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An internet debt reduction “scam” encouraging consumers to contest credit card debts and arbitration agreements on specious grounds is ineffective in relieving debt or frustrating arbitration, according to a federal district court in California.
In Carmack v. The Chase Manhattan Bank (USA), No. C 07-02124 WHA, 2007 WL 3274151 (N.D. Cal. Aug. 3, 2007), Carmack entered into a credit card agreement with Chase. After becoming delinquent on the credit card account, Carmack obtained the services of Internet firm NAES to help her “eliminate” her debt.
With a formula provided by NAES, referred to by the Court as “an Internet scam… perpetrated on consumers over their heads in debt and looking for a way out,” Carmack sent Chase a letter alleging unspecified billing errors on the account in an attempt to invoke the Truth in Lending Act (TILA) and frustrate Chase’s attempt to collect on the account while a billing dispute was pending.
Chase did not respond to Carmack’s letter, and instead filed a claim for arbitration with the National Arbitration Forum (NAF). Carmack responded with an NAES formula letter, objecting to the NAF’s jurisdiction and alleging that she never agreed to arbitrate with Chase. Carmack then refused to participate in any of the arbitration proceedings. The NAF arbitrator entered an award in favor of Chase.
Carmack then filed suit against Chase, alleging TILA violations, breach of contract, and violations of due process. Chase counterclaimed for confirmation of the arbitration award. The Court rejected all of Carmack’s claims, and confirmed the award.
The Court found Chase had not violated TILA by failing to respond to Carmack’s “billing inquiry” and by proceeding to arbitration. The Court agreed that TILA required that creditors respond to billing error inquiries before attempting to collect disputed debt, but found Carmack’s inquiry letter only relied on her supposed “misunderstanding,” and failed to allege any specific error on the statement. Instead, she merely suggested that her debt had been previously paid off by promissory notes without providing any evidence that such notes were sent or would have been accepted as payment by Chase.
The Court also found no breach of contract in Chase’s pursuit of an arbitral remedy against Carmack. Carmack alleged that she had never received amendments to the original cardholder agreement that contained an arbitration clause, but the Court noted that the original agreement contained a valid arbitration agreement, and Carmack had failed to contest that she received the original agreement.
The Court further found that Carmack’s right to due process under the law had not been violated during arbitration. The Court stated that the NAF provided all the necessary procedural safeguards required under the law, and noted that “[t]he NAF has been recognized by other courts as a viable alternative to the judicial system.”
Without any statutory grounds for vacatur or modification of the underlying award, the Court then granted Chase’s motion to confirm. Carmack had alluded to arbitrator bias in her complaint, but the Court found no evidence of actual bias that would warrant vacatur of the award.
Later, the Court denied Carmack’s motion for reconsideration of the confirmation. In her motion, Carmack claimed that she had a jury right under the Federal Arbitration Act (FAA) as to whether a valid arbitration agreement existed. The Court rejected her claim, finding that the FAA jury right applied to motions to compel arbitration, but not to motions to confirm an award.
Finally, Chase moved for an award of attorney’s fees, claiming that it was entitled to such fees as the prevailing party under the arbitration agreement. The Court granted Chase’s motion, finding the fees provision in the agreement valid, and finding the award of fees to the prevailing party permissible under California law.
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