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By Eric Jones

On July 6, 2015, the Fourth Circuit issued a published opinion in the civil case Jones v. Dancel.  Several plaintiffs, representing a class of individuals who utilized a credit management and debt reduction service, appealed to the Circuit asking that an arbitration award be reversed.  Because the arbitrator had not manifestly disregarded the law, the award was affirmed.

 

The Dispute and Arbitration

Laverne Jones, Stacey Jones, and Kerry Ness (collectively, the Plaintiffs) separately entered into contracts with Genus Credit Management (Genus) for the purposes of debt management and credit counseling.  Under those contracts, Genus was authorized to seek reductions in the Plaintiffs’ owed debts.  Although Genus held itself out as a non-profit organization providing debt management services free of charge, Genus accepted voluntary contributions from both debtors and creditors.  Pursuant to an arbitration clause in their contracts, the Plaintiffs initiated an arbitration action alleging individual and class claims against several original defendants alleging violations of the Credit Repair Organizations Act (CROA or the Act), the Racketeer Influenced and Corrupt Organizations Act, the Maryland Consumer Protection Act (MCPA), the Maryland Debt Management Services Act, and Maryland common law on matters of fraud and breach of fiduciary duty.  After certifying the class for the Plaintiffs’ CROA and MCPA claims, many of the original defendants entered into settle agreements with the class.  These settlements included $2.6 million in attorneys’ fees, and were approved by the arbitrator.  Amerix Corporation, Amerix’s founder Bernaldo Dancel, and several of Amerix’s affiliates (collectively, the Defendants) remained in arbitration.

Plaintiffs specifically alleged that the Defendants had violated CROA by making untrue or mislead statements, and by unlawfully billing consumers for debt management services.  After extensive hearings, however, the arbitrator found that the Defendants had violated CROA only in failing to make certain disclosures to consumers which are mandated under CROA, including a document summarizing their right to accurate information in certain credit reports.  CROA’s damages provision, 15 U.S.C. § 1679g(a)(1)(B), actual damages include “any amount paid by the person to the credit repair organization.”  In interpreting this provision, the arbitrator found that it contemplated payments on a quid pro quo basis, where the payment was in exchange a defined credit repair service.  The arbitrator then reasoned that the Plaintiff’s voluntary contributions were not “amount[s] paid” under CROA, primarily because a significant percentage of class members had not made any voluntary contributions.  Accordingly, the arbitrator denied any actual damages.

As to CROA’s punitive damages provision, 15 U.S.C. § 1679g(a)(2), the arbitrator awarded Plaintiffs $1,948,264 for failing to provide the required disclosures.  This amount was intended to serve as a powerful deterrent to the Defendants.

Finally, as to attorneys’ fees, the arbitrator found that the Plaintiffs had failed to account separately for time spent on the successful and unsuccessful claims, to substantiate proposed lodestar billing rates, and had submitted time and expense entries that were otherwise “defective.”  The arbitrator then concluded that the $2.6 million already received from settlements more than covered the amounts payable, and declined to award additional fees.  The district court affirmed the arbitrator based on the limited standard of review applicable to arbitration awards, and the Plaintiffs filed a timely appeal.

 

The Arbitrator Did Not Manifestly Disregard the Law as to Actual Damages

As explained by the Fourth Circuit, a court may vacate an arbitration award only when the disputed legal principle is clearly defined and not subject to reasonable debate, and the arbitrator refused to apply that principle.  The Plaintiff’s first argument was that their voluntary contributions to Genus constituted “payment” under CROA, and that the arbitrator had manifestly disregarded CROA by finding that they were outside the scope of the Act.  The Circuit disagreed, holding that the definition of “payment” under CROA was well within the scope of reasonable debate, largely because the Act defined a “credit repair organization” as somebody who provided credit repair services “in return for the payment of money.”  Thus, given the absence of any binding precedence on the exact meaning of the term, the arbitrator’s finding that the voluntary contributions were not “payment” was not a clear disregard for established law.  The Circuit explained that other arbitrators may have come to the opposite conclusion, but that the appropriate standard of was limited and thus they could not “pass judgment on the strength of the arbitrator’s chosen rationale.”

 

The Refusal to Award Attorneys’ Fees Did Not Violate CROA

In 15 U.S.C. § 1679g(a)(3), CROA directs that in the case of any successful action under the Act, plaintiffs may recover actual damages as well as “the costs of the action, together with reasonable attorneys’ fees.”  On appeal, the Plaintiffs argued that the arbitrator had thus manifestly disregarded CROA by refusing to award additional attorneys’ fees.  The Fourth Circuit noted, however, that the arbitrator declined to award attorneys’ fees because they were not “reasonable,” and thus were not within the mandate of CROA.  The arbitrator identified several deficiencies with the Plaintiff’s fee requests, including “counsel’s use of “block billing” practices, quotation of unjustified billing rates, and submission of time entries that failed to segregate successful claims from unsuccessful claims.”  The arbitrator also highlighted other improper requests for questionable litigation fees, including “bills from costly restaurants” and excessive travel and lodging costs.  The arbitrator thus did not refuse to heed CROA, but instead found that the fee request in its entirety could be disregarded.  Rather than do so, the arbitrator decided to set off the established amount with the already received fees, and declined to award additional fees.  As explained by the Fourth Circuit, the arbitrator acted well within the law, and thus this argument failed as well.

 

The Fourth Circuit Affirmed the Arbitrator’s Award

Because the arbitrator’s reasoning and ruling did not indicate a manifest disregard for CROA, the Fourth Circuit affirmed the district court’s denial of the Plaintiff’s motion to vacate in part the final award.  As of October 28, 2015, the Plaintiffs have filed a petition for certiorari to the Supreme Court of the United States, which awaits response.

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