
Express v. McMahon, 482 U.S. 220 (1987), that this outcome
presents an inherent conflict between the TILA and EFTA
and arbitration and denied arbitration. The Third Circuit
reversed.
This Court granted certiorari and has heard argu-
ment in Green Tree v. Randolph, 99-1235, which also pre-
sents an issue regarding TILA and arbitration. This
demonstrates that the Court already views this to be an
important issue. However, should the Court not reach the
merits in Green Tree, or the issue of class actions and
arbitration, the Court should grant certiorari here.
Also, the lower courts (including the Third Circuit)
have been applying this Court’s holding in Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991) to
mean that class actions are not a bar to arbitration. How-
ever, in Gilmer, the plaintiff was not paying for the arbi-
tration. Here, consumers are being asked to pay
arbitration costs and give up their right to proceed as a
class action, which is a mechanism that allows costs to be
spread over numerous borrowers’ cases. Without clari-
fication, the lower courts will continue to apply Gilmer
erroneously.
Finally, the proliferation of short term loans with
extremely high interest rates in this country gives rise to
concerns about low-income consumers having their rights
violated without an effective remedy. TILA and EFTA
specifically provide for civil fines in class actions not
exceeding the lesser of $500,000 or 1% of the net worth of
the defendant. This remedy is unavailable in arbitration.
A. The Paydzy Loan Industry.
The last decade has seen the rise of the short term
loan industry. These lenders specialize in lending rela-
tively small amounts of money for extremely high inter-
est rates to low income borrowers. The loans are
generally made for two-week periods, i.e. until the bor-
rowers next payday, hence they are popularly known as
“payday loans.”
Studies by the Departments of Financial Institutions
for Illinois and Indiana show that most of these loans are
repeatedly rolled-over (i.e. extended or renewed past the
original two-week due date) - more than 90% of the time
~ and that there is a high default rate. See also Report to
the 101st General Assembly on the Deferred Presentment
Services Act, Department of Financial Institutions for the
State of Tennessee (“a customer might end up paying
$500.00 to pay off a $100.00 loan”).
A survey of the payday loan industry published by
the Consumer Federation of America shows that the most
common APR is over 350%. See “Show Me the Money,”
Consumer Federation of America, February 2000. The
loans usually contain additional fees, such as “bounced
check fees” and the borrower becomes mired in perpetual
debt. The study also cites the use of abusive collection
activities on the part of lenders.
B. The Pervasiveness of Arbitration Clauses.
The inclusion of arbitration clauses, commonly uti-
lized (and designed for) employment disputes or
commercial disputes, has become more common in trans-
actions involving consumers. They are now frequently
used in payday loan agreements (examples of arbitration
clauses in other short-term, high-interest loans are
included in Appendix D). It is paradoxical to expect a
person who is borrowing an amount of money under
$500 at an interest rate of over 500% APR to rationally
agree to forego their right to utilize the courts, a forum
funded by the public, in exchange for using a forum such
as arbitration which is partially funded by the debtor. The
use of arbitration clauses insulates these lenders from
liability in class actions (1% of their net worth up to
$500,000) under TILA, EFTA and other consumer protec-
tion statutes.
C. Johnson Is an Amicus in Green Tree v. Ran-
dolph.
It should be noted that this Court granted Johnson
leave to file an amicus curiae brief in Green Tree v. Ran-
dolph, 99-1235. Green Tree also presented the Court with
the problems caused by arbitrating a consumer claim,
however, that case focused on the costs involved. The
Court has not addressed the issue presented here as to
whether there is an “inherent conflict” between arbitrat-
ing a statutory claim, which would prevent bringing the
claim as a class action, where the statute encourages the
use of class actions to vindicate its purpose and policies.
ONE eS
~~ ae eee
Il.
THE DECISION OF THE COURT OF APPEALS IS
ERRONEOUS
A. If Compelling Arbitration Creates an “Inherent
Conflict” With Another Statute, The Statutory
Claim Should Not Be Arbitrated.
This Court’s opinions in Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) and
Shearson/American Express v. McMahon, 482 U.S. 220, 227
(1987) held that when dealing with statutes that evince a
contrary congressional mandate, “deducible from text or
legislative history,” arbitration is precluded on those
claims. Mitsubishi, 473 U.S. at 628 (emphasis added). This
intent is “deducible from . . . an inherent conflict between
arbitration and the statute’s underlying purposes.”
McMahon, 482 U.S. at 227.1
In Gilmer v. Interstate/Johnson Lane Corp., this Court
held that “So long as the prospective litigant effectively
may vindicate [his or her] statutory cause of action in an
arbitral forum, the statute will continue to serve both its
remedial and deterrent function.” Gilmer v. Interstate/John-
son Lane Corp., 500 U.S. 20, 28 (1991) (quoting Mitsubishi
1 This is consistent with the long-standing principle of
statutory construction that the implications of one statute may
be altered by the implications of a later statute. See, e.g., FDA v.
Brown & Williamson Tobacco Corp., 2000 U.S. LEXIS 2195, No.
98-1152, 2000 WL 289576, at *13 (Mar. 21, 2000); Healthcare v.
Watson Pharmaceuticals, Inc., 2000 U.S. App. LEXIS 6200, *20 n.3
(2d Cir. April 4, 2000); Sunshine Health Systems v. Bowen, 842 F.2d
1097, 1101 (9th Cir. 1988); In re Johnson, 787 F.2d 1179, 1182 (7th
Cir. 1986). Of course, this is not the same as arguing that a prior
Statute was repealed by implication by a later statute.
10
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614
(1985) (quotations omitted).
Where the arbitration clause would be a barrier to a
litigant’s exercise of his or her statutory rights, the arbi-
tration clause is unenforceable. Randolph v. Green Tree
Financial Corp., 178 F.3d 1149, 1157 (11th Cir. 1999) cert.
granted, Green Tree Financial Corp. v. Randolph, ___ U.S. ___
120 S. Ct. 1552 (2000); Paladino v. Avnet Computer Technolo-
gies, Inc., 134 F.3d 1054,1062 (11th Cir. 1998) (“When an
arbitration clause has provisions that defeat the remedial
purpose of [a] statute, . . . the arbitration clause is not
enforceable”).
“[AJ]rbitration of statutory claims works because
potential litigants have an adequate forum in which to
resolve their statutory claims and because the broader
social purposes behind the statute are adhered to. This
supposition[ ] falls apart, however, if the terms of an
arbitration agreement actually prevent an individual
from effectively vindicating his or her statutory rights.
Accordingly, an arbitration agreement that prohibits use
of the judicial forum as a means of resolving statutory
claims must also provide for an effective and accessible
alternative forum.” Shankle v. B-G Maintenance Manage-
ment of Colorado, Inc., 163 F.3d 1230, 1234 (10th Cir. 1999).
As noted previously, the lower courts (including the
Third Circuit) have applied the holding in Gilmer v. Inter-
state/Johnson Lane Corp., 500 U.S. 20, 28 (1991) to mean
that the inability to bring class actions in arbitration is
not a bar to arbitration. However, in Gilmer, the plaintiff
was not paying for the arbitration. In this case, the con-
sumer is required to pay arbitration costs and give up
11
their right to proceed as a class action which is a mecha-
nism that helps defray the cost of litigation. Without
clarification, the lower courts will continue to apply
Gilmer erroneously.
Gilmer is further distinguishable because it involved
different statutory language in the Age Discrimination in
Employment Act, 29 U.S.C. § 621 (“ADEA”). That statute
did not provide for a civil fine obtainable through class
actions like TILA and EFTA. The EEOC, the agency
charged with enforcement of the statute, was authorized
to bring class actions. Finally, the ADEA does not evince
a strong policy favoring class actions, whereas TILA does,
in that the ADEA does not authorize a Fed. R. Civ. P. 23
class action, but only allows for an opt-in class action.
Since the ADEA does not manifest a strong policy in
favor of class actions, there was no “inherent conflict” in
arbitrating statutory claims under ADEA. As discussed
below, TILA does have a strong policy in favor of class
actions and so there is an “inherent conflict.”
Congress specifically provided for class action relief
when enacting TILA, 15 U.S.C. § 1640, and EFTA, 15
U.S.C. § 1693m. Class relief is beyond the power of an
arbitrator. Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir.
1995). If an arbitrator cannot grant the relief specified in
TILA, the TILA claim cannot be subject to arbitration. See
Baltimore & Ohio Chicago Terminal R. Co. v. Wisconsin Cen-
tral Ltd., 154 F.3d 404 (7th Cir. 1998). Even where the
claim is of a type which can normally be arbitrated, if the
arbitrators are deprived of the ability to afford complete
relief, the particular arbitration clause cannot be
enforced. Hooters of America, Inc. v. Phillips, 39 F. Supp. 2d
582 (D.S.C. 1998).
12
In Cole v. Burns Int’l Security Services, 105 F.3d 1465,
1481-82 (D.C. Cir. 1997), the court emphasized that an
arbitration clause cannot be used to deprive persons pro-
tected by the law of their substantive rights:
The starting point of our analysis is the Supreme
Court’s decision in Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20 (1991). In that case, the
Court held that an employee’s agreement to
arbitrate employment-related disputes may
require him to arbitrate statutory claims under
the ADEA because “by agreeing to arbitrate a
statutory claim, [an employee] does not forgo
the substantive rights afforded by the statute;
[he] only submits to their resolution in an arbi-
tral, rather than a judicial, forum.” Gilmer, 500
U.S. at 26 (quoting Mitsubishi, 473 U.S. at 628)
(first alteration in original). As noted above, the
Court emphasized that “so long as the prospec-
tive litigant effectively may vindicate [his or
her] statutory cause of action in the arbitral
forum, the statute will continue to serve both its
remedial and deterrent function.” Id. at 28 (quo-
ting Mitsubishi, 473 U.S. at 637) (alteration in
original). .. .
Obviously, Gilmer cannot be read as holding that
an arbitration agreement is enforceable no mat-
ter what rights it waives or what burdens it
imposes. See Gorman, 1995 U. ILL. L. REV. at 644
(“The Supreme Court in the Gilmer case did not
hold that any sort of arbitration procedure
before any manner of arbitrator would be satis-
factory in the adjudication of public rights.”).
Such a holding would be fundamentally at odds
with our understanding of the rights accorded
to persons protected by public statutes like the
ADEA and Title VII. The beneficiaries of public
13
statutes are entitled to the rights and protections
provided by the law. Clearly, it would be unlaw-
ful for an employer to condition employment on
an employee’s agreement to give up the right to
be free from racial or gender discrimination.
[citation] Any such condition of employment
would violate Title VII, regardless of whether or
not the agreement was viewed as a contract of
adhesion. Thus, in a subsequent suit by the
employee raising a viable claim of racial dis-
crimination or sexual harassment, it would be
no defense that the employee had signed a con-
tract giving up her right to be free from discrim-
ination.
Similarly, an employee cannot be required as a
condition of employment to waive access to a
neutral forum in which statutory employment
discrimination claims may be heard. ... At a
minimum, statutory rights include both a sub-
stantive protection and access to a neutral forum
in which to enforce those protections. See
Graham Oil Co. v. ARCO Products Co., 43 F.3d
1244, 1246-48 (9th Cir. 1994) (arbitration clause
that purported to waive remedies provided by
federal statute and to shorten statute of limita-
tions for filing such claims violated statute and
was unenforceable); JEROLD S. AUERBACH,
JUSTICE WITHOUT LAW? 144-45 (1983) (pre-
servation of “individual rights requires an
accessible legal system for their protection” and
enforcement). .. .
Cole further held that “[t]he premise of the [Supreme]
Court’s rulings . . . is that arbitration entails only a
waiver of a procedural right to a judicial forum rather
than a waiver of any substantive right accorded by the
Statute. Id., at 1483, quoting S. Estreicher, Arbitration of
14
Employment Disputes Without Unions, 66 CHI.-KENT L.
REV. 753, 791 (1990).
The inconsistency between the substantive statute
and arbitration need not be express. As the Seventh Cir-
cuit held in Baltimore & Ohio Chicago Terminal R. Co. v.
Wisconsin Central Ltd., supra, 154 F.3d at 410-11, “No
provision of the Interstate Commerce Act expressly for-
bids the arbitration of claims under the Act. But the cases
we have cited hold that the statutory prohibition need not
be express to be effective; as in other cases of preemption,
it is enough if allowing arbitration would disrupt the
statutory scheme.” See also McMahon, 482 U.S. at 227
(whether there is an “inherent conflict” is “deducible”
between arbitration and the statute’s underlying pur-
poses).
B. ‘rhe Purpose Of The Class Action in Consumer
Protection Laws.
Congress has had genuine concerns about the lack of
nationwide compliance with TILA and other consumer
protection laws. The purpose of the class action remedy
was to ensure such compliance. See S. Rep. 93-278 at 14-15
(“The Committee believes a maximum class action lia-
bility of $100,000? is sufficient to deter potential viola-
tions and achieve widespread compliance.”). Without this
class remedy, the penalty imposed by Congress would be
evaded and the consumer protection statutes would lose
their sting.
2 Later this section was amended upward to $500,000.
15
1. The Purpose of TILA.
It is evident that Congress, in enacting the 1974
amendments to TILA, intended to create a private attor-
ney general class action right for the express purpose of
“insur[ing] nationwide adherence to uniform disclosures”
and providing a vehicle by which courts can “assess a
meaningful penalty upon a creditor to induce compliance
with” TILA’s requirements. S. Rep. 93-278, 14-15.
A substantial amount of legislative history is avail-
able which demonstrates Congress thoroughly evaluated
its options for enforcement and purposefully incorpo-
rated class actions into its scheme for enforcement by
“private attorney generals.” In 1974, Congress amended
§ 1640 to provide a cap on liability for class actions
brought under TILA. Watkins v. Simmons & Clark, 618 F.2d
398, 400 (6th Cir. 1980); Bantolina v. Aloha Motors, Inc., 419
F. Supp. 1116, 1119-20 & n.10 (D.Haw. 1976).
This amendment was in direct response to courts’
reluctance to certify classes under TILA. One can draw a
historical comparison here to the passing of the FAA,
which was intended by Congress to address the reluc-
tance of the courts to enforce arbitration clauses. Clearly,
the statutes create a conflict as to what the courts are
directed to do because to enforce the arbitration clause is
to forego the class action remedy. Under the analysis in
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614 (1985) and Shearson/American Express v.
McMahon, 482 U.S. 220 (1987), arbitration creates an
“inherent conflict” with TILA and the arbitration must
not be enforced.
16
Prior to the 1974 amendment, a plaintiff was entitled
to a minimum award of $100 under the statute. See 15
U.S.C. § 1640 (1970). Without the cap, if a class action
lawsuit involved millions of consumers, a defendant
creditor would be liable for “an astronomical damage
figure.” For this reason, numerous courts found class
actions not to be a superior method of adjudication
because of the extreme penalty. The courts found this to
be “inconsistent” with the “remedy Congress prescribed
as the means of private enforcement.” See Ratner v. Chemi-
cal Bank of New York Trust Co., 54 F.R.D. 412, 414 (S.D.N.Y.
1972).
-In response to these decisions, Congress amended the
statute to provide a limit on the maximum recovery avail-
able under the TILA. This amendment was intended to
encourage the federal courts to begin certifying class
actions in Truth in Lending lawsuits. S. Rep. 93-278, at
14-15 (1973); Watkins, 618 F.2d at 400 n.6; Bantolina, 419
F. Supp. 1116, 1119-20 & n. 11.
It was Congress’s express intent to encourage the use
of class actions as an enforcement mechanism. See Wat-
kins, 618 F.2d at 401 & n.7 (citing S. Rep. 94-590, reprinted
in 1976 U.S. Code Cong. & Admin. News, at 431, 438).
While the amendment limited the exposure of creditors to
the lessor of $500,000 or 1 per centum of their net worth,
it provided “a workable structure for private enforce-
ment.” Id. Congress concluded the cap to be a sufficient
deterrent against a creditor of any size.
