New York financier J. Michael Cline set out to build a billion-dollar empire in the realm of consumer-debt disputes. His firm would stand at the center of a complex arrangement linking America's biggest arbitrator of consumer credit-card disputes with another business that collects debts in some of those same cases.
Instead, his grand plans have unraveled, turning the world of consumer arbitration on its head.
Amid a congressional investigation, regulatory complaints and lawsuits from consumers, Mr. Cline's woes are prompting a major shift in the way many U.S. consumer-debt disputes are settled.
For more than a decade, most credit-card companies have required customers to use arbitration, rather than the courts, to resolve disputes over unpaid bills. Minneapolis-based NAF has mediated the vast majority of these claims. But both NAF and another arbitrator have stopped hearing arbitrations of consumer-debt cases, and major banks are dropping arbitration requirements.
Sunday, October 18, 2009
The W$J describes the "turmoil" that has hit the credit card industry after a pair of private arbitrators have been hounded out of business for operating what can only be described as "arbitration mills;" companies that purported to arbitrate consumer debt disputes that resolved in favor of the creditor 99% of the time, usually without the participation, or even knowledge, of the consumer: Turmoil In Arbitration Empire Upends Credit Card Disputes
Disingenuous mercantilists, bearing the mantle of the "free market," have claimed that the end of Cline's arbitration empire is a set back for arbitration and "market efficiency". Don't believe that for a second. Arbitration and other extra-judicial proceedings can be useful and economical, but only if both sides are participating on an equal footing. That was not the case here. Cline's business partners were the credit card companies themselves, as well as law firms specializing in debt collection. They actively engaged in obfuscatory tactics to confuse luckless debtors just long enough to "win" the award, and then obtain judgments against them in court. I'm all for being pro-business, but not when business is actively ripping people off for the benefit of insiders.
Libertarians often claim that civil disputes would be better resolved by private entities that sell their services as a neutral arbiter, rather than going through the expense of maintaining a public court system. I don't know about other states, but CA already has a robust "private" system of arbitrators, mediators, etc. This works well for sophisticated litigants; but, for the ordinary consumer, these are no substitute for the basic due process protections offered by the civil courts.
1. While civil courts require plaintiff's to sue in counties that have some connection to the defendant (i.e. he lives there, he entered into the contract there, etc), the NAF would simply sue people in Minnesota, and "screw you" if you can't come to the hearing next week.
2. Naturally, the NAF had its own procedural rules, which were difficult to access and impossible to follow. By contrast, a determined litigant in civil court really can litigate his own case, if he applies himself to the task.
3. Civil courts require plaintiff's to give defendants proper notice of actions against them, while the NAF would simply send out mailings that looked like junk mail.
And so on. Cline and his partners were engaging in practices that were last used in pre-14th Amendment America, and medieval England. They were certainly not engaging in a process that resulted in any sort of just or equitable result.
Cline, by the way, hoped to parlay his consumer debt arbitration into the medical-related arbitrations, which is where the real money apparently is. It makes me shudder to think of the implications of that. Private death panels, anyone?