In Zambrana v. Pressler & Pessler LLP,[i] the Southern District Court of New York stayed a putative class action against various creditors for alleged violations of the Fair Debt Collection Practices Act (FDCPA), referring the matter to arbitration.
In the case, lead plaintiff Alicia Zambrana (Zambrana) obtained a Best Buy credit card from, and entered into a cardholder agreement with, Household Bank N.A (HSBC) in 2003 (2003 Agreement). The 2003 Agreement includes a mandatory arbitration clause, obligating the parties to arbitrate all future disputes. In 2010, HSBC allegedly sent Zambrana a change in term notice and an amended cardholder agreement (2010 Agreement). The 2010 Agreement included a revised arbitration clause that allowed cardholders to opt out of arbitration by notifying HSBC within 30 days of receiving the 2010 Agreement. Zambrana never sent HSBC an opt-out notice. In 2012, Zambrana defaulted on her account. By then, her account had been assigned to a number of creditors, initially from HSBC to Capital One, and then to other creditors (defendants). The defendants initiated a separate state action against Zambrana for the outstanding debt. In turn, Zambrana initiated the instant action claiming that the defendants’ collection practices violated the FDCPA.
Zambrana argued that the defendants could not compel arbitration for two reasons:
- First, neither the arbitration provision in the 2003 Agreement nor the 2010 Agreement was enforceable as to her. Specifically, she argued that the 2003 Agreement was inoperative because it had been superseded by the 2010 Agreement. The 2010 Agreement—including the arbitration clause therein—was also unenforceable because the defendants could not prove that they sent her the 2010 Agreement—thus whether or not she opted out of arbitration in 2010 was a non-issue.
- Second, Zambrana argued that the defendants lacked standing because the initial assignment of her account from HSBC to Capital One was improper, thereby rendering all subsequent assignments invalid as well.
In response, the defendants submitted a declaration of the HSBC senior legal counsel responsible for the Best Buy credit card portfolio in 2010, who stated that because the 2010 Agreement was sent to all HSBC Best Buy cardholders, and Zambrana was a customer at the time, she would have been sent one as well. With respect to standing, the defendants submitted business records, including a Bill of Sale, showing that Zambrana’s account was assigned by HSBC to Capital One.
The court found the legal counsel’s declaration insufficient to prove that HSBC in fact sent Zambrana the 2010 Agreement, because, while he had knowledge of the creation of the 2010 Agreement, he did not have personal knowledge of how or when the 2010 Agreement was sent out to Zamrabana, and therefore the defendants failed to establish ordinary office procedures to prove that Zambrana received the 2010 Agreement. Nevertheless, the court held that the 2003 Agreement required arbitration. Rejecting Zambrana’s “heads I win, tails you lose” argument that both the 2003 and 2010 Agreement were inoperative, the court determined that “[e]ither the 2010 Agreement was sent to her so that her failure to opt out of arbitration means that she is bound by the 2010 Agreement, or it was never sent to her, in which case the 2003 Agreement with its arbitration provision remains in force.” Since there was no evidence that Zambrana received the 2010 Agreement, the arbitration clause in the 2003 Agreement remained in effect.
The court also found that the defendants had standing. Unlike in a debt collection case, defendant creditors seeking to enforce the arbitration clause in a binding contract need not prove a complete chain of title over the account in order to prevail. Instead, the court held that the defendants need only show “by a preponderance of the evidence that [Zambrana]’s account and corresponding cardholder agreement were assigned.” Defendants did so by submitting evidence that the initial assignment from HSBC to Capital One was valid.
The case presents some takeaways for financial institutions seeking to enforce arbitration agreements in their agreements:
- Establish and implement ordinary mailing procedures for disseminating important notifications to customers; and
- Present evidence of the these ordinary office procedures to the court, not just evidence of the creation of the agreement or the purpose of the agreement.
[i] 2016 U.S. Dist. LEXIS 166722 (S.D.N.Y. Dec. 2, 2016)