Congress decided that the statute would be enforced
privately, and with class actions, not by a federal agency,
such as the FTC. “The purpose of the civil penalties
17
under [the] Truth in Lending [Act] was to provide credi-
tors with a meaningful incentive to comply with the law
without relying on an extensive new bureaucracy.” S.
Rep. 93-278, at 14. In this case, an agency is not effectively
structured to do so, which Congress recognized and
instead opted to encourage individuals to bring class
actions. See Watkins v. Simmons & Clark, Inc., 618 F.3d 398,
400 (6th Cir. 1980) (holding that the intended purpose of
the TILA was to encourage class actions in the truth-in-
lending context because of the apparent inadequacy of
the Federal Trade Commission’s enforcement resources)
(citing S. Rep. 93-278, at 14-15). —
It is important to note that Congress intended TILA
remedies to be punitive in nature, rather than compensa-
tory. Class actions under a statute such as the ADEA
involved in Gilmer are accumulating individual claims,
whereas TILA class actions seek to impose statutory dam-
ages determined in the same manner as a criminal fine.
Congress characterized the statutory damages provision
as “the civil penalties section.” S. Rep. 93-278, at 14.
Section 1640 provides that “In determining the
amount of award [of statutory damages] in any class
action, the court shall consider, among other relevant
factors, the amount of any actual damages awarded, the
frequency and persistence of failures of compliance by
the creditor, the resources of the creditor, the number of
Persons adversely affected, and the extent to which the
creditor’s failure of compliance was intentional.” The
damages are thus assessed in the same manner as a fine or
punitive damages, and the classwide Statutory damages are
18
not merely a convenient means of enforcing the individ-
ual rights of numerous class members. Because this pen-
alty is similar to a fine, defendant should not be allowed
to escape its effects by contract.
The purpose of the cap was to provide a meaningful
incentive to effectuate compliance with the law and yet
make the penalty reasonable. S. Rep. 93-278 at 14. Con-
gress, concurring with the Federal Reserve Board, found
that potential class action liability was an important
encouragement to the voluntary compliance which was
sO necessary to ensure nation-wide adherence to uniform
disclosure since most Truth in Lending violations do not
involve actual damages and . . . some meaningful penalty
provisions are therefore needed to ensure compliance. S.
Rep. 93-278, at 15. This is why it has been held that class-
action exposure is “essential to the prophylactic intent” of
TILA. Bantolina, 419 F. Supp. at 1120. This is what gives
the statute its “sting.” Id.
Thus there is ample evidence of Congressional intent
to conclude that “Congress did intend . . . to encourage
class actions and to use the threat of class action recov-
eries to force compliance with the Act.” See Appendix
(District Court Opinion) at 31-32 (quoting Watkins, 618
F.2d at 402). The legislative history for TILA is more
developed and expansive than a “general statement of
legislative purpose.” See Pritzker v. Merrill Lynch, 7 F.3d
1110, 1119 (3d Cir. 1993).
The legislative history for TILA and EFTA is quite
specific. Congress repeatedly modified the statute for the
express purpose of “encouraging class actions.” The Sen-
ate Report reveals that Congress engaged in a thorough
19
investigation and analysis in order to counter judicial
hostility to TILA class actions and effectuate the goal of
national uniform compliance. This is the same sort of
legislative history that was relied on in Sues v. John
Nuveen & Co., Inc., where it was held that Congress had
expressed its intent to “encourage” arbitration in the
context of the Civil Rights Act of 1991. Sues v. John Nuveen
& Co., Inc., 146 F.3d 175, 182 n.1 (3d Cir. 1998). Therefore,
defendants’ argument that the legislative history is insub-
stantial must be rejected.
7 ig Rt esa nas
PE WEe Pets sel
Compelling arbitration precludes the class relief
included in TILA and EFTA. Champ v. Siegel Trading Co.,
55 F.3d 269 (7th Cir. 1995). This would Strip the federal
Statute of its “sting” and reduce it to nothing more than
its mere nuisance value. Creditors will not be provided
with a “meaningful incentive for compliance” since they
would not be facing a “meaningful penalty provision.” S.
Rep. 93-278 at 14, 15. Congress determined this to be an
effective and desirable means of vindicating the statute’s
cause of action and that class actions served a meaningful
remedial and deterrent function.
While the statute does not provide an automatic right
to $500,000 worth of class relief (for obvious due process
concerns), it cannot be ignored that Congress intended
for class relief to be part of its Statutory scheme. “By
enforcing the boiler plate arbitration clause which is con-
tained in this (and every other) one-page loan agreement
unilaterally drafted by the defendants, the court would
be allowing them to effectively insulate themselves
against the very statutory penalties which Congress
deemed necessary to ‘provide creditors with a meaning-
ful incentive to comply with the law.’” See Appendix
20
Johnson, 82 F. Supp. 2d at 271 (Appendix B) (quoting S.
Rep. 93-278, at 14); see also Powertel, Inc. v. Bexley, 743
So.2d 570, 576 (Fla. App. Ct. 1999) (“The arbitration
clause also effectively removes Powertel’s exposure to
any remedy that could be pursued on behalf of a class of
consumers . . . Class litigation provides the most econom-
ically feasible remedy for the kind of claim asserted here.
The potential claims are too small to litigate individu-
ally . . . The prospect of class litigation ordinarily has
some deterrent effect on a manufacturer or service pro-
vider, but that is absent here . . . ”). Congress recognized
the special efficacy of class actions, which has also been
recognized by the courts. Crawford v. Equifax Payment
Services, 201 F.3d 877, 880 (7th Cir. 2000) (small-stakes
consumer claims are best filed as class actions); Mace v.
Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997); In re
General Motors Corp. Pick-Up Truck Fuel Tank Products Lia-
bility Litigation, 55 F.3d 768, 809 (3d Cir. 1995).
For example, Johnson could only recover a maximum
of $1,000 statutory damages, see 15 U.S.C.
§§ 1640(a)(1)(2)(A), whereas, as a representative of a
class, he could obtain 500 times that amount. Enforcing
the arbitration clause raises doubts as to whether TILA
could serve both its remedial and deterrent functions. S.
Rep. 93-278, at 14.
Congress need not discuss and reject all other options
of enforcement. “[T]he cases we have cited hold that the
statutory prohibition need not be express to be effective;
as in other cases of preemption, it is enough if allowing
arbitration would disrupt the statutory scheme.” Baltimore &
Ohio Chicago Terminal, 154 F.3d 404, 410 (7th Cir. 1998).
TILA provides for class actions and judicial enforcement
21
for exactly the same reasons that the Interstate Commerce
Act at issue in Baltimore & Ohio confided certain tariff
issues to the Surface Transportation Board - nationwide
compliance and uniformity are essential. The statutory
scheme here is to allow suit by “private attorney gen-
erals” and create liability of up to $500,000 or 1% of net
worth for noncompliance.
In fact, because Congress has expressly “encouraged”
arbitration of other statutory causes of action, principles
of statutory interpretation support the argument that if
Congress intended to encourage arbitration of statutory
rights it could do so. See Sues v. John Nuveen & Co., Inc.,
146 F.3d 175, 182 (3d Cir. 1998) (discussing Section 118 of
the Civil Rights Act of 1991).
To conclude that arbitration precludes Johnson’s pur-
suit of his class action claim is to say he waived this
remedy under TILA. This is precisely what Congress
intended to prevent by providing that it is unlawful to
discriminate against the exercise of any right under the
Consumer Credit Protection Act. 15 U.S.C. § 1691(a)(3).
In Parker v. DeKalb Chrysler Plymouth, supra, 673 F.2d
1178, 1182 (11th Cir. 1982), the court held that a general
release did not apply to TILA claims. In so holding, it
stressed that TILA is imbued with a public purpose with
individuals and their attorneys serving as private attor-
neys-general. The specific grant of the right to bring class
action litigation is part of enforcing that public purpose.
If, as in this case, defendants were allowed to bypass the
class action device through the use of arbitration clauses,
congressional attempt would be stymied.
22
“Before Gilmer, courts had unanimously found that
any waiver, including a knowing waiver, of statutory
rights was precluded. In Gilmer, the Court established the
baseline test that ‘so long as the prospective litigant effec-
tively may vindicate [his or her] statutory cause of action
in the arbitral forum, the statute will continue to serve
both its remedial and deterrent functions.’ ” Hooters of
America, 39 F.Supp. 2d 582, 616 (D.S.C. 1998), quoting
Gilmer, 500 U.S. at 28. Recognizing this concept, the Court
of Appeals in Tran v. Tran, 54 F.3d 115 (2d Cir. 1995), held
that statutory rights under the Fair Labor Standards Act
could not be made the subject of binding arbitration. This
decision affirms the validity of Brooklyn Savings Bank v.
O’Neil, 324 U.S. 697 (1945), which the court relied upon in
Parker v. DeKalb Chrysler-Plymouth, 673 F.2d 1178 (11th
Cir. 1982), to hold that TILA rights were not the subject of
a general release. Further, even the individual suit under
Truth-in-Lending has public dimensions. See Buford v.
American Finance Co., 333 F. Supp. 1243, 1248 (N.D.Ga.
1971).
Additional public-related benefits are provided by
the stare decisis effect successful litigation may have
entitling others to statutorily provided relief. Id.; Accord,
Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir. 1994)
(“Congress intended the statute to create a system of
private attorneys general to aid its enforcement; thus, to
further its remedial purpose”). Reported decisions are
important to the stated purpose of having standardized
disclosures on a nationwide basis. No matter where you
are in the country, you should get the same form dis-
closures. This requires reported decisions with reasons
spelled out and subject to appellate review. The Court
23
found reported decisions expendable under ERISA, see
Pritzker, 7 F.3d at 1119, but under ERISA every plan can
be different. The purpose of TILA requires uniform dis-
closures which necessitates reported, precedential law
which is not available under private arbitration.
In Broughton v. Cigna Healthplans of California, 21 Cal.
4th 1066, 988 P.2d 67 (Cal. 1999), the court would not
enforce an arbitration clause because it impeded the abil-
ity of plaintiff to “[play] in the role of a bona fide private
attorney general” as intended by the California legisla-
ture in the California Legal Remedies Act (CRLA).
Broughton, 988 P.2d at 76-77. Similarly, here, arbitration
would impede the public benefit Congress intended by
encouraging plaintiffs to bring class action Suits as pri-
vate attorney generals to enforce uniform compliance
with TILA. The court in Broughton distinguished its hold-
ing from the outcome in Mitsubishi Motors, which held
that the Sherman Act’s treble damages provision only
had an “incidental” public benefit. In Broughton, the
intent to create “private attorney generals” and ability to
obtain injunctive relief had a more tangible public benefit
and was clear expression of legislative intent that suits
brought under the CRLA were to have a public benefit
rather than only compensate the plaintiff individually.
Similarly here, by encouraging plaintiffs to bring
class actions for Statutory damages, Congress intended
for TILA to have a more tangible public benefit rather
than merely compensate the individual. Given this legis-
lative intent, putting Johnson’s claim in a forum that
Prevents the bringing of a class action defeats the legisla-
ture’s intent. The conflict between the FAA and TILA
24
need not be express but can be, and is, deducible from the
text and legislative history.
C. TILA’s Private Attorney Generals.
Certainly, class actions are part of TILA’s statutory
scheme of enforcement by “private attorney generals.”
Compelling a claim alleged as a class to be arbitrated as
an individual claim is disruptive with that scheme.
TILA’s statutory mandate of disclosure of material
terms is intended to benefit all consumers and compliant
creditors, not just the individual claimant. Parker v.
DeKalb Chrysler Plymouth, 673 F.2d 1178, 1180 (11th Cir.
1982). The general statutory scheme envisions individual
consumers acting as “private attorneys general.” Parker,
673 F.2d at 1181. Congress intended to create a private
attorney general class action right for the express purpose
of “insur[ing] nationwide adherence to uniform dis-
closures” and providing a vehicle by which courts can
“assess a meaningful penalty upon a creditor to induce
compliance with” TILA’s requirements. S. Rep. 93-278,
14-15.
This congressional purpose has been recognized by
every court to have considered the history of the act. An
early case stating the purpose of TILA was Ratner v.
Chemical Bank, 329 F. Supp. 270 (S.D.N.Y. 1971) where the
Court held that “The scheme of the statute, as both sides
agree (emphasis added), is to create a species of ‘private
attorney general’ to participate prominently in enforce-
ment . . . Congress made clear its broader scheme, and
25
broader system of reimbursement, for private enforce-
ment. It invited people like the present plaintiff, whether
they were themselves deceived or not, to sue in the public
interest. Following familiar precedents, it encouraged
such actions by Providing, in addition to the incentive of
public service, costs and a reasonable attorney’s fee
above the minimum recovery of $100.” Id.
In James v. Home Construction Co., 689 F.2d 1357 (11th
Cir. 1982), the Court agreed with Ratner, and stated that
“One of the congressional goals underlying TILA was the
creation of a system of private attorneys general who
could effectively enforce the Act without government
intervention. Sosa v. Fite, 498 F.2d 114, 121 (5th Cir. 1974);
Bizier v. Globe Fin. Services, Inc., 654 F.2d 1, 2 (1st Cir.
1981); Thomas v. Myers-Dickson Furniture Co., 479 F.2d 740,
748 (Sth Cir. 1973).
In Thomas v. Myers-Dickson Furniture Co., 479 F.2d 740
(Sth Cir. 1973) the Court Stated that “Section 1640 is
intended to allow aggrieved consumers to Participate in
policing the Act. The domain of consumer credit with its
allied commercial practices is no longer in the laissez
faire era of caveat emptor. That doctrine is increasingly
relegated to its Proper place as a historical relic without
modern application. The regulatory scheme forcefully
expounds an emerging ethic of ‘caveat vendor,’ and we
will not strain to avoid giving effect to the Federal Con-
sumer Credit Protection Act.” Id.; see also Broughton v.
Cigna Healthplans of California, supra at 18.
The stated purpose of TILA is “to assure a meaning-
ful disclosure of credit terms so that the consumer will be
able to compare more readily the various credit terms
26
available to him and avoid the uninformed use of credit.”
15 U.S.C. § 1601(a). As this Court noted, TILA “reflects a
transition in congressional policy from a philosophy of
‘Let the buyer beware’ to one of ‘Let the seller disclose.’ ”
Mourning v. Family Publications Service, Inc., 411 U.S. 356,
377 (1973). Since one of the major problems TILA sought
to correct was the lack of uniformity in credit disclosure
practices, it requires creditors to disclose all key informa-
tion in a uniform manner.*
To effectuate its purposes, TILA and Regulation Z
mandate the disclosure of, among other things, the
finance charge, annual percentage rate (“APR”), and
amount financed in every consumer credit transaction. 15
U.S.C. § 1638(a); 12 C.F.R. § 226.18. To promote unifor-
mity, TILA and Regulation Z regulate the timing, form
and placement of the mandated disclosures by requiring
the disclosures to be “made before the credit is extended”
and “grouped together” and “conspicuously segregated”
from other information. 15 U.S.C. § 1638(b)(1); 12 C.F.R.
§ 226.17(a)(1). The “conspicuously segregated” require-
ment is normally satisfied by the use of a “federal box” —
a heavy border surrounding the federal disclosures that
separates them from other extraneous information.* The
federal box allows the consumer to look to one place in
the document so that he can easily compare the costs of
credit. For information deemed extremely important (i.e.
APR and finance charge), TILA requires that they be
3 S. Rep. No. 73, supra, at 17, reprinted in 1980 U.S.C.C.A.N.
at 280.
4 The use of the “federal box” is illustrated by the model
forms accompanying Regulation Z. See e.g., Appendix O.
a I a =
27
disclosed “more conspicuously” than other required dis-
closures. 15 U.S.C. § 1632(a).
The legislative history of TILA indicates that “the
enforcement of [TILA] would be accomplished largely
through the institution of civil actions... ” Riggs v.
