Henry v Cash Biz–can filing a criminal complaint waive the right to compel arbitration?


Case Summaries, Compelling Arbitration, Texas Supreme Court / Saturday, March 10th, 2018

In Henry v. Cash Biz, LP, — S.W.3d–, 2018 WL 1022838 (Tex. 2018), the Texas Supreme Court addressed, and ultimately rejected, a unique argument on waiver of arbitration–holding that a ‘payday’ lender did not substantially invoke judicial process, and thus did not impliedly waive its right to arbitrate, by filing criminal complaints against borrowers who had written checks to the lender that were returned for insufficient funds.

Background

Plaintiff borrowers brought a putative class action against short-term lender for malicious prosecution, fraud, and violations of the Deceptive Trade Practices Act, Consumer Protection Act, and the Finance Code against lender Cash Biz, in Bexar County district court. The crux of borrowers claims is that Cash Biz wrongfully used the criminal justice system to collect unpaid loans by failing false charges against borrowers. As security for loans, borrowers provided postdated checks made out to Cash Biz for the amount of the loan plus a finance charge. When borrowers defaulted, Cash Biz deposited the checks. When checks were returned for insufficient funds, Cash Biz forwarded information about the borrowers and the returned checks to the district attorney.

Underlying Litigation

In response to the petition, Cash Biz moved to compel arbitration, which Judge Salinas denied on the grounds that the borrowers claims related solely to Cash Biz’s alleged use of the criminal justice system to enforce civil debts and Cash Biz waived its right to arbitration by substantially invoking the judicial process.

Cash Biz filed an interlocutory appeal and the San Antonio Court of Appeals, 2016 WL 4013794, reversed the district court and ordered arbitration, with one justice dissenting. The majority (Pulliam, J.) held that the borrowers claims fell within the scope of the arbitration clause because their allegations were factually intertwined with the loan contracts and that filing of a criminal complaint did not rise to the level of active engagement in litigation required to waive an otherwise existing right to arbitrate. Justice Martinez dissented on the issue of waiver, finding a pattern of specific, deliberate, and affirmative conduct by Cash Biz in filing sworn complaints with the district attorneys’ offices following its borrowers’ defaults, thus procuring and becoming a witness in the criminal prosecution of the defaulting borrowers.

Borrowers then petitioned for review from the Texas Supreme Court, which was granted.

Texas Supreme Court Opinion

Justice Phil Johnson authored the opinion of a unanimous court, holding that the arbitration agreement applied to Henry’s claims, Cash Biz did not substantially invoke judicial process, and thus did not impliedly waive its right to arbitrate by filing criminal complaints.

Scope of Arbitration Clause

The Court first addressed the scope of the arbitration clause, noting that under prior precedent and in light of Texas policy in favor of arbitration, Texas courts are to resolve any doubts about the scope of an arbitration clause in favor of arbitration, a presumption so compelling that unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue, it is arbitrable. The Waiver of Jury Trial and Arbitration Provision in Cash Biz’s contracts with the borrowers provided that “all disputes … shall be resolved by binding arbitration only on an individual basis with you.” The Court noted that the scope of an arbitration clause that includes all “disputes” and not just claims, is interpreted broadly and encompasses more than the claims based solely on rights originating exclusively from the contract. In that light, the Court found that the clause would apply to all disputes, even those relating only indirectly to the loan agreements.  The Court thus held that while borrowers claims were not for breach of any specific obligations under the loan contracts, those claims were based on the manner in which Cash Biz pursued collection of the loans and are at least indirectly related to the contracts; thus the claims were within the scope of the arbitration agreements.

