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Granting a motion to compel arbitration of a consumer credit dispute, a New York federal court held that the Federal Arbitration Act (FAA) preempts New York state laws rendering arbitration agreements for consumer goods unenforceable.
In Nichols v. Washington Mut. Bank, No. 07-CV-3216 (JG)(VVP), 2007 WL 4198252 (E.D.N.Y. Nov. 21, 2007), Nichols obtained a secured loan from Washington Mutual. When Nichols failed to make payments on her loan, Washington Mutual transferred the delinquent account to National Foreclosure Relief.
National Foreclosure Relief sent Nichols a 14-page fax containing detailed loan information along with an arbitration clause. Nichols responded by paying an $895 fee. Washington Mutual eventually sold Nichols' apartment in a foreclosure sale. Nichols responded by suing Washington Mutual and National Foreclosure Relief for various Fair Debt Collection Practices Act violations. National Foreclosure Relief moved to compel arbitration pursuant to the parties' arbitration agreement. Nichols countered arguing New York's General Business Law Section 399-c prohibited arbitration agreements in contracts for consumer goods.
The Court ordered the parties to arbitrate the dispute holding that the FAA preempts Section 399-c because the transaction involved interstate commerce. Here, a Nevada corporation in California transmitted a facsimile to a New York resident in New York, thus falling within the FAA's ambit. Under the FAA, a court may only revoke an arbitration agreement "save upon such grounds as exist at law or equity for the revocation of any contract." Section 399-c specifically targets arbitration agreements and is not a ground for the revocation of "any" contract. Because federal law supersedes inconsistent state law under the Supremacy Clause, the arbitration was enforceable under the FAA.
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