Government Employees Financial Corp., 623 F.2d 68, 72 (9th
Cir. 1980); see also, Rodash v. AIB Mortgage Co., 16 F.3d
1142, 1144 (11th Cir. 1994); Davis v. Werne, 673 F.2d 866,
869 (Sth Cir. 1982). However, Congress knew that actual
damages for disclosure violations were likely to be non-
existent or difficult to ascertain.5 See Watkins v. Simmons
and Clark, Inc., 618 F.2d 398, 400, n.6 (quoting S. Rep. No.
93-278, supra, at 14); Postow v. OBA Federal S. & L. Ass'n.,
627 F.2d 1370, 1384 (D.C. Cir. 1980). Therefore, § 1640(a)
provides for the recovery of Statutory damages as a basic
enforcement and deterrent mechanism. Riggs, 623 F.2d at
rae
D. EFTA Includes Similar Statutory Language
Encouraging Class Actions.
The Electronic Funds Transfer Act, 15 U.S.C. § 1693 et
seq. (“EFTA”) contains the same statutory cap on liability
as TILA. Compare 15 U.S.C. § 1693m (1994) with 15 U.S.C.
§ 1640(a) (1994). As discussed previously, this statutory
language balances Congress’s desires for nationwide uni-
form compliance with desires for encouraging certifica-
tion of class actions under TILA, and so Congress used
the same language in EFTA to accomplish the same goals.
5 See S. Rep. No. 93-278, 93rd Cong., 1st Sess., 14 (1973).
28
This intent is confirmed by the Report of the Com-
mittee on Banking, Finance and Urban Affairs on the
EFTA bill. The committee specifically recommended the
inclusion of a provision regarding class actions to encour-
age them. The recommendation was not just for purposes
of efficient disposition of potentially small claims, but
because of the “symbolic” as well as practical effects on
the industry. Including the provision sends a signal that
Congress is “serious” about enforcement of this statute.
“Yet the potential threat of class-action suits
has been and remains important in persuading
creditors and debt collectors to comply, who
might otherwise be inclined to violate these
laws with impunity. So, also would the threat of
class-action suits in EFT persuade financial
institutions and others subject to this legislation
to comply with the spirit and letter of the law.
Without a class action suit an institution could
violate the title with respect to thousands of
consumers without their knowledge, if its finan-
cial impact was small enough or hard to dis-
cover. Class-action suits for damages are an
essential part of enforcement of the bill because,
all too often, although many consumers have
been harmed, the actual damages in contrast to
the legal costs to individuals are not enough to
encourage a consumer to sue. . . . many individ-
ual losses could quickly add up to thousands of
dollars. The opposite could result, for without
the class-action option courts might get
besieged with iaw suits...
“The potential of class actions is symbolically as
well as practically important to consumers and
to industry. Both groups will assess the serious-
ness of Congressional purpose on whether or
29
not class-action suits are provided for in this a
EFT legislation. Included, no one can doubt con- a
gressional intent that institutions provide EFT
services only in a beneficial, responsible man-
ner. Excluded, the opposite might assumed.”
Committee on Banking, Finance and Urban
Affairs, H.R. 95-1315 (June 21, 1978).
¢
CONCLUSION
For the reasons above, petitioner Terry Johnson
respectfully requests that this Court grant his petition for
a writ of certiorari to the United States Court of Appeals
for the Third Circuit.
Respectfully submitted,
Donte. A. EDELMAN
Counsel of Record
CATHLEEN M. Comas
James O. LatrurNER
JoHN M. Broperick
EDELMAN, Comps & LATTURNER
120 South LaSalle Street,
18th Floor
Chicago, IL 60603
(312) 739-4200
(312) 419-0379 (FAX)
Counsel for Petitioner
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APPENDIX A
TERRY JOHNSON v. WEST SUBURBAN BANK;
TELE-CASH INC.; COUNTY BANK OF REHOBOTH
BEACH, DELAWARE; Tele-Cash Inc.; County Bank
of Rehoboth Beach, Delaware,
Appellants
NO. 00-5047
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
225 F.3d 366; 2000 U.S. App. LEXIS 22151
July 17, 2000, Argued
August 29, 2000, Filed
PRIOR HISTORY:
On Appeal From the United States District Court For
the District of Delaware. (D.C. Civ. No. 99-cv-00104).
District Judge: Honorable Gregory M. Sleet.
DISPOSITION:
Order of the District Court denying the motion to
Stay proceedings and compel arbitration reversed and the
case remanded for further proceedings consistent with
this opinion.
COUNSEL:
WALTER WEIR, JR., ESQUIRE, SUSAN VERBONITZ,
ESQUIRE (ARGUED), Weir and Partners, LLP, Phila-
delphia, PA. JAMES D. GRIFFIN, ESQUIRE, Griffin &
Hackett, Georgetown, DE, Counsel for Appellants.
A2
CATHLEEN M. COMBS, ESQUIRE (ARGUED),
JOHN M. BRODERICK, ESQUIRE, Edelman, Combs &
Latturner, Chicago, IL. WILLIAM L. O’DAY, JR.,
ESQUIRE, Law Office of William L. O’Day, Jr., Wilm-
ington, DE, Counsel for Appellee.
CHRISTOPHER R. LIPSETT, ESQUIRE, ERIC J.
MONGILNICKI, ESQUIRE, MICHAEL D. LEFFEL,
ESQUIRE, Wilmer, Cutler & Pickering, Washington, DC,
Counsel for Amici Curiae —- The Delaware Retail Council;
The New Jersey Retail Merchants Association; The Penn-
sylvania Retailers Association.
RICHARD P. ECKMAN, ESQUIRE, STEPHEN G.
HARVEY, ESQUIRE, JEFFREY K. TECHENTIN,
ESQUIRE, Pepper Hamilton, LLP, Philadelphia, PA,
Counsel for Amici Curiae —- American Bankers Associa-
tion, American Financial Services Association, Consumer
Bankers Association, and Delaware Bankers Association.
JUDGES:
Before: BECKER, Chief Judge, SLOVITER and
NYGAARD, Circuit Judges.
OPINION:
OPINION OF THE COURT
BECKER, Chief Judge.
This appeal arises under the Truth in Lending Act
(“TILA”), 15 U.S.C. § 1601 et seq., and the Electronic
Fund Transfer Act (“EFTA”), 15 U.S.C. § 1693 et seq.
A3
Plaintiff Terry Johnson, who entered into a short-term
loan agreement with County Bank of Rehoboth Beach,
Delaware (“Bank”), contends that the terms of the loan
violated both the TILA-and the EFTA. He seeks to bring a
class action suit against both the Bank and Tele-Cash,
Inc., which acted as the Bank’s agent for the loan transac-
tion. The Defendants respond that the dispute belongs in
an arbitral forum, as the loan agreement signed by John-
son contains an arbitration clause. This appeal presents
the question, one of first impression in the Courts of
Appeals, whether claims under the TILA and the EFTA
can be referred to arbitration under an arbitration clause
when a plaintiff seeks to bring a claim on behalf of
multiple claimants.
Johnson submits that compelling arbitration is pre-
cluded by an “irreconcilable conflict” between the arbi-
tration clause and the Purposes of the TILA and the
EFTA. He argues that Congress consciously inserted lan-
guage into the statutes with the intent of encouraging
district court judges to certify class actions under Fed. R.
Civ. P. 23. He further maintains that in the legislative
history of amendments to the TILA, Congress communi-
cated that class action remedies play a central role in the
TILA and EFTA enforcement schemes. Rather than simply
provide restitution, Johnson asserts, such litigation is
meant to serve public policy goals through plaintiffs who
act as private attorneys general, for the class action
device is necessary to ensure meaningful deterrence to
creditors who might violate the acts.
The District Court agreed with Johnson that there
was an “inherent conflict” between compelling
arbitration and the TILA and the EFTA and denied the
A4
Defendants’ motion to compel arbitration under the
agreement. We will reverse. Though there may be some
tension between the purposes of the debtor-protection
statutes and arbitration, we are not persuaded that the
two are so at odds as to preclude arbitration in this
context. The Supreme Court has made clear that the
presumption in favor of arbitration established by the
Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., is a
powerful one. Because neither the TILA nor the EFTA
explicitly precludes the selection of arbitration instead of
litigation, a party who agrees to arbitrate, but then asserts
that his or her statutory claim cannot be vindicated in an
arbitral forum, faces a heavy burden. That burden has not
been met here.
i
As a predicate to this conclusion, we note our belief
that the public interest purposes behind the civil penalty
provisions of the statutes are not in conflict with arbitra-
tion, even if arbitration clauses may prevent the bringing
of class actions. To the extent that class actions serve
public interest goals, those goals are also met by other
provisions of the laws, which allow for enforcement of
the statutes by federal agencies that possess sufficient
sanctioning power to provide a meaningful deterrent to
creditors who violate the terms of either act. Moreover,
neither act grants potential plaintiffs any substantive
right that cannot be vindicated in an arbitral forum.
While it may be true that the benefits of proceeding as a
class are unavailable in arbitration, neither statute confers
upon plaintiffs the right to proceed as a class. Instead, the
right is merely a procedural one, arising under Fed. R.
A5
Civ. P. 23, that may be waived by agreeing to an arbitra-
tion clause. In sum, because we can discern no congres-
sional intent to preclude the enforcement of arbitration
clauses in either statute’s text, legislative history, or pur-
pose, we hold that such clauses are effective even though
they may render class actions to pursue statutory claims
under the TILA or the EFTA unavailable.
I.
Johnson applied for and received a short-term loan
for $ 250 from the Bank on July 10, 1998. The loan
agreement disclosed an annual percentage rate of 917%,
stemming from finance charges of $ 88 for the two-week
loan. Thus, under the agreement, Johnson had to repay
the loan by making one payment of $ 338 two weeks after
receiving his $ 250. The loan agreement also contained
the following arbitration clause:
You and we agree that any claim, dispute, or
controversy between us... and any claim aris-
ing from or relating to this Note, no matter by
whom or against whom . . . including the val-
idity of this Note and of this agreement to arbi-
trate disputes as well as claims alleging fraud or
misrepresentation shall be resolved by binding
arbitration by and under the Code of Procedure
of the National Arbitration Forum. . . . This
arbitration agreement is made pursuant to a
transaction involving interstate commerce and
shall be governed by the Federal Arbitration
Act, 9 U.S.C. §§ 1-16.
App. 20. The loan agreement further provided:
A6é
NOTICE: YOU AND WE WOULD HAVE HAD
A RIGHT OR OPPORTUNITY TO LITIGATE
DISPUTES ‘THROUGH A COURT BUT HAVE
AGREED INSTEAD TO RESOLVE DISPUTES
THROUGH BINDING ARBITRATION.
By signing and sealing below, you agree to all of
the terms of this Note, including the agreement
to arbitrate disputes.
Id. at 20.
Johnson filed suit on behalf of a putative class in the
District Court for the District of Delaware, alleging that
the Bank and Tele-Cash, Inc., the bank’s agent for the
loan transaction, violated both the TILA and the EFTA by
failing to properly disclose the high rate of interest, and
by requiring loan applicants to open accounts from which
they were required to irrevocably preauthorize electronic
fund transfers to pay the loan.
The Defendants moved to stay the proceedings and
compel arbitration. Concluding that arbitration was at
odds with the purposes of the TILA and the EFTA, the
District Court denied a motion to compel arbitration and
stay the proceedings or dismiss the case. The District
Court did, however, dismiss Johnson’s claim that the
arbitration clause was unconscionable. The Defendants
timely appealed. The District Court had jurisdiction to
hear Johnson's action under 28 U.S.C. § 1331. Though the
District Court’s refusal to compel arbitration was inter-
locutory, such refusals are immediately appealable under
the FAA. See 9 U.S.C. § 16(a) (“An appeal may be taken
from...an order... refusing a stay of any action under
section 3 of this title [or] denying a petition under section
4 of this title to order arbitration to proceed.”). The
A7
question whether the TILA and the EFTA preclude arbi-
tration when the plaintiff seeks to assert claims on behalf
of a class presents a question of law over which our
review is plenary.
Il.
Whether a court can compel arbitration of TILA
claims when the parties’ loan agreement contains an arbi-
tration clause but the plaintiff seeks to bring claims on
behalf of multiple claimants is a question of first impres-
sion for this court. No other federal appellate court has
squarely addressed the issue either. A number of district
courts have ruled on the subject. Most of these rulings
favor the view that the TILA does not preclude the pre-
dispute selection by the parties of an arbitral forum
should any controversy arise. Compare Thompson v. IIli-
nois Title Loans, Inc., 2000 U.S. Dist. LEXIS 232, No. 99-
C-3952, 2000 WL 45493 (N.D. III. Jan. 11, 2000); Sagal v.
First USA Bank, N.A., 69 F. Supp. 2d 627 (D. Del. 1999);
Stout v. Byrider, 50 F. Supp. 2d 733 (N.D. Ohio 1999);
Randolph v. Green Tree Fin. Corp., 991 F. Supp. 1410 (M.D.
Ala. 1997), rev’d on other grounds, 178 F.3d 1149 (11th
Cir. 1999), cert. granted, 120 S. Ct. 1552 (2000); Lopez v.
Plaza Fin. Co., 1996 U.S. Dist. LEXIS 5566, No. 95-C-7567,
1996 WL 210073 (N.D. III. April 25, 1996); Meyers v. Uni-
vest Home Loan, Inc., 1993 U.S. Dist. LEXIS 11335 No.
C-93-1783 MHP, 1993 WL 307747 (N.D. Cal. Aug. 4, #993),
with Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp. 2d
1087 (W.D. Mich. 2000).
In general, nothing prevents contracting parties from
including a provision in their agreements that refers
A8
statutory claims arising under the contract to arbitration.
See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26,
114 L. Ed. 2d 26, 111 S. Ct. 1647 (1991). Arbitration of
statutory claims will not be precluded absent congres-
sional direction. “Having made the bargain to arbitrate,
the party should be held to it unless Congress itself has
evinced an intention to preclude a waiver of judicial
remedies for the statutory rights at issue.” Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,
628, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985). The burden of
establishing that Congress meant to preclude arbitration
for a statutory claim rests with the party who seeks to
avoid arbitration. See Gilmer, 500 U.S. at 26. Such inten-
tion may be found in the text, legislative history, or in an
“inherent conflict” between arbitration and the statute’s
underlying purposes. Id. (citing Shearson/American
Express, Inc. v. McMahon, 482 U.S. 220, 227, 96 L. Ed. 2d
185, 107 S. Ct. 2332 (1987)). “Throughout such an inquiry,
it should be kept in mind that ‘questions of arbitrability
must be addressed with a healthy regard for the federal
policy favoring arbitration.’ ” Id. (quoting Moses H. Cone
Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 74
L. Ed. 2d 765, 103 S. Ct. 927 (1983)).
It is the third category, inherent conflict, on which the
District Court based its opinion. The Court concluded
that an inherent conflict existed because “without the
possibility of class action liability looming on a creditor’s
horizon, there is a very real possibility that these entities
will not voluntarily comply with the Truth-in-Lending
regulations.” Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264,
271 (D. Del. 1999). We agree that if Johnson is to prevail, it
KS
Ag
must be on the basis of demonstrating an inherent con-
flict. There is nothing in either the text or the legislative
history of the TILA to indicate that Congress intended to
allow plaintiffs to avoid binding arbitration clauses. Both
the statute and the legislative history, however, offer
insight into the question whether an “inherent conflict” is
to be found between the statute and arbitration.
A. Statutory Language
The TILA provides for civil liability for lenders who
fail to give the disclosures required by the statute. See 15
U.S.C. § 1640. An aggrieved party is entitled to recover
actual as well as statutory damages. Statutory damages
can be twice the amount of any finance charge, but, for
most transactions, they may not exceed $ 1,000 or fall
short of $ 100. See id. §§ 1640(a)(1), (2). The statute speci-
fically addresses the damages available in a class action,
limiting the maximum potential recovery. Plaintiffs can
recover
in the case of a class action, such amount as the
court may allow, except that as to each member
of the class no minimum recovery shall be appli-
cable, and the total recovery under this subpara-
graph in any class action or series of class
actions arising out of the same failure to comply
by the same creditor shall not be more than the
lesser of $ 500,000 or 1 per centum of the net
worth of the creditor.
