San Antonio COA Holds Payday Lender Did Not Waive Right to Arbitrate When it Filed Criminal Charges Against Customers

In a 2-1 decision, Texas’ Fourth Court of Appeals in San Antonio has ruled that a payday loan business did not waive its right to engage in arbitration when the company filed criminal complaints against its defaulting customers.  In Cash Biz, LP v. Henry, No. 04-15-00469-CV (July 27, 2016), a payday lender, Cash Biz, provided short-term loans to individuals.  As part of this process, loan customers provided the company with a post-dated check for the amount of the loan and any applicable service fees.  Customers were also required to sign a credit service agreement that contained an arbitration clause and class action waiver.  When individuals failed to repay Cash Biz in accordance with the terms of their loan, the company deposited the post-dated check which was then typically returned for insufficient funds.

At some point, Cash Biz began contacting the local district attorney in order to file a criminal complaint against defaulting customers based on the returned checks.  Although criminal charges were filed against the borrowing customers under Texas Penal Code Section 32.41, most were eventually dismissed based on the knowledge requirement included in the law.  Still, certain Cash Biz customers were detained, served jail time, and incurred fines.

In January 2015, several defaulting Cash Biz customers filed a class action petition against Cash Biz in Bexar County, Texas.  According to the plaintiffs, Cash Biz engaged in “malicious prosecution, fraud, violation of the DTPA, and violation of Finance Code Section 393.301.” In response, Cash Biz filed a motion to compel the plaintiffs to individual arbitration based on the signed credit service agreements.  Cash Biz also asked the court to enforce the class action waiver included in the agreement.

According to the trial court, the arbitration provision and class waiver were inapplicable to the claims that were brought against Cash Biz.  In addition, the trial court ruled that the company waived its right to arbitration by substantially invoking the litigation process when it filed criminal charges against the plaintiffs. Because of this, the trial court denied Cash Biz’s motion.  Cash Biz then filed an interlocutory appeal with the Fourth Court of Appeals.

The appellate court first examined whether the arbitration provision and class action waiver applied to the plaintiffs’ case.  The court said:

Because the facts as alleged to support the causes of action are factually intertwined with the Loan Contracts and because the broad definition of “dispute” within the arbitration provision encompasses these allegations, Cash Biz satisfied its burden of proof to show the claims in dispute fall within the scope of the arbitration provision. Thus, the burden of proof shifted to the Borrowing Parties to establish an affirmative defense, that is, waiver of the right to enforce the arbitration provision. Venture Cotton Co-op., 435 S.W.3d at 227; J.M. Davidson, 128 S.W.3d at 227.

Next, the San Antonio court examined whether Cash Biz waived its right to arbitration by substantially invoking the litigation process.  According to the Fourth District:

Cash Biz’s filing of a criminal complaint does not rise to the extent of active engagement in litigation that Texas courts have consistently held to be specific and deliberate actions inconsistent with a right to arbitrate or that display an intent to resolve a dispute through litigation. To begin, courts consistently evaluate a party’s conduct after suit is filed to determine whether it waived its right to arbitration. See Pilot Travel Ctrs, 416 S.W.3d at183; Sedillo, 5 S.W.3d at 827; Nationwide of Bryan, Inc. v. Dyer, 969 S.W.2d 518, 521 (Tex. App.—Austin 1998, no pet.). Here, the parties focus on Cash Biz’s conduct in a separate proceeding before the underlying litigation was filed by the Borrowing Parties. Further, under these facts, Cash Biz was not a party to the criminal prosecutions and did not serve as a witness or provide any interviews to facilitate prosecution. Cash Biz’s actions, though presumably vindictive, do not evince a desire to achieve repayment of any loans through the criminal process. Thus, Cash Biz’s actions were not sufficiently active or deliberate to constitute substantial invocation of the judicial process. See G.T. Leach Builders, LLC, 458 S.W.3d at 512; Richmont Holdings, Inc., 455 S.W.3d at 576. Finally, Cash Biz’s actions, even if wrong, were insufficient to rise to the level of “substantial invocation” of a litigation process. In Texas, the filing of criminal charges and initiation of criminal process is the discretion of the prosecuting attorney. Even if this court were to construe Cash Biz’s preliminary act as an initiation of litigation to “achieve a satisfactory result,” the filing of suit or initiation of litigation is not “substantial invocation of judicial process”. See G.T. Leach Builders, LLC, 458 S.W.3d at 512; Richmont Holdings, Inc., 455 S.W.3d at 576. Therefore, the filing of a criminal complaint, though the impetus for initiation of criminal process, is insufficient to be construed as substantial invocation of a judicial process.

Similarly, the appellate court held the class action waiver included in the credit service agreement was both valid and applicable to the case.

Finally, Texas’ Fourth Court of Appeals in San Antonio reversed the trial court’s order denying Cash Biz’s motion to compel arbitration and enforce the class action waiver and remanded the case.  The court also stayed litigation pending the completion of individual arbitration proceedings with each plaintiff.  Judge Rebeca Martinez dissented in a separate opinion.

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