No Waiver of Arbitration

 The Court then turned to borrowers argument that Cash Biz had waived its right to arbitrate through its substantial invocation of the judicial process, a much-litigated defense to arbitrability in Texas courts. The Court first noted the high standard Texas law has set for a finding of implied waiver. Texas courts are to look to the specifics of each case. The necessary conduct must go beyond merely filing suit or seeking initial discovery and will not result in a waiver of the right to arbitrate in all but the most unequivocal of circumstances. Texas courts examine how much discovery has been conducted, who initiated it, whether it relates to the merits, how much time and expense has been incurred in litigation, and the proximity in time between a trial setting and the filing of the motion seeking arbitration. Examining the record before it, the Texas Supreme Court noted that borrowers provided as evidence of waiver only a list of cases and case summaries of criminal cases in Harris County in which Cash Biz was a named complainant, including those of the named Borrowers, and articles stemming from a Texas Appleseed investigation. The Texas Supreme Court did not conclude that Cash Biz must have filed criminal complaints against them, noting that the record did not reflect that it did.  The reports and an affidavit submitted by Cash Biz, provided only that Cash Biz provided information to the district attorney but did not make any formal charges, did not participate in any trial, was not a witness, and was not asked to appear. The Court concluded that there was no evidence of conduct by Cash Biz related to the criminal charges other than being a complainant in them.  The Court thus distinguished cases in other jurisdictions, such as Principal Investments Inc v. Harrison, in which the Nevada Supreme Court held that filing more than 16,000 individual collection actions in justice of the peace courts waived its right to arbitrate. The Court also distinguished In re Christus Spohn Health System, a 2007 case in which the Corpus Christi Court of Appeals denied a motion to compel arbitration in part because the hospital had sought an order of contempt against husband’s counsel in criminal proceedings as part of what it characterized as “part of a strategic plan of defense” that was inconsistent with the right to arbitrate. That case was not appealed to the Texas Supreme Court. The Court contrasted the evidence of conduct relied upon by Christus Spohn court with the evidence in this case, which it characterized as merely initiating litigation.

Take Aways

As the Texas Supreme Court noted, its determination in this case was in contrast with the Fifth Circuit’s opinion in Vine v. PLS Financial Services, Inc., 689 Fed.Appx. 800 (5th Cir. 2017) (per curiam). Vine also involved payday lenders which required borrowers to sign postdated checks which were presented for payment after the borrowers defaulted and made reported to the district attorney when returned for insufficient funds. The Vine court concluded that the lender’s actions in submitting affidavits to prosecuting attorneys waived its right to enforce the arbitration agreement. While recognizing that it is important for federal and state law to be as consistent as possible in this area where the federal courts and Texas courts have concurrent jurisdiction, the Texas Supreme Court expressly agreed with Justice Higginson’s dissenting opinion in Vine, which cited the San Antonio Court of Appeals opinion in this case.
As a matter of evidentiary practice, it is worth noting that both the San Antonio Court of Appeals and the Texas Supreme Court were highly critical of the evidence offered by borrowers to support a finding of waiver. The Texas Supreme Court noted that the borrowers simply provided no evidence of any actions by Cash Biz related to the criminal charges other than evidence that Cash Biz was the complainant in them (evidence substantially found in that acknowledgement in an affidavit provided by Cash Biz) and showed only that Cash Biz informed the district attorney of the checks returned for insufficient funds. One wonders whether the outcome might have been different if borrowers could have presented evidence that their prosecutions were based on complaints made by Cash Biz, documents which would presumably be obtainable through open records requests. On the one hand, the evidence and arguments provided were sufficient to convince the trial judge, but once that determination was made, the record was closed and both the Court of Appeals and the Supreme Court refused to give the normal deference to the trial court’s factual determinations because it was not supported by legally sufficient evidence. On the whole, however, it is unlikely to have been outcome determinative, as the Texas Supreme Court expressly approved of the dissent in Vine, which would have found no waiver despite a more well developed factual background.

It is also worth noting the role that Texas Appleseed played in providing amicus curae briefing on behalf of borrowers’ position. Texas Appleseed filed briefs in the appeals before the San Antonio Court of Appeals and Texas Supreme Court, detailing its role in investigating payday lenders’ use of criminal complaints through public records review and filing its own complaint with several regulatory bodies.

Documents

Luke Gilman is an attorney at Jackson Walker in Houston, Texas, specializing in arbitration and ancillary litigation in federal and state court.