Id. § 1640(a)(1)(B). The statute further directs that
in determining the amount of award in any class
action, the court shall consider, among other
Al10
relevant factors, the amount of any actual dam-
ages awarded, the frequency and persistence of
failures of compliance by the creditor, the
resources of the creditor, the number of persons
adversely affected, and the extent to which the
creditor’s failure of compliance was intentional.
Id. § 1640(a).
Though the statute clearly contemplates class actions,
there are no provisions within the law that create a right
to bring them, or evince an intent by Congress that claims
initiated as class actions be exempt from binding arbitra-
tion clauses. The “right” to proceed to a class action,
insofar as the TILA is concerned, is a procedural one that
arises from the Federal Rules of Civil Procedure. See Fed.
R. Civ. P. 23.
B. Legislative History
Johnson relies heavily on the legislative history
behind several amendments to the TILA. After the law
was first enacted, some courts were reluctant to certify
class actions, in part due to the concern that large class
awards could overwhelm lending institutions. See gener-
ally Ratner v. Chemical Bank New York Trust Co., 54 F.R.D.
412, 414 (S.D.N.Y. 1972) (refusing to certify class of TILA
plaintiffs when “the allowance of thousands of minimum
recoveries like plaintiff's would carry to an absurd and
stultifying extreme the specific and essentially inconsis-
tent remedy Congress prescribed as the means of private
enforcement”). In 1974 Congress responded by enacting
the limitations on class action recovery discussed above.
In so doing, it created some legislative history that
bespeaks the potential role that class actions are meant to
All
play in the enforcement of the TILA’s substantive require-
ments. Johnson contends that this history demonstrates
Congress’s intent to preserve a statutory class action rem-
edy under the TILA.
Most of the language favorable to Johnson is found in
a report of the Senate Committee on Banking, Housing
and Urban Affairs pertaining to the 1974 amendments.
We quote from it at length.
A problem has arisen in applying these mini-
mum liability provisions in class action suits
involving millions of consumers. If each mem-
ber of the class is entitled to a minimum award
of $ 100, a creditor’s liability can be enormous.
For example, if a large national department
store chain with 10 million customers fails to
include a required item of information on its
monthly billing statement, it can be subject to a
minimum liability of $ 1 billion in a class action
suit
-... The purpose of the civil penalties section
under Truth in Lending was to provide creditors
with a meaningful incentive to comply with the
law without relying upon an extensive new
bureaucracy. However, the Committee feels this
objective can be achieved without subjecting
creditors to enormous penalties for violations
which do not involve actual damages and may
be of a technical nature. Putting a reasonable
limit on a creditor’s maximum class action lia-
bility would seem to be in the best interest of
both creditors and consumers.
-..+ The Committee believes the present ambi-
guities and uncertainties with respect to class
action suits under Truth in Lending should be
Al12
clarified. Moreover, the Committee agrees with
the Federal Reserve Board that “potential class
action liability is an important encouragement
to the voluntary compliance which is so neces-
sary to insure nationwide adherence to uniform
disclosure” and that such remedies should not
be restricted to actual damages. As the Commit-
tee pointed out in its report on similar legisla-
tion last year, “Most Truth in Lending violations
do not involve actual damages and . . . some
meaningful penalty provisions are therefore
needed to insure compliance.”
Accordingly, the Committee again decided to
place an aggregate limitation on a creditor’s
class action liability for violations not involving
actual damages.
S. Rep. No. 93-278, at 14-15 (1973). The conference
report for the final legislation is far less expansive, not
discussing the purposes of the caps in any great detail,
but stating that “the limitation on class action suits was
further limited to the lesser of $ 100,000 or 1 percent of
the net worth of the creditor to protect small business
firms from catastrophic judgments.” H.R. Conf. Rep. No.
93-1429 (1974), reprinted in 1974 U.S.C.C.A.N. 6148, 6153.
Several years later, the cap on class action awards
was raised from $ 100,000 to $ 500,000. At the time, the
Senate report, prepared by the Banking, Housing and
Urban Affairs Committ’ | noted:
The chief enforcement tool will continue to be
private actions for actual damages and civil pen-
alties. . . . The risk of any ceiling on class action
recoveries is that, if it is too low, it acts as a
positive disincentive to the bringing of such
Al3
actions and thus frustrates the enforcement pol-
icy for which class actions are recognized... .
The Committee wishes to avoid any implication
that the ceiling on class action recovery is meant
to discourage use of the class action device. The
recommended $ 500,000 limit, coupled with the
1% formula, provides, we believe, a workable
structure for private enforcement. Small busi-
nesses are protected by the 1% measure, while a
potential half million dollar recovery ought to
act as a significant deterrent to even the largest
creditor.
S. Rep. No. 94-590, at 8 (1976), reprinted in 1976
U.S.C.C.A.N. 431, 438.
Though Congress did not address the role of arbitra-
tion in the legislative history, Johnson urges that the
history recited above demonstrates the centrality of class
actions to the TILA’s effective enforcement.! Accordingly,
we turn to consider whether an arbitration clause that
precludes bringing a class action Suit under the TILA
irreconcilably conflicts with the statute.
C. Statutory Purposes
Because nothing in the legislative history or the stat-
utory text of the TILA clearly expresses congressional
intent to preclude the ability of parties to engage in
1 Insofar as the committee did endorse class actions, it
should be noted that the endorsement was not unequivocal. The
committee said it would be considering alternatives to class
actions in the future, adding “we are hopeful that there may be
workable and effective substitutes for the class action as a
consumer enforcement device... . ” Id.
Al4
arbitration, Johnson must demonstrate that arbitration
irreconcilably conflicts with the purposes of the TILA.
While Johnson may be correct in arguing that Congress
contemplated class actions as a part of the TILA enforce-
ment scheme, and even that class actions were self-con-
sciously promoted by Congress in amending the statute,
he falls short of demonstrating irreconcilable conflict
between arbitration and the TILA.
1. TILA’s public policy goals
Johnson focuses on the ability of a class action award
to act as a penalty against lenders who violate the TILA.
This focus is logical. The prospect of a class action award
will doubtless deter TILA violations more effectively than
the prospect that debtors will pursue individual actions,
either in court or in arbitration, because the damages
available to individuals are generally limited. See 15
U.S.C. § 1640. In this manner, argues Johnson, class
actions are central to TILA’s purposes, because the stat-
ute’s civil damages provisions are not remedial, but
rather, given the frequent absence of actual damages, are
designed to deter unfair credit practices. Phrased another
way, the TILA, in Johnson’s submission, is meant to
encourage private attorneys general, and the statute as a
whole is intended for public purposes rather than private
grievances. While these arguments carry force, they are
ultimately unpersuasive, for they do not translate into a
conclusion that class actions are necessary to provide
deterrence or fulfill any of the other goals of the Act.
Al5
a. The effects of arbitration on private litigation
First, even if plaintiffs who sign valid arbitration
agreements lack the procedural right to proceed as part of
a class, they retain the full range of rights created by the
TILA. These rights remain available in individual arbitra-
tion proceedings. The Supreme Court has made clear that
when arbitration will Preserve a plaintiff’s substantive
rights, compelling arbitration in accordance with an arbi-
tration clause will not impede a statute’s deterrent func-
tion. “So long as the Prospective litigant effectively may
vindicate [his or her] Statutory cause of action in the
arbitral forum, the statute will continue to serve both its
remedial and deterrent function.” Mitsubishi Motors Corp.
v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 87
L. Ed. 2d 444, 105 S. Ct. 3346 (1985). Johnson does not
argue that the arbitral forum selected in his agreement is
somehow inadequate to vindicate any of his rights under
the TILA or that arbitrators would be unable to afford
him any relief that he could individually obtain in a court
Proceeding, including injunctive relief or attorney’s fees.
Cf. Randolph v. Green Tree Fin. Corp., 178 F.3d 1149, 1158
(11th Cir. 1999), cert. granted, 120 S. Ct. 1552 (2000)
(reversing order compelling arbitration in a TILA case
because the clause at issue “raises serious concerns with
respect to filing fees, arbitrators’ costs and other arbitra-
tion expenses that may curtail or bar a plaintiff’s access
to the arbitral forum”); Baron v. Best Buy Co., Inc., 75
F. Supp. 2d 1368, 1370 (S.D. Fla. 1999) (appeal pending)
(refusing to compel arbitration in a TILA case when arbi-
tration agreement required parties to bear own expense
for attorneys’ costs in contravention of TILA provisions
that provide for recovery of attorneys’ fees).
Al6
Under the prevailing jurisprudence, when the right
made available by a statute is capable of vindication in
the arbitral forum, the public policy goals of that statute
do not justify refusing to arbitrate. The notion that there
is a meaningful distinction between vindicating a stat-
ute’s social purposes and adjudicating private grievances
for purposes of determining whether a statute precludes
compelling arbitration under a valid arbitration clause
was rejected by the Supreme Court in Gilmer v. Interstate/
Johnson Lane Corp., 500 U.S. 20, 114 L. Ed. 2d 26, 111 S. Ct.
1647 (1991). That case concerned whether claims under
the Age Discrimination in Employment Act (“ADEA”)
must be available in a judicial forum. The Court con-
cluded otherwise, despite arguments based on the
ADEA’s important social policy goals. “As Gilmer con-
tends, the ADEA is designed not only to address individ-
ual grievances, but also to further important social
policies. We do not perceive any inherent inconsistency
between those policies, however, and enforcing agree-
ments to arbitrate age discrimination claims.” Id. at 27
(citation omitted). Class actions could be similarly effec-
tive in promoting the ADEA’s social policies, and, as
discussed below, that statute lends itself more easily to
being construed as creating a substantive right to a class
action. Gilmer therefore appears to foreclose much of
Johnson’s argument.
We also note that while arbitrating claims that might
have been pursued as part of class actions potentially
reduces the number of plaintiffs seeking to enforce the
TILA against creditors, arbitration does not eliminate
plaintiff incentives to assert rights under the Act. The
sums available in recovery to individual plaintiffs are not
Al17
automatically increased by use of the class forum. Indeed,
individual plaintiff recoveries available in a class action
may be lower than those possible in individual suits
because the recovery available under TILA’s statutory
cap on class recoveries is spread over the entire class. Nor
will arbitration necessarily choke off the supply of law-
yers willing to pursue claims on behalf of debtors. Attor-
neys’ fees are recoverable under the TILA, see 15 U.S.C.
§ 1640(a)(3), and would therefore appear to be recover-
able in arbitration, as arbitrators possess the power to
fashion the same relief as courts.2 In sum, though pursu-
ing individual claims in arbitration may well be less
attractive than pursuing a class action in the courts, we
do not agree that compelling arbitration of the claim of a
prospective class action plaintiff irreconcilably conflicts
with TILA’s goal of encouraging private actions to deter
violations of the Act. Whatever the benefits of class
actions, the FAA” requires piecemeal resolution when
necessary to give effect to an arbitration agreement.”
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Co., 460 U.S.
1, 20, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1985) (emphasis in
the original).
2 There does not appear to be a problem with securing the
full range of remedies available under the TILA in this case
because Rule 20(d) of the National Arbitration Forum, the
arbitrators selected in the parties’ contract, currently authorizes
arbitrators to “grant any remedy or relief allowed by applicable
substantive law and based on a Claim, Response, or Request
Properly submitted by a Party under this Code.” Of course if the
arbitral rules in question precluded the substantive relief made
available by the statute, or the forum otherwise presented
barriers to a plaintiff’s assertion of his or her rights, we would
have a different case.
A18
b. The availability of administrative enforcement
mechanisms
Our conclusion that there is no irreconcilable conflict
between the TILA’s social policy goals and arbitration of
claims that could have been heard as part of a class action
is bolstered by the statute’s administrative enforcement
provisions. These provisions offer meaningful deterrents
to violators of the TILA if private enforcement actions
should fail to fulfill that role. The statute gives general
enforcement power to the Federal Trade Commission as
the “overall enforcing agency,” and permits it to employ
its powers under the Federal Trade Commission Act, see
15 U.S.C. § 1607(c), such as the issuing of cease and desist
orders, see 15 U.S.C. § 45. The TILA also grants enforce-
ment authority to the variety of federal agencies that
have jurisdiction over various lending institutions,
including the Office of the Comptroller of the Currency,
the Federal Reserve Board, and the FDIC. See 15 U.S.C.
§ 1607(a). In addition to allowing these federal agencies
to order the adjustment of inaccurately disclosed finance
charges, see id. § 1607(e), the TILA cross references section
8 of the Federal Deposit Insurance Act, 12 U.S.C. § 1818,
to set forth other enforcement powers, see 15 U.S.C.
§ 1607(a). Therefore the agencies may, for example,
impose monetary penalties of up to $ 5,000 per day (or of
$ 25,000 per day if the violations are part of a pattern of
misconduct), see 12 U.S:C. § 1818(i), or in some instances
order the suspension and removal of institution directors
or officers, see 12 U.S.C. § 1818(e).
Al9
Johnson responds by invoking the portion of the
legislative history that speaks to the need to avoid “rely-
ing upon an extensive new bureaucracy.” S. Rep. No.
93-278, at 14 (1973). This reference is of limited useful-
ness, for this snippet of legislative history does not indi-
cate congressional intent that arbitration be precluded, or
that individual actions are inadequate to serve the func-
tion of deterring violations of the TILA. It may be true
that Congress saw value in maintaining the availability of
class actions, but that does not translate to the conclusion
that it intended to preclude private parties from contract-
ing around their availability. Under the framework estab-
lished by the Supreme Court, legislative history may be
used to demonstrate congressional intent to preclude
arbitration. See Gilmer v. Interstate/Johnson Lane Corp., 500
U.S. 20, 26, 114 L. Ed. 2d 26, 111 S. Ct. 1647 (1991). When
that history is used, as here, merely to demonstrate that
the judicial remedies provided for or contemplated by a
Statute are important, it is of noticeably reduced value.
The importance of Statutory judicial remedies are always
evident from their mere existence -— Congress obviously
enacted them for a reason. Were they not the object of a
congressional goal, they would not have been enacted. It
is therefore hard to see how the legislative history relied
upon by Johnson could possibly be dispositive.3
* Moreover, even if legislative history were dispositive,
there is similar history accompanying the original version of the
TILA that indicates the importance of administrative
enforcement in securing the rights of most consumers. The
House Report, prepared by the Committee on Banking and
Currency, explained that enforcement on the administrative
level was essential to the legislative purpose of the Act. See H.R.
‘
A20
Insofar as Congress’s intent, broadly contemplated, is
concerned, we must give equal consideration to Con-
gress’s policy goals in enacting the FAA. The statute was
intended to overcome judicial hostility to agreements to
arbitrate, see Dean Witter Reynolds Inc. v. Byrd, 470 U.S.
213, 219-21 & n.6, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985),
and it reflects “a liberal federal policy favoring arbitra-
tion agreements,” see Moses H. Cone Mem'l Hosp. v. Mer-
cury Constr. Co., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct.
927 (1983). See also H.R. Rep. No. 68-96, at 1 (1924)
(“Arbitration agreements are purely matters of contract,
and the effect of this bill is simply to make the contract-
ing party live up to his agreement.”). Indeed, a Senate
Judiciary Committee Report supporting the legislation
explained that arbitration provides benefits to both con-
sumers and businesses in speed and lower costs. “The
desire to avoid the delay and expense of litigation per-
sists. The desire grows with time and as delays and
expense increase. The settlement of disputes by arbitra-
tion appeals to big business and little business alike, to
corporate interests as well as to individuals.” S. Rep. No.
68-536, at 3 (1924).
Rep. No. 90-1040 (1968), reprinted in 1968 U.S.C.C.A.N. 1962,
1975. “For the relatively unsophisticated consumer, particularly
those of modest means, administrative enforcement will
provide their only protection against unscrupulous merchants
or lenders.” Id. The report also characterizes the civil remedies
as secondary to the administrative ones. “While primary
enforcement of the bill would be accomplished under the
administrative enforcement section discussed above, further
provision is made for the institution of civil action by an
aggrieved debtor.” Id. at 1976.
A21
Similarly, the committee found that there was general
Satisfaction among participants with arbitration. See id.
A 1982 House of Representatives report reached similar
conclusions, stating that “the advantages of arbitration
are many: it is usually cheaper and faster than litigation;
it can have simpler procedural and evidentiary rules;
it normally minimizes hostility and is less disruptive
of ongoing and future business dealings among the par-
ties; [and] it is often more flexible in regard to schedul-
ing. ...” H.R. Rep. No. 97-542, at 13 (1982). These
benefits have been similarly recognized by the Supreme
Court as being part of Congress's intent in passing the
FAA. See Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265,
280, 130 L. Ed. 2d 753, 115 S. Ct. 834 (1995) (citing the
1924 Senate Report and the 1982 House Report). We
therefore cannot consider the legislative history relied
upon by Johnson without giving equal heed to the clear
congressional policy behind the FAA.
In short, Johnson’s reliance on the legislative history
summarized in Part II.B is fundamentally flawed. He uses
it not to show that Congress intended that parties could
avoid a valid arbitration clauses [sic] if they wished to
litigate a TILA claim, but rather, and in a more attenuated
manner, to show that class actions have important pur-
poses under the statute. But nothing in the cited passages
demonstrates that parties cannot choose to waive judicial
remedies in favor of arbitration. In any case, the loss of
the availability of a class action does not mean the loss of
meaningful deterrence to TILA violations, insofar as the
public remedies discussed above remain. It may be true
A22
that the unavailability of class actions removes an incen-
tive for lenders to comply with the statute, but it is far
from the only incentive to do so.
We similarly do not view the fact that Congress
seems to have self-consciously encouraged class actions
as particularly telling. In acting to ease the certification of
classes, see supra Part II.B, Congress did nothing to pre-
serve the right to a class action over arbitration or pre-
clude opting for arbitration. Rather, it only altered the
factors that judges consider in determining whether to
allow the procedural right of a class action to be exer-
cised. Notably, Congress did not add language compel-
ling judges to recognize prospective classes under any
circumstances. One can therefore look at the 1974 and
1976 amendments as efforts by Congress to place class
actions on the same footing as any other lawsuit, no more
or less subject to arbitration than a cause of action arising
under any other statute.
‘
2. Substantive Rights
Johnson also argues that the TILA does effectively
create an unwaivable right to bring a class action. The
strongest statement of this argument is as follows. Con-
gress enacted a scheme in which the court hearing a class
action could set a damage figure up to a certain amount
for certain patterns of conduct. This judicial flexibility in
imposing damages up to $ 500,000 only exists if a class
action is allowed, as individual plaintiff claims are gener-
ally capped at $ 1,000. Therefore, a right of classes to a
judicially crafted punitive remedy is lost if this court
orders arbitration of Johnson’s claims. Similarly, if class
Pa
A23
actions are precluded, arbitrators acting in lieu of courts
would not have a basis for considering, in connection
with a class remedy, the frequency and persistence of
compliance failures by the creditors, the number of per-
sons adversely affected, or the creditors’ intent. See 15
U.S.C. § 1640(a).4
This argument is unavailing in light of Gilmer pv.
Interstate/Johnson Lane Corp., 500 U.S. 20, 114 L. Ed. 2d 26,
111 S. Ct. 1647 (1991). The ADEA, at issue in Gilmer,
presented far more powerful textual support than the
TILA for concluding that there is a right to proceed
collectively despite the existence of an arbitration clause.
The ADEA actually Provides for collective litigation. See
29 U.S.C. § 626(b) (referencing the remedies in 29 U.S.C.
§ 216). “An action... may be maintained against any
employer (including a public agency) in any Federal or
State court of competent jurisdiction by any one or more
employees for and in behalf of himself or themselves and
other employees similarly situated.” 29 U.S.C. § 216(b)
(emphasis added). In short, the Statute creates a right to
sue collectively, which is not similarly created by the
TILA. Yet the Supreme Court stil] ruled that the ADEA
* This court has never addressed the question whether class
actions can be pursued in arbitral forums, though it appears
indicated that the rules of the National Arbitration Forum,
which govern the arbitration agreement here, preclude the
joinder of actions unless all Parties affirmatively consent. We
therefore assume, for Purposes of this appeal, that Johnson’s
effort to pursue his claims as a representative of a class would
be precluded by enforcement of the arbitration clause.
A24
did not preclude arbitration notwithstanding the
unavailability of the class action remedy there (and also
notwithstanding all of the public interests vindicated by
the statute as discussed above in Part II.C.1). See Gilmer,
500 U.S. at 32.
Johnson argues that Gilmer is taken out of context
vis-a-vis the provision for class actions because the
Supreme Court noted that the EEOC, in enforcing the
ADEA, could still seek class-wide relief, while the FTC is
not similarly capable. We do not believe that this argu-
ment carries any force. As discussed above, powerful
punitive enforcement mechanisms remain available to
administrative bodies under the Act even if these tools
are not in the form of class actions.
Furthermore, simply because judicial remedies are a
part of a law does not mean that Congress meant to
preclude parties from bargaining around their availabil-
ity. This is manifest in the Supreme Court’s treatment of
the availability of class actions in Gilmer. “But ‘even if the
arbitration could not go forward as a class action or class
relief could not be granted by the arbitrator, the fact that
the [ADEA] provides for the possibility of bringing a
collective action does not mean that individual attempts
at conciliation were intended to be barred.’ ” Gilmer, 500
U.S. 20 at 32 (quoting Nicholson v. CPC Int'l Inc., 877 F.2d
221, 241 (3d Cir. 1989) (Becker, J., dissenting)) (alteration
in the original). The same holds true for the TILA. Even if
we were to conclude that the statute implies a right to
proceed as a member of a class, Gilmer indicates that
rights of this nature are waivable so long as the rights the
statute was designed to protect may be vindicated by
other means. We do not think this unfair. Only those who
A25
consent to credit agreements with binding arbitration
clauses are forced to abandon this procedural avenue;
those who do not consent to arbitration in their contracts
have the full selection of forums.5
° Of course even when arbitration clauses are included in
agreements, they may be set aside if they are fraudulently
induced or are in some way unconscionable. As noted above,
Johnson did allege that his arbitration clause was
unconscionable, but the District Court found no basis for the
conclusion that the clause was in any way oppressive, in large
part because the clause did not create an arbitration procedure
that favors one party over another. See Johnson v. Tele-Cash, Inc.,
82 F. Supp. 2d 264, 279 (D. Del. 1999). Though Johnson
complains on appeal that the arbitration clause was a contract of
adhesion, he does not make any argument to contradict the
District Court’s conclusion that the arbitration clause is not
unconscionable.
Johnson also claims that waiver of judicial remedies
through a contract of adhesion violates the Equal Credit
Opportunity Act (“ECOA”), which prohibits discrimination
against any credit applicant who exercised a right created unde
the chapter of the U.S. Code that includes the TILA. See 15
U.S.C. § 1691. But Johnson does not properly allege that there
has been any discrimination, or that he exercised any right
under any act. Johnson’s Purported authority for the
Proposition that the ECOA is applicable is Owens v. Magee Fin.
Serv., 476 F. Supp. 758 (E.D. La. 1979), and Bryson v. Bank of New
York, 584 F. Supp. 1306 (S.D.N.Y. 1984). Both cases, however,
presented strikingly different facts from those at issue here, as
they involved oppressive conduct against individuals who
actively sought to assert rights under the TILA. In Owens, a
creditor defendant, already being sued for a TILA violation by
the debtor, made additional credit contingent on the debtor’s
signing a settlement document of her active lawsuit. See Owens,
476 F. Supp. at 768. Bryson involved a denial of a loan
application simply because an applicant inquired about the
ability to obtain a loan without taking credit insurance. This was
A26
In sum, Johnson’s arguments that the TILA precludes
arbitration are unpersuasive. “If Congress intended the
substantive protection afforded by a given statute to
include protection against waiver of the right to a judicial
forum, that intention will be deducible from text or legis-
lative history.” Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 628, 87 L. Ed. 2d 444, 105
S. Ct. 3346 (1985). No such intent is deducible here.
Il.
The District Court further held that compelling arbi-
tration of claims arising under the EFTA irreconcilably
conflicts with that statute as well. This ruling was based
on the fact that the EFTA contains limitations on class
action recovery that mirror those contained in the TILA.
Compare 15 U.S.C. § 1640(a), with 15 U.S.C. § 1693m(a).
The District Court inferred that Congress’s use of identi-
cal language bespoke identical goals, and that Congress
was seeking to encourage the certification of class actions
under the EFTA as it had under the TILA. Because the
Court had concluded that this goal created an inherent
conflict with arbitration in the TILA context, it followed
that the same conflict was manifest when EFTA claims
a violation because TILA provides consumers with the right to
refuse to purchase such insurance unless the premium is
included in the statement of the finance charge of the loan. See
Bryson, 584 F. Supp. at 1318.
These differences aside, Johnson plainly cannot claim that
Defendants’ conduct violated the ECOA or its implementing
regulation because, as we discuss in the text, we hold today that
the arbitration clause contained in the loan agreement did not
serve to deprive Johnson of any rights held under the TILA.
A27
were arbitrated. See Johnson v. Tele-Cash, Inc., 82
F. Supp. 2d 264, 272 (D. Del. 1999). While we agree that
resolution of the arbitration issue with respect to TILA
claims would also apply to the EFTA, cur disagreement
with the District Court about whether the TILA precludes
compelling arbitration commands a similarly contrary
conclusion about the EFTA issue. The EFTA’s class action
language was drafted in 1978, after the identical language
was placed in the TILA by the 1974 and 1976 amend-
ments. See Electronic Fund Transfer Act, Pub. L. No.
95-630, § 915, 92 Stat. 3737 (1978) (codified at 15 U.S.C.
§ 1693m(a)). We do not believe that Congress would have
different intended meanings for identical Statutory lan-
guage contained in similar statutes. Because there is no
irreconcilable conflict between arbitration and the goals
of the TILA, we similarly hold that claims arising under
the EFTA may also be subject to arbitration notwithstand-
ing the desire of a plaintiff who Previously consented to
arbitration to bring his or her claims as Part of a class.
The order of the District Court denying the motion to
Stay proceedings and compel arbitration will be reversed
and the case remanded for further Proceedings consistent
with this opinion.
Bl
APPENDIX B
TERRY JOHNSON, Plaintiff, v. TELE-CASH, INC.,
and COUNTY BANK OF REHOBOTH BEACH,
DELAWARE, Defendants.
Civil Action No. 99-104-GMS
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF DELAWARE
82 F. Supp. 2d 264; 1999 U.S. Dist. LEXIS 20632
December 29, 1999, Decided
December 29, 1999, Filed
DISPOSITION:
Motion to Stay Proceedings and Compel Arbitration
(D.I. 7) filed by Defendants Tele-Cash, Inc. and County
Bank of Rehoboth Beach, Delaware DENIED; Motion to
Dismiss (D.I. 7) filed by Defendants Tele-Cash, Inc. and
County Bank of Rehoboth Beach, Delaware GRANTED IN
PART and DENIED IN PART; Claim seeking a declaratory
judgment that the arbitration clause contained within the
loan agreement signed by Plaintiff Terry Johnson uncon-
scionable DISMISSED.
COUNSEL:
William L. O’Day, Jr., Esquire, Law Offices of William
L. O’Day, Jr., Wilmington, Delaware, for Plaintiff.
Daniel A. Edelman, Esquire, Kathleen M. Combs,
Esquire, James O. Latturner, Esquire, Sheila A.
O’Laughlin, Esquire, and Heather C. Sullivan, Esquire, Of
counsel, EDELMAN & COMBS, Chicago, Illinois, for
Plaintiff.
nN
B2
James D. Griffin, Esquire and David R. Hackett,
Esquire, GRIFFIN & HACKETT, P.A., Georgetown, Dela-
ware, for Defendants.
Walter Weir, Esquire,
NERS, LLP, Philadelphia,
JUDGEs:
Of counsel, WEIR & PART-
Pennsylvania, for Defendants.
Gregory M. Sleet, UNITED STATES DISTRICT JUDGE.
OPINION By:
Gregory M. Sleet
OPINION:
December 29, 1999.
Wilmington, Delaware.
Gregory M. Sleet
District Judge.
I. INTRODUCTION.
On February 25, 1999, Terry Johnson filed a class
action lawsuit with this court. In it, he alleges that Tele-
Cash, Inc. and the County Bank of Rehoboth Beach, Dela-
ware (the “defendants”)! have violated both the Truth In
Lending Act (“TILA”), 15 U.S.C. § 1601 et seq. (1994), and
the Electronic Funds Transfer Act (“EFTA”), 15 U.S.C.
§ 1693 et seq (1994), by failing to Properly disclose the
excessively high rates of interest which they charge for
? On May 20, 1999, the Parties agreed to voluntarily dismiss
the claims against a third defendant - West Suburban Bank.
B3
their short-term loans and by requiring borrowers to
consent to a complicated electronic fund transfer scheme
in order to obtain these loans.?
On May 5, 1999, the defendants moved to stay these
proceedings pending the outcome of arbitration.? In their
motion, the defendants point out that Johnson’s loan
application contains an arbitration clause which prohibits
him from filing suit and, instead, requires him to vindi-
cate any claim that he may have against the defendants
through binding arbitration. In opposition to the motion,
Johnson claims that the arbitration clause is unenforce-
able as unconscionable since it would effectively evisce-
rate the purpose of the TILA by eliminating the
possibility of class relief.
The court agrees. The intended purpose of the TILA
was “to encourage class actions in the truth-in-lending
2 On this point, Johnson alleges that, in order to obtain a
loan, applicants must first open a checking account into which
their wages are directly deposited. However, according to
Johnson, the defendants immediately transfer these deposits
out of these checking accounts into another account without
providing the required notice to the borrowers. Johnson claims
that, in order to obtain a loan, he had to irrevocably agree to this
system of electronic transfers. Otherwise, the defendants would
not extend him a line of credit. Put differently, he claims that
terms were part of the loan agreement which the defendants
drafted unilaterally.
3 In the alternative, the defendants moved to dismiss
Johnson’s complaint on the grounds that the terms of the loan
were adequately disclosed and, thus, no violation of the TILA
occurred. In addition, the defendants contend that, given the
factual allegations of the complaint, all of Johnson’s remaining
claims fail as a matter of law.
B4
context because of the apparent inadequacy of the Fed-
eral Trade Commission’s enforcement resources and
because of a continuing problem of minimum compliance
with the Act on the part of creditors.” See Watkins v.
Simmons & Clark, Inc., 618 F.2d 398, 400 (9th Cir. 1980)
(citing Sen. Rept. No. 93-278, at 14-15 (1973)). As a result,
a ruling which compels arbitration seems contrary to the
underlying purpose of the TILA. The court reaches the
same conclusion with respect to Johnson’s EFTA claims.
For these reasons, the court will deny the defendants’
motion to compel arbitration. It will also deny the defen-
dants’ motion to dismiss as it relates to Johnson’s claims
under the TILA, the EFTA, and for a declaratory judg-
ment that the rate of interest charged by the defendants
was unconscionable. The following sections explain the
court’s reasoning more thoroughly.
II. BACKGROUND
On July 10, 1998, Johnson applied for and received a
short-term loan in the amount of $250 from the County
Bank of Rehoboth Beach. The one-page loan agreement
set forth an annual percentage rate of 917 percent and a
finance charge of $88. As a result, Johnson was required
to repay his $250 loan by making one payment of $338 on
July 24, 1998 - two weeks after he submitted his loan
application and received the $250.
These terms were disclosed in a table located at the
top of the loan agreement which looks something like
this:
SC i i a arn ater
B5
sanjsued pes spunsai yuousAedaid pus ‘2)8p
Prnpayrs 243 21079q |jNy w} UauLLed pasmnbaa Lue 4}ngjap QuawXeduou ynogy uoysuLs0;u1 BONPPE 4103 m0(2q 225
aBa8y2 s.usUYy ay} JO pIE JO PuNjas B 0) PapNud aq JOU
qs nok ‘aousape at avo] snot fed nok jy juawAedasg
asBp aap 24}
jo Lep of orques pied jou 3) wBo'T snoK }1 quaw fed 338]
dq) JO &.6 JO 2Bs8yD 338) w Led ysnut NOX SadsEYD 2187
paansasun 8) uvo'] 24], 3s9ua}Uy AjLin2ag
“SeruL-
ud “SCE $0 uawAd auo axe ysNW NO,
eupeysy pusuteg
Scr panpayos sv syuauAed js spew aany
nok 4248 pred savy fim nod yunows Jy],
$ SINSWAYd JO TVLOL
: * geqeq anok
00°0S7 wo nok 6} pap!aosd prpas2 jo yunowe 34],
$ (TADNVNLAINNOWV
BB nok ys02 jue pau9 a4 JUNOw SHOP ML
$ FTOUVHD DIONVNI
IL°LI6 3782 dyeak 8 SB 31P922 INOA JO 9509 WY],
% WLVY ADV LNAI Ud ‘1VONNY
B6
While this table is not an exact representation of the
information since the margins of the original are slightly
different, it is in all other respects a fairly accurate por-
trayal of the information available to Johnson at the time
that he entered into the loan agreement.
In addition, at the bottom, right above the signature
line, the loan agreement provided a “boiler plate” arbitra-
tion clause which, in relevant part, reads:
ARBITRATION: You and we agree that any
claim, dispute, or controversy between
us .. . and any claim arising from or relating to
this Note, no matter by whom or against
whom ... , including the validity of this Note
and of this agreement to arbitrate disputes as
well as claims alleging fraud or misrepresenta-
tion shall be resolved by binding arbitration. . . .
This arbitration agreement is made pursuant to
a transaction invelving interstate commerce and
shall be governed by the Federal Arbitration
Act, 9 U.S.C. [§§ ] 1-16. Judgment upon the
award may be entered by any party in any court
having jurisdiction.
(emphasis added).
Below this paragraph, the loan agreement provides
two others which state:
NOTICE: YOU AND WE WOULD HAVE HAD a
RIGHT OR OPPORTUNITY TO LITIGATE UIS-
PUTES THROUGH a COURT BUT HAVE
AGREED INSTEAD TO RESOLVE DISPUTES
THROUGH BINDING ARBITRATION.
By signing and sealing below, you agree to all of
the terms of this Note, including the agreement
to arbitrate disputes.
B7
With these facts in mind, this memorandum turns to a
discussion of the relevant law.
III. DISCUSSION.
Given the clear and explicit language of the loan
agreement, compelling arbitration seems to be a logical
ruling, especially in light of the “congressional declara-
tion of a liberal federal policy favoring arbitration agree-
ments.” See Moses H. Cone Mem‘! Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983).
However, this ruling would contravene the express con-
gressional intent to “encourage the use of class actions as
an important tool for enforcing Truth in Lending.” See
Bantolina v. Aloha Motors, Inc., 419 F. Supp. 1116, 1120 (D.
Haw. 1976). For this reason the court will deny the defen-
dants’ motion.
A. The Origin And Evolution Of The FAA.
Originally enacted in 1925, the FAA was adopted in
an attempt to place arbitration agreements on the same
level as other contracts and, thus, reverse the “longstand-
ing judicial hostility” to these agreements that American
courts had inherited from their English ancestors. See
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 114
L. Ed. 2d 26, 111 S. Ct. 1647 (1991); see also Harris v. Green
Tree Fin. Corp., 183 F.3d 173, 178 (3d Cir. 1999) (citing
Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,
225-26, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987)). In light of
the purpose of the FAA, it should come as no surprise to
B8
learn that federal law presumptively favors the enforce-
ment of arbitration agreements. See In re Prudential Inc.
Co. of Am. Sales Practice Litig., 133 F.3d 225, 231 (3d Cir.
1998) (cited in Harris). For this reason, the FAA autho-
rizes a district court to compel the arbitration of any issue
covered by a valid and enforceable arbitration agreement
when a party to that agreement commences a legal action
without first attempting to arbitrate the dispute. See 9
U.S.C. §§ 3 - 4 (1994); see also Southland Corp. v. Keating,
465 U.S. 1, 11-12, 79 L. Ed. 2d 1, 104 S. Ct. 852 (1984) (also
cited in Harris).
Here, Johnson does not (and probably cannot) argue
that his dispute falls outside the scope of the arbitration
agreement. In fact, given the breadth of the contractual
Provision,‘ it is impossible to see how Johnson could
claim otherwise. As a result, he effectively concedes the
point. Thus, the court is left with only one question -
namely, is the arbitration clause enforceable?
B. The Enforceability Of The Arbitration Clause With
Respect To Johnson’s TILA Claims.
On this point, Johnson contends that the arbitration
clause is not enforceable because (1) Congress expressly
intended to preclude the arbitration of claims arising
* As mentioned earlier, the arbitration clause states, in
relevant part, that “any claim, dispute, or controversy between
[Johnson and the defendants] . . . and any claim arising from or
relating to this Note, no matter by whom or against whom... ,
including the validity of this Note and of this agreement to
arbitrate disputes as well as claims alleging fraud or
misrepresentation shall be resolved by binding arbitration... . ”
SPE NT
ee oe a.
B9
under the TILA by explicitly allowing for the possibility
of class relief under the statute and (2) the arbitration
agreement itself is unconscionable. Because the court
agrees with Johnson’s first argument, it need not address
the second.
Citing to 15 U.S.C. § 1640 (1994), Johnson argues that
Congress expressed a clear intent to guarantee class relief
under the TILA by allowing individuals to bring a class
action under the statute. Since an arbitrator cannot award
this type of class-wide relief, Johnson contends that this
court cannot compel the arbitration of this matter.
The most convincing rejection of this argument was
expressed in Lopez v. Plaza Fin. Co., 1996 U.S. Dist. LEXIS
5566, No. 95-C-7567, 1996 WL 210073, at *2-3 (N.D. Ill.
Apr. 26, 1996). There, the district court stated that:
It is true that compelling arbitration . . . will
eliminate [the] plaintiff's ability to arbitrate his
claims on behalf of a class. Nonetheless, this
result is required because Congress has not cre-
ated a statutory right to bring class actions
under [the] TILA. . . . Section 1640, cited by [the]
plaintiff in support of the proposition that a
statutory right exists, does not establish a right
per se; it only sets forth a limit on liability under
class actions. . . . Where an enforceable arbitra-
tion clause allows only for individual arbitra-
tion, a class will not be certified. Therefore, [the]
plaintiff's inability to bring class claims under
[the] TILA is of no legal consequence.
Id. at *3 (citing Champ v. Siegel Trading Co., 55 F.3d
269, 276-77 (7th Cir. 1995); see also Sagal v. First USA Bank,
N.A., 69 F. Supp. 2d 627, 1999 WL 803851, at *4 (D. Del.
Aug. 30, 1999) (citing Lopez).
B10
In addition to concluding that the plaintiff had no
statutory right to maintain a class action under the TILA,
the Lopez court also found that Congress never intended
to preclude the arbitration of TILA claims because the
“plaintiff had provided no compelling legal authority to
support this proposition. ...” Id. As the Lopez court
stated, “without such authority, [the] plaintiff’s argument
must fail.” Id. While it is not clear what authority (if any)
the Lopez plaintiff cited, the legislative history of Section
1640 suggests that Congress was trying to encourage the
use of class actions as a means for enforcing the TILA. As
a result, the court believes that a strong argument can be
made that TILA claims should not be arbitrated since this
forum cannot provide the class-wide relief available in
the courts.
In 1974, Congress amended Section 1640 to provide a
cap on liability for class actions brought under the TILA.
See Watkins v. Simmons & Clark, 618 F.2d 398, 400 (9th Cir.
1980); Bantolina v. Aloha Motors, Inc., 419 F. Supp. 1116,
1119-20 & n. 10 (D. Haw. 1976). Prior to the amendment,
upon a showing of injury, each individual plaintiff was
entitled to a minimum award of $100 under the statute.
See 15 U.S.C. § 1640 (1970). However, in class action
lawsuits which involved millions or tens of millions of
consumers, granting this minimum amount of recovery to
each individual plaintiff would result in an astronomical
damage figure. For this very reason, numerous federal
courts refused to certify class actions under the TILA
since the “allowance of thousands of minimum recov-
eries . . . would carry to an absurd and stultifying
extreme the specific and essentially inconsistent remedy
B11
Congress prescribed as the means of private enforce-
ment.” See Ratner v. Chemical Bank of New York Trust Co.,
54 FR.D. 412, 414 (S.D.N.Y. 1972). In response to these
decisions, Congress amended the statute to provide a
limit on the maximum recovery available under the TILA.
This amendment was intended to encourage the federal
courts to begin certifying class actions in Truth in Lend-
ing lawsuits. See Watkins, 618 F.2d at 400 n.6 (citing Sen.
Rept. No. 93-278, at 14-15 (1973)); see also Bantolina, 419
F. Supp. 1116, 1119-20 & n. 11 (citing same).
In capping the maximum amount of recovery in class
action lawsuits under the TILA at “the lesser of $500,000
or 1 per centum of the net worth of the creditor,” 15
U.S.C. § 1640 (1994). Congress expressly stated that it
“wished to avoid any implication that the ceiling on class
action recovery was meant to discourage use of the class
action device.” See Watkins, 618 F.2d at 401 & n.7 (citing
Sen. Rept. No. 94-590, reprinted in 1976 U.S. Code Cong. &
Admin. News, at 431, 438). Instead, this amount was
“meant to limit the exposure of creditors to vast judg-
ments whose size would depend on the number of mem-
bers who happened to fall within the class” while, at the
same time, “providing . . . a workable Structure for pri-
vate enforcement.” See id. (citing same). As the Congress
noted, “small businesses were protected by the 1 [per-
cent] measure, while a potential half-million dollar recov-
ery ought to act as a significant deterrent to even the
largest creditor.” See id. (citing same).
In adopting these amendments, Congress explained
that “the purpose of the civil penalties under [the] Truth
in Lending [Act] was to provide creditors with a mean-
ingful incentive to comply with the law without relying
i NON ge eS
B12
on an extensive new bureaucracy.” Sen. Rept. No. 93-278,
at 14. However, because “this objective could be achieved
without subjecting creditors to enormous penalties for
violations which did not involve actual damages and may
be technical in nature,” the Congress decided to “put[] a
reasonable limit on a creditor’s maximum class action
liability” since it “seemed to be in the best interests of
both creditors and consumers.” Id. In so doing, Congress
concurred with an earlier conclusion by the Federal
Reserve Board that “potential class action liability was an
important encouragement to the voluntary compliance
which was so necessary to ensure nation-wide adherence
to uniform disclosure” since “most Truth in Lending vio-
lations do not involve actual damages and . . . some
meaningful penalty provisions are therefore needed to
ensure compliance.” Id. at 15 (citations omitted).
In light of this language, one district court has con-
cluded that:
The possibility of class-action exposure is essen-
tial to the prophylactic intent of the Act and is
necessary to elevate truth-in-lending lawsuits
“from the ineffective ‘nuisance’ category to the
type of suit which has enough sting to insure
that management will strive with diligence to
achieve compliance.”
See Bantolina, 419 F. Supp. at 1120 (quoting sen. Rep.
No. 93-278, at 36-37) (emphasis added).
In Watkins, the Ninth Circuit reached the same con-
clusion, stating that the “legislative history surrounding
these amendments [to the TILA] convinces us that Con-
gress did intend, by them, to encourage class actions and
B13
to use the threat of class action recoveries to force compli-
ance with the Act.” 618 F.2d at 402.
Here, if the court compelled arbitration, Johnson
would be prevented from seeking and, therefore, obtain-
ing this type of relief. As a result, the federal statute
would be effectively stripped of its “sting” and reduced
to nothing more than its mere “nuisance” value. Cf. Ban-
tolina, 419 F. Supp. at 1120. Consequently, there would be
no way to “provide creditors with a meaningful incentive
to comply with the law” since they would no longer be
facing the “meaningful penalty provisions [which were]
needed to ensure compliance.” See Sen. Rept. No. 93-278,
at 14, 15. In other words, without a guarantee that John-
son may “effectively . . . vindicate his statutory cause of
action in the arbitral forum,” it is questionable that the
“statute will continue to serve both its remedial and
deterrent function.” Cf. Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 87 L. Ed. 2d 444,
105 S. Ct. 3346 (1985). In light of this “inherent conflict”
between compelling arbitration and the underlying pur-
poses of the TILA, the court will deny the defendants’
motion. See id.
In Mitsubishi, the Supreme Court did state that “We
must assume that if Congress intended the substantive
protection afforded by a given statute to include protec-
tion against waiver of the right to a judicial forum, that
intention will be deducible from text or legislative his-
tory.” 473 U.S. at 628. As the Supreme Court has later
clarified, this intent is also “deducible from . . . an inher-
ent conflict between arbitration and the statute’s underly-
ing purposes.” See McMahon, 482 U.S. at 227 (citing
Mitsubishi, 473 U.S. at 632-37).
B14
1. The Mitsubishi decision.
The central issue in Mitsubishi revolved around
whether the plaintiff would be able to recover treble
damages for the defendant's anti-competitive behavior
under the Sherman Act. Id. at 635-36. According to the
plaintiff, if the dispute proceeded to arbitration, there
was a risk that the arbitrator might apply Swiss law and,
as a result, deny the plaintiff the Opportunity to recover
treble damages for activities which clearly occurred in the
United States. Id.
In compelling arbitration, the Supreme Court noted
that both of the parties agreed that U.S. law applied to
the dispute. Id. at 636-37 & n.19. As a result, the Court
was not concerned that the arbitration clause might be
interpreted as a waiver of the plaintiff’s statutory right to
recover treble damages. Id. In fact, as the Supreme Court
made clear when it compelled arbitration, if the “choice-
of-forum and choice-of-law clauses operated in tandem as
a prospective waiver of [the plaintiff's] right to pursue
Statutory remedies for anti-trust violations, we would
have little hesitation in condemning the agreement as
against public policy.” Id. at 637 n.19. Thus, because the
plaintiff could “effectively . . . vindicate its statutory
cause of action in the arbitral forum,” the Court was
willing to compel arbitration since there was no question
that the Sherman Act “would continue to serve both its
remedial and deterrent function.” Id. at 637.
B15
2. The Mitsubishi decision as it
applies to Johnson’s case.
Admittedly, the TILA does not confer a statutory
_ right to “the lesser of $500,000 or 1 per centum of the net
worth of the creditor.” 15 U.S.C. § 1640. Instead, the Act
only states that, “in the case of a class action,” the plain-
tiff may recover this amount. Id. In this respect, the Lopez
court was entirely correct. “Congress has not created a
statutory right to bring class actions under [the] TILA.”
1996 WL 210073 at *3. However, Congress did adopt this
cap in an attempt to “encourage class actions and to use
the threat of class action recoveries to force compliance
with the Act.” See Watkins, 618 F.2d at 402 (emphasis
added); see also Bantolina, 419 F. Supp. at 1120 (recogniz-
ing the class action device as “an important tool [for]
enforcing Truth in Lending”). Thus, without the possi-
bility of class action liability looming on a creditor’s
horizon, there is a very real possibility that these entities
will not voluntarily comply with the Truth-in-Lending
regulations.
For example, under Section 1640, Johnson as an indi-
vidual can only recover a maximum of $1,000 from the
defendants. 15 U.S.C. § 1640(a)(1)(2)(a). However, as a
representative of a class, he could obtain as much as 500
times that amount. See id. at § 1640(a)(1)(2)(B) (capping
the maximum allowable recovery at $500,000). Obviously,
the latter penalty ensures greater compliance with the
TILA. However, by enforcing the boiler plate arbitration
clause which is contained in this (and every other) one-
page loan agreement unilaterally drafted by the defen-
dants, the court would be allowing them to effectively
insulate themselves against the very statutory penaities
B16
which Congress deemed necessary to “provide creditors
with a meaningful incentive to comply with the law.” See
Sen. Rept. No. 93-278, at 14. For this reason, this court
doubts whether the TILA could “continue to serve both its
remedial and deterrent function[s]” if the arbitration
clause was enforced. See Mitsubishi, 473 U.S. at 637
(emphasis added). Thus, after considering the facts of this
case in light of the teachings of the Mitsubishi decision,
this court finds that there is “inherent conflict” between
compelling arbitration and the underlying purposes of
the TILA. The court will, therefore, deny the defendants’
motion to compel the arbitration of Johnson’s TILA
claims.
Delaware law allows a court to rescind a contract on
the grounds of unconscionability. See Del. Code Ann. tit.
6, § 2-302 (1998). However, the Delaware Supreme Court
has held that “mere disparity between the bargaining
power of parties to a contract will not support a finding
of unconscionability.” See Graham v. State Farm Mut. Auto.
Ins. Co., 565 A.2d 908, 912 (Del. 1989). Instead, in order
for a court to find unconscionability, “the party with the
superior bargaining power [must have] used it to take
advantage of his weaker counterpart” by drafting terms
that are “so one-sided as to be oppressive.” Id. (citing
Tulowitzki v. Atlantic Richfield Co., 396 A.2d 956, 960 (Del.
1978)).
> Because the court has resolved the defendants’ motion on
these grounds, it need not reach Johnson’s argument that the
arbitration clause is itself unconscionable. However, because
Johnson has also asked for a declaration that the clause in
unconscionable, the court feels obligated to briefly address this
argument.
B17
In Graham, the Delaware Supreme Court compelled
arbitration in the face of a clause which was virtually
identical to the one contained in Johnson’s loan agree-
ment. The clause at issue in Grahum obligated the parties
to enter into binding arbitration and, like the one here,
was Offered on a “take-it or leave-it” basis. 565 A.2d at
912-13. However, because the clause did not create &
procedure which favored one party over another, the
Graham court found it to be fair. Id. at 913. Thus, while
inarguably a contract of adhesion, there can be little
doubt that, under Delaware law, the arbitration clause
which was contained within Johnson’s loan agreement
was not so unfair as to be unconscionable.
C. The Enforceability Of The Arbitration Clause With
Respect To Johnson’s Claims Under The EFTA.
Unfortunately, the parties only address Johnson’s
EFTA claims in passing. As a result, the court is left with
little guidance on whether it should compel the arbitra-
tion of these claims.
In their opening brief, the defendants issue a blanket
statement that “nothing contained in the TILA or EFTA
expresses a congressional intent to preclude arbitration as
a forum for litigating consumer claims brought under
those statutes.”
However, after reviewing the text of the EFTA, the
court notes that the statute contains a provision entitled
“civil liability” which sets forth a cap on class action
damages that is virtually identical to the one provided
under the TILA. Compare 15 U.S.C. § 1693m (1994) (“In
the case of a class action, . . . the total recovery under this
B18
subparagraph in any class action or series of class actions
arising out of the same failure to comply to the same
person shall not be more than the lesser of $500,000 or 1
per centum of the net worth of the defendant.”) with 15
U.S.C. § 1640(a) (1994) “In the case of a class
action, . . . the total recovery under this subparagraph in
any class action or series of class actions rising out of the
same failure to comply by the same creditor shall not be
more than the lesser of $500,000 or 1 per centum of the
net worth of the creditor.”). Thus, even though there is no
legislative history which explains why Congress adopted
the same ceiling on class action liability under the EFTA,
the court presumes that Congress was trying to encour-
age courts to certify class action under this statute as
well. Given this “inherent conflict” between compelling
arbitration and the underlying purpose of the EFTA, the
court will deny the defendants’ motion to compel arbitra-
tion as it relates to Johnson’s EFTA claims. Cf. Mitsubishi,
473 U.S. at 637.
D. The Enforceability Of The Arbitration Clause With
Respect To Johnson’s Claims For A Declaratory Judg-
ment.
In their submissions, the parties failed to address
whether Johnson’s requests for a declaratory judgment
Should be heard by an arbitrator instead of this court.
However, requiring the parties to arbitrate a minor por-
tion of their dispute while they are simultaneously litigat-
ing the major issues before a court of law would be
highly inefficient. For this reason, the court will not com-
pel the arbitration of Johnson’s claims seeking a declara-
tory judgment.
RO ae rer eo ne eT ae
B19
E. The Court Will Deny The Defendants’ Motion To
Dismiss In Part.
In their motion to dismiss, the defendants essentially
advance two arguments. First, they contend that John-
son’s TILA claims fail as a matter of law since (1) any
arguable violation they committed is, at best, a mere
technicality and (2) in any event, Johnson has failed to
allege that he has suffered any actual injuries as a result
of this alleged violation. Second, the defendants argue
that Johnson’s claims under the EFTA are like wise inade-
quately plead and, consequently, also fail as a matter of
law.
The court disagrees. Because the law prohibits even
“technical” violations of the TILA and because Johnson’s
allegations are sufficiently pled to state a cause of action
under both the TILA and EFTA, the court will deny the
defendants, motion to dismiss as it relates to these claims.
Nevertheless, the court will grant the motion to dismiss
with respect to Johnson’s request for a declaratory judg-
ment that the arbitration clause is unconscionable since
the terms of this agreement were not so one-sided as to
be oppressive.
1. Johnson’s TILA claims.
Under 15 U.S.C. § 1632,
The terms “annual percentage rate” and
“finance charge” shall be disclosed more conspic-
uously than other terms, data, or information
provided in connection with a transaction,
except information relating to the identify of the
creditor.
B20
15 U.S.C. § 1632(a) (1994) (emphasis added); see also
12 C.F.R. 226.17(a)(2) (1998) (Regulation Z).
Here, the one-page loan agreement signed by John-
son contained the followed table which set forth, inter
alia, the annual percentage rate of the loan and the
finance charge.
B21
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B22
Thus, while it seems Safe to say that the table “con-
spicuously disclosed” both the annual percentage rate
and finance, it also seems fair to say that this information
was not disclosed “more conspicuously” than the sur-
rounding information, see 15 U.S.C. § 1632(a), since the
“annual percentage rate” and the “finance charge”
appear in the same-sized font with the same emphasis as
the loans terms concerning the “amount financed” and
the “total of payments.”
As another district court Stated in a strikingly similar
context,
While the terms “annual percentage rate” and
“finance charge” are the most conspicuous
terms on the page, [the terms] “amount
financed” and “total of payments” are also
prominently displayed. As a result, the four
terms are identically presented and the defen-
dants have failed to disclose the “annual per-
centage rate” and “finance charge” more
conspicuously than the other terms . . . While this
court acknowledges that this amounts to a tech-
nical violation, . . . the Plaintiffs’ claims survives
the motion to dismiss because [the] TILA
requires strict compliance with its terms.
See Brown v. C.LL., Inc., 1996 U.S. Dist. LEXIS 4053,
No. 94-C-1479, 1996 WL 164294, at *7 (N.D. Ill. Apr. 1,
1996) (emphasis added). In fact, the disclosure statement
in Brown was virtually identical to the one at issue in this
litigation. As the district court described,
The top third of this box is subdivided into a
horizontal row of four one-inch boxes. The first
two boxes (reading from left to right) contain
the terms “Annual Percentage Rate” and
B23
“Finance Charge” in bold capital letters, along
with the appropriate values. The second two
boxes contain the terms “Amount Financed”
and “Total of Payments,” also in bold capital
letters.
Id. (citing U.S. Mag. Rept. & Rec., at 36).
In response, the defendants contend that, in 1980,
Congress amended the TILA to “eliminate lawsuits, like
[this one], based on hyper-technical violations of the
TILA.” Quoting In re Russell, the defendants claim,
In 1980, Congress . . . softened the bite of the
TILA somewhat by enacting the Truth-In-Lend-
ing Simplification and Reform Act... . At that
point, Congress became convinced that one of
the consequences of the TILA was a large vol-
ume of lawsuits based upon hyper-technicalities
which no longer worked in the best interests of
our society.”
72 B.R. 855, 862 (Bankr. E.D. Pa. 1987) (citing Pub. L. No.
92-221, Title VI (1980)); see also Laws v. PayDay Loan Corp.
of Illinois, 1999 U.S. Dist. LEXIS 16225, No. 98-C-5562,
1999 WL 966964, at *2-3 (N.D. Ill. Oct. 1, 1999).
The court is not persuaded by this argument.
a. The legislative history does not support this
argument.
In 1980, Congress did amend the TILA but just not in
the manner that the defendants claim. As Congress
explained in adopting the amendments to the TILA, it
hoped to “provide the consumer with clearer credit infor-
mation” and to “make creditor compliance easier.” See
B24
Sen. Rept. No. 96-73, at 2 (reprinted in 1980 U.S. Code
Cong. & Admin. News, at 280). Under the prior law, the
creditor only needed to disclose information “clearly and
conspicuously” and in a “meaningful sequence.” See
Lamar v. American Fin. Sys. of Fulton County, Inc., 577 F.2d
953, 954 (Sth Cir. 1978) (citing 15 U.S.C. § 1631(a) (1974);
12 C.F.R. § 226.6(a) (1974)). Given this fairly ambiguous
language, disclosures were often “lengthy and difficult to
understand.” See Sen. Rept. No. 96-73, at 2. In fact, as
Congress observed when it amended the TILA,
The typical disclosure statement . . . is not an
effective communication device. Most disclosure
statement are lengthy, written in legalistic fine
print, and have essential truth in lending dis-
closures scattered among various contractual
terms. The result in a piece of paper which
appears to be “just another legal document
Instead of the simple, concise disclosure form
Congress intended.
Id. at 3.
Not surprisingly, consumers were often confused
about the terms of these agreements, and creditors, who
had “sincerely tried to comply with the Act,” often
“found themselves in violation and subject to litigation”
because they were unable to “keep[ ] current with [the]
steady stream of administrative interpretations and
amendments, as well as highly technical judicial deci-
sions,” concerning the Act. Id. at 2. For this reason, Con-
gress sought to “simplify the typical truth in lending
statement” by amending the TILA’s disclosure require-
ments.
B25
For starters, Congress replaced the “clearly and con-
spicuously” standard with the following requirement:
The terms “annual percentage rate” and
“finance charge” shall be disclosed more con-
spicuously than terms, date, or information pro-
vided in connection with a transaction, except >
information relating, to the identity of the credi-
tor.
See The Truth In Lending Simplification and Reform
Act, Pub. L. No. 96-221, § 122(a), 94 Stat. 168, 175 (1980)
(codified as amended at 15 U.S.C. § 1631(a) (1994)). Given
this change, it is highly doubtful that Congress would
consider the failure to follow the explicit requirements of
the new law as a “technical violation.” Cf. Shroder v.
Suburban Coastal Corp., 729 F.2d 1371, 1379-80 (11th Cir.
1984) (“The applicable standard is strict compliance with
the technical requirements of the Act. . . . Where the
terms ‘annual percentage rate’ and ‘finance charge’ are
nut printed more conspicuously than other terminology
in the . . . disclosure statement, the violation is a serious
one which entities the plaintiffs to recovery.”) (citing
Dixey v. Idaho First Nat’l Bank, 677 F.2d 749, 751 (9th Cir.
1982)).
Moreover, to provide creditors with some guidance
on how to comply with the new regulations, Congress
included a “simplified statement prepared by the Federal
Reserve Board” which “illustrated what a disclosure
statement prepared in accordance with this bill’s provi-
sions would resemble.” Id. at 3, 4. The first portion of this
statement looked something like this:
4s
B26
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hited tet eee ee EEE ee (ROA ys09 JEM yIPOID ay yUMOUR IENOP an) qADUVHD WFONVNIA
cece eeees (e702 Apsead w se pessardxa pars sn0K yo ju0 1) ALYY TOV.LINANId TVANNY
B27
As this illustration makes clear, the sample form
which Congress provided as an example to creditors dis-
closed “more conspicuously” the “annual percentage
rate” and “finance charge” for the loan. Consequently, the
defendants’ argument that Congress amended the TILA
to “eliminate lawsuits, like [this one], based on hyper-
technical violations of the TILA” misses the mark since,
in 1980, Congress amended the TILA to discourage credi-
tors from providing the very type of disclosures which
are contained in the one-page loan agreement at issue in
this case. While this decision may seem “hyper-techni-
cal,” as the Seventhh [sic] Circuit has observed in a
similar context, “hyper-technicality reigns” in TILA law-
suits. See Cowen v. Bank United of Texas, FSB, 70 F.3d 937,
941 (7th Cir. 1995).
b. Johnson’s ability to recover statutory damages
for violations of the TILA.
The defendants also contend that Johnson’s TILA
claims fails as a matter of law because he has failed to
allege that he suffered any actual damages as a result of
the defendants’ apparent violation of the Act’s the dis-
closure requirements. However, as countless circuit
courts have noted, the
TILA is a prophylactic measure that creates a
system of “private attorneys general” to aid its
enforcement. In order to penalize non-comply-
ing creditors and to deter future violations, the
private attorneys general may recover the statu-
tory penalties even if they have not sustained
any actual damages or even if the creditors are
guilty of only minute deviations from the
B28
requirements of [the] TILA and implementing
Regulation Z.
See, e.g., Davis v. Werne, 673 F.2d 866, 869 (Sth Cir.
1982); see also Gambardella v. G. Fox & Co., 716 F.2d 104,
108 n.4 (7th Cir. 1983) (“It is well settled . . . that proof of
actual deception or damages is unnecessary to a recovery
of statutory damages under 15 U.S.C. § 1640(a).”); Dryden
v. Lou Budke’s Arrow Fin. Co., 630 F.2d 641, 647 (8th Cir.
1980) (“TILA plaintiffs . . . need not show that they have
sustained actual damages stemming from the TILA viola-
tions . . . before they can recover... Statutory dam-
eae.
While the defendants claim that Congress effectively
overruled these decisions when it amended the statute to
limit a creditor’s exposure to the Statutory damages pro-
vision relating to certain disclosure violations, the court
disagrees.
i. The express language of the statute.
In 1980, when it was reforming the TILA to simplify
its disclosure requirements, Congress also adopted an
amendment which was “Intended to restrict the scope of
creditor civil liability for statutory penalties to only those
disclosures which are of material importance in credit
Shopping.” See Sen. Rept. No. 96-73, at 17 (reprinted in
1980 U.S. Code Cong. & Admin. News, at 280, 294).
According to Congress, it “believed that this [measure]
would culminate litigation based on purely technical vio-
lations of the Act.” Id. In relevant part, this amendment
provided that:
B29
In connection with the disclosures referred
to in [Section 1638 of this Title], a creditor shall
have liability determined under paragraph (2)
[the statutory damages provision] only for fail-
ing to comply with the requirements . . . of
paragraph (2) (insofar as it requires disclosure
of the “amount financed”), (3), (4), (5), (6), or (9)
of [Section 1638(a)]... .
See The Truth In Lending Simplification and Reform
Act, Pub. L. No. 96-221, § 615(b), 94 Stat. 168, 181 (1980)
(codified as amended at 15 U.S.C. § 1640(a) (1994)).
The specific paragraphs of Section 1638 listed in the
amendment require a creditor to make the following dis-
closures:
(2) The “amount financed,” using that term,
which shall be the amount of credit of which the
consumer has actual use... .
(3) The “finance charge,” not itemized, using
that term.
(4) The finance charge expressed as an “annual
—percentage rate,” using that term... .
(5) The sum of the amount financed and the
finance charge, which shall be termed the “total
of payments.”
(6) The number, amount, and due dates or
periods of payments scheduled to repay the
total of payments. . . . [and]
(9) Where the credit is secured, a statement
that a security interest has been taken in (A) the
property which is purchased as part of the
credit transaction or (B) property not purchased
B30
as part of the credit transaction identified by
item or type.
See 15 U.S.C. § 1638(a)(2)(A), (3)-(6), (9).
Noting that Section 1638 expressly “refer[s] to” the
disclosure of the “annual percentage rate” and the
“finance charge,” the defendants claim that Section 1640
therefore limits their liability to only those damages
which Johnson actually suffered. See 15 U.S.C. § 1640(a).
However, Section 1638 only requires a creditor to set
forth these specific terms along with explanations which
describe them, 15 U.S.C. § 1638(a). Nowhere does Section
1638 require these terms to be “disclosed more conspicu-
ously than other terms, data, or information provided in
connection with a transaction.” See 15 U.S.C. § 1632(a).
Instead, this disclosure requirement is found in Section
1632. Thus, it does not appear that the specific violation
alleged by Johnson is “in connection with the disclosures
referred to in Section 1638” as required by Section 1640.
See 15 U.S.C. § 1640(a). As previously stated, this viola-
tion instead appears to be in connection with the dis-
closures referred to in Section 1632. As a result, the
defendants seem to fall outside the express exception
which Congress provided.
Furthermore, even if the disclosures at issue fell
solely within the scope of Section 1638 because Johnson
was engaging in a transaction “other than an open end
credit plan,” see 15 U.S.C. § 1638, the court notes that the
disclosure requirements set forth in Section 1632
expressly state that “the terms ‘annual percentage rate’
and ‘finance charge’ shall be disclosed more conspicu-
ously than other terms, data, or information provided in
a
B31
connection with a transaction. ...” 15 U.S.C. § 1632(a).
Since Section 1632 precedes Section 1638, the court pre-
sumes that Congress intended a violation of Section
1632(a) to be treated as a violation of Section 1638(a)(3)
and 1638(a)(4). But see Laws, 1999 WL 966964, at *3 n.2.
This conclusion is supported by the legislative history.
ii. The statute’s legislative history.
In 1980, Congress enacted Sections 1632 and 1640
simultaneously. As previously explained, Section 1632
replaced the previous “clearly and conspicuously” stan-
dard, which had led to lengthy and confusing disclosure
statements, with the “more conspicuously” standard in
an effort to “provide the consumer with clearer credit
information” and to “make creditor compliance easier.”
See Sen. Rept. No. 96-73, at 2 (reprinted in 1980 U.S. Code
Cong. & Admin. News, at 280). As a result, it would seem
odd to conclude that this disclosure was not “of material
importance in credit shopping.” See Sen. Rept. No. 96-73
at 17. In fact, as the Eleventh Circuit has noted,
The terms “finance charge” and “annual per-
centage rate” are among the material terms
affecting credit shopping and are protected by
civil liability. Where these terms . . . are not
printed more conspicuously than other termi-
nology on the Truth-In-Lending disclosure state-
ment, the violation is a serious one which entitles
the plaintiffs to recovery.
See Shroder, 729 F.2d at 1380 (emphasis added) (citing
Dixey, 677 F.2d at 752).
B32
Thus, while Congress did intend to “eliminate litiga-
tion based on purely technical violations of the Act”
when it enacted Section 1640, the court would be hard
pressed to conclude that the violations alleged by John-
son fall into this category.
Consequently, in the event that Johnson establishes a
violation of the disclosure requirements, his recovery is
limited only by provisions of subsections (2)(A) and
(2)(B) which respectively cap individual and class action
awards at “twice the amount of any finance charge in
connection with the transaction” or “not... more that the
lesser of $500,000 or 1 per centum of the net worth of the
creditor” taking into account the “amount of any actual
damages awarded, the frequency and persistence of fail-
ures of compliance by the creditor, the resources of the
creditor, the number of persons adversely affected, and
the extent to which the creditor’s failure of compliance
was intentional.” See 15 U.S.C. §§ 1640(a)(2)(A),
1640(a)(2)(B), 1640(a).
2. Johnson’s EFTA claims.
In their motion to dismiss, the defendants contend
that Johnson has not adequately plead his EFTA allega-
tions. Moreover, they claim that, given the facts of this
case, he cannot possibly plead a cause of action under the
EFTA. As a result, they argue, Johnson’s claims fail as a
matter of law. Again, the court disagrees.
B33
a. Johnson’s allegations and their factual basis.
In his complaint, Johnson alleges that, as a condition
for obtaining the loan, he was required to sign a waiver
of his right to stop payment of any “pre-authorized elec-
tronic fund transfers” out of an account created for him
by the defendants. In response to these allegations, the
defendants contend that the loan to Johnson “did not
involve a pre-authorized electronic fund transfer” as
defined by the EFTA. Noting that the Act defines these
transfers as ones that are “authorized in advance to recur
at substantially regular intervals,” see 15 U.S.C. § 1693a
(1994), the defendants distinguish the transfer arrange-
ment at issue here since the loan only authorized the
defendants to “effect a debit entry” of “one payment”
from Johnson’s account. As a result, the defendants con-
tend, this transfer cannot “recur at substantially regular
intervals.”
Johnson responds by pointing out that his loan is
very likely to “roll over” and, thus, “it is completely
possible, and even likely, that a pre-authorized debt in
this case would ‘recur at substantially regular intervals.’ ”
However, the defendants point out that even if Johnson
re-financed his old loan through a new roll over, he
would have to enter into a new loan agreement. Thus,
even though this new agreement (like the old one) would
authorize the defendants to “effect a debit entry” of “one
payment” from Johnson’s account, the defendants would
still “make only one electronic funds transfer per note”
and thus remain in technical compliance with the EFTA
since the transfers, while possibly “recurring at substan-
tially regular intervals,” would occur on different notes.
B34
b. This literal interpretation of the statute would
offend the law’s primary purpose.
Were the court to adopt the defendant's literal inter-
pretation of the term “pre-authorized electronic fund
transfer,” the EFTA’s “primary objective,” which “is the
Provision of individual consumer rights,” would be
undermined. See 15 U.S.C. § 1693(b) (1994). Thus, while
Johnson literally only authorizes the defendants to “effect
a debit entry” of “one payment” from his account every
time he rolls over his loan, the “pre-authorized electronic
fund transfer” arguably “recur[s] at substantially regular
intervals” as a direct result. Therefore, the court will deny
the defendants’ motion to dismiss as it relates to john-
son’s claims under the EFTA.
3. Johnson’s claims for a declaratory judgment.
Finally, in his complaint, Johnson asks this court to
declare that both the rate of interest on his loan and the
arbitration clause contained within the loan agreement
are unconscionable. The defendants have sought the dis-
missal of these claims as well.
a. The rate of interest.
With respect to the first claim, the defendants argue
that because unconscionability is a defense to a contract
action, there is no actual controversy before the court in
which to issue a declaratory judgment since Johnson has
failed to allege that anyone has attempted enforce the
loan agreement. See 28 U.S.C. § 2201 (1994) (requiring the
existence of an “actual controversy before the court can
B35
exercise jurisdiction). There is little merit to this argu-
ment since, as the Tenth Circuit has observed, “a party to
a contract is not compelled to wait until he has committed
an act which the other party asserts will constitute breach
but may [instead] seek relief by declaratory judgment and
have the controversy adjudicated in order . . . [to] avoid
the risk of damage or other untoward consequence[s].”
See Keener Oil & Gas Co. v. Consolidated Gas Util. Corp., 190
F.2d 985, 989 (10th Cir. 1951). In other words, the court
should not require Johnson to breach his loan agreement
in order to become the subject of a lawsuit so that he can
then raise the defense of unconscionability.
Perhaps in anticipation of this conclusion, the defen-
dants argue in the alternative that the annual percentage
rate paid by Johnson is not unconscionable since it is
“entirely legal.” On this point, the defendants note that
(1) the rate was disclosed to Johnson, (2) he was aware of
it when he signed the agreement, and (3) he had the
opportunity to reject the terms of the loan but did not.
Given this opportunity to “take it or leave it,” the defen-
dants claim that the terms of the loan agreement are not
“so one-sided as to be oppressive.” See Graham, 565 A.2d
at 912. This argument completely misinterprets the
Graham decision.
In Graham, the Delaware Supreme Court specifically
stated that “[a] contract of adhesion [like the loan agree-
ment here] may be declared unenforceable, in whole or in
part, if its terms are unconscionable within the meaning
of . . . [Section] 2-302” of Title 6 of the Delaware Code. Id.
As the Graham court explained, while “mere disparity
between the bargaining power of parties to a contract will
not support a finding of unconscionability,” when a
B36
“party with superior bargaining power use[s] it to take
unfair advantage of his weaker counterpart” by provid-
ing terms that were “so one-sided as to be oppressive,”
then a finding of unconscionability is warranted Id.
Thus, even though the State of Delaware does not
place a limit on the amount of interest or other charges a
bank may charge, see Del. Code Ann. tit. 5, § 962 (1998),
the court cannot conclude (given the present record) that
(1) the defendants did not abuse their superior bargain-
ing power by (2) drafting terms which were “so one-
sided as to be oppressive” since Johnson has alleged that
he was charged a rather exorbitant rate of interest —
specifically, 917 percent per annum.
b. The arbitration clause.
As far as Johnson’s second claim for a declaratory
judgment is concerned, the arbitration clause contained
within the loan agreement was not “so one-sided” as to
be unconscionable. As the Graham court stated,
while it is true that the [agreement] was pre-
sented to the [plaintiffs] on a ‘take-it or leave-it’
basis, we do not believe that the inclusion of an
arbitration clause unfairly favored [the defen-
dant]. If the arbitration mechanism established
by the policy had been unfairly structured, a
finding of unconscionability might be appropri-
ate. However, since both parties have equal
input into the selection of the arbitrators and
since both parties are bound by the result, we
find no inherent unfairness in the clause.
Id. at 912-13.
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B37
The court reaches the same conclusion here. While
the arbitration clause might be unenforceable with
respect to Johnson’s TILA claims, the clause itself is not
in any way oppressive. It does not unfairly structure the
arbitration process by affording the defendants any pro-
cedural advantages in the arbitral forum. See Note 5 infra.
Because this claim fails as a matter of law, the court will
dismiss it.
IV. CONCLUSION.
Because compelling arbitration would effectively
strip both the TILA and EFTA of their sting, the court will
deny the defendants’ motion to compel in order to ensure
that creditors have a “meaningful incentive to comply”
with the disclosure requirements of these Acts. In addi-
tion, the court will deny the defendants’ motion to dis-
miss as it relates to Johnson’s claims under the TILA and
EFTA as well as for a declaratory judgment on whether
the rate of interest on his loan was unconscionable. How-
ever, the court will grant the motion to dismiss as it
relates to Johnson’s claim that the arbitration clause is
unconscionable since the terms of this agreement were
not so one-sided as to be oppressive. The court will issue
an order to this effect in conjunction with this opinion.
ORDER
For the reasons stated in its Opinion of this date. IT
IS HEREBY ORDERED that:
1. The Motion to Stay Proceeding and Compel
Arbitration (D.I. 7) filed by Defendants Tele-
B38
Cash, Inc. and County Bank of Rehoboth Beach,
Delaware is DENIED; ;
2. The Motion to Dismiss (D.I. 7) filed by
Defendants Tele-Cash, Inc. and County Bank of
Rehoboth Beach, Delaware is GRANTED IN
PART and DENIED IN PART:
3. The claim seeking a declaratory judgment
that the arbitration clause contained within the
loan agreement signed by Plaintiff Terry John-
son is unconscionable is DISMISSED.
Date: 12/29/99
Gregory M. Sleet
UNITED STATES DISTRICT JUDGE
Cl
APPENDIX C
TITLE 9. ARBITRATION
CHAPTER 1. GENERAL PROVISIONS
9 USCS § § 1 (2000)
§§1. “Maritime transactions” and “commerce” defined;
exceptions to operation of title
“Maritime transactions”; as herein defined, means charter
parties, bills of lading of water carriers, agreements relat-
ing to wharfage, supplies furnished vessels or repairs to
vessels, collisions, or any other matters in foreign com-
merce which, if the subject of controversy, would be
embraced within admiralty jurisdiction; “commerce”, as
herein defined, means commerce among the several
States or with foreign nations, or in any Territory of the
United States or in the District of Columbia, or between
any such Territory and another, or between any such
Territory and any State or foreign nation, or between the
District of Columbia and any State or Territory or foreign
nation, but nothing herein contained shall apply to con-
tracts of employment of seamen, railroad employees, or
any other class of workers engaged in foreign or inter-
state commerce.
C2
TITLE 9. ARBITRATION
CHAPTER 1. GENERAL PROVISIONS
9 USCS § § 2 (2000)
§ § 2. Validity, irrevocability, and enforcement of agree-
ments to arbitrate
A written provision in any maritime transaction or a
contract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising out
of such contract or transaction, or the refusal to perform
the whole or any part thereof, or an agreement in writing
to submit to arbitration an existing controversy arising
out of such a contract, transaction, or refusal, shall be
valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of
any contract.
TITLE 9. ARBITRATION
CHAPTER 1. GENERAL PROVISIONS
9 USCS § § 3 (2000)
§ § 3. Stay of proceedings where issue therein referable
to arbitration
If any suit or proceeding be brought in any of the courts
of the United States upon any issue referable to arbitra-
tion under an agreement in writing for such arbitration,
the court in which such suit is pending, upon being
Satisfied that the issue involved in such suit or proceed-
ing is referable to arbitration under such an agreement,
~
C3
shall on application of one of the parties stay the trial of
the action until such arbitration has been had in accor-
dance with the terms of the agreement, providing the
applicant for the stay is not in default in proceeding with
such arbitration.
[sec]§ 1640. Civil liability [TILA § 130]
(a) Individual or class action for damages; amount of
award; factors determining amount of award
Except as otherwise provided in this section, any creditor
who fails to comply with any requirement imposed under
this part, including any requirement under section 1635
of this title, or part D or E of this subchapter with respect
to any person is liable to such person in an amount equal
to the sum of -
(1) any actual damage sustained by such per-
son as a result of the failure;
(2)(A)(i) in the case of an individual action
twice the amount of any finance charge in con-
nection with the transaction, (ii) in the case of an
individual action relating to a consumer lease
under part E of this subchapter, 25 per centum
of the total amount of monthly payments under
the lease, except that the liability under this
subparagraph shall not be less than $100 nor
greater than $1,000 or (iii) in the case of an
individual action relating to a credit transaction
not under an open end credit plan that is~
C4
secured by real property or a dwelling, not less i
than $200 or greater than $2,000;
(B) in the case of a class action, such
amount as the court may allow, except that
as to each member of the class no minimum
recovery shall be applicable, and the total
recovery under this subparagraph in any
class action or series of class actions arising
out of the same failure to comply by the
same creditor shall not be more than the
lesser of $500,000 or 1 per centum of the net
worth of the creditor;
(3) in the case of any successful action to
enforce the foregoing liability or in any action in
which a person is determined to have a right of
rescission under section 1635 of this title, the
costs of the action, together with a reasonable
attorney’s fee as determined by the court; and
(4) in the case of a failure to comply with any
requirement under section 1639 of this title, an
amount equal to the sum of all finance charges
and fees paid by the consumer, unless the credi-
tor demonstrates that the failure to comply is
not material.
In determining the amount of award in any class action,
the court shall consider, among other relevant factors, the
amount of any actual damages awarded, the frequency
and persistence of failures of compliance by the creditor,
the resources of the creditor, the number of persons
adversely affected, and the extent to which the creditor’s
failure of compliance was intentional. In connection with
the disclosures referred to in subsections (a) and (b) of
section 1637 of this title, a creditor shall have a liability
C5
determined under paragraph (2) only for failing to com-
ply with the requirements of section 1635 of this title,
section 1637(a) of this title, or of paragraph (4), (5), (6),
(7), (8), (9), or (10) of section 1637(b) of this title or for
failing to comply with disclosure requirements under
State law for any term or item which the Board has
determined to be substantially the same in meaning
under section 1610(a)(2) of this title as any of the terms or
items referred to in section 1637(a
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