[IMGCAP(1)]

 

Minnesota Attorney General Lori Swanson yesterday filed a lawsuit against the National Arbitration Forum of Minnesota for allegedly misrepresenting its independence and hiding its "extensive" ties to the collection industry.

Swanson's lawsuit alleges that Minneapolis-based National Arbitration Forum, while holding itself out as impartial, works behind the scenes – alongside creditors and against the interests of ordinary consumers – to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appointing the Forum to decide the disputes. The lawsuit was filed in Hennepin County District Court, and alleges violations of Minnesota's consumer fraud, false advertising and deceptive trade practices laws.

"This is a classic case of the little guy getting stepped on by fine-print contracts," Swanson said in a news release. "The company tells consumers, the public, courts and the government that it is independent and operates like an impartial court system. In fact, it has extensive ties to the collection industry, ties that it hides from the public."

The lawsuit also alleges that the Forum pays commissions to executives who convince creditors to put mandatory arbitration clauses in their customer agreements. The suit alleges that the Forum does this to generate arbitration filings in the Forum and revenue for itself.

"As an adversarial means of dispute resolution, like litigation, arbitration provides for a decision in favor of one party, typically leaving at least one party unhappy with the result. As such, any administrator of arbitration is likely going to get complaints," according to a statement posted on the company's Web site.

"The National Arbitration Forum makes every effort to fully address complaints, including those filed by the Minnesota Attorney General's Office. The National Arbitration Forum does this to ensure the fairness of the arbitration process and to continually improve the administration of arbitration," the company states. "Published studies and empirical data indicate that consumers prevail at the same or better rate as they do in court. For debt collection matters in particular, lenders prevail 93.8% of the time in arbitration and over 96% of the time in court."

The lawsuit alleges that, beginning in 2006 and through 2007, Accretive, a family of New York private equity funds, engineered two transactions. In the first transaction, Accretive formed several equity funds under the name "Agora" (meaning "Forum" in Greek), which invested $42 million in the Forum. In the second transaction, three debt collection law firms, Mann Bracken of Georgia, Wolpoff & Abramson of Maryland, and Eskanos & Adler of California, merged into one large national law firm called Mann Bracken. Accretive then acquired the majority interest in a debt collection agency called Axiant, which acquired the collections operations of Mann Bracken. Through these transactions, Accretive took control of one of the country's largest debt collection enterprises and became affiliated with the Forum. The lawsuit alleges that Accretive principals remain actively involved with the Forum.

The lawsuit states that, in 2006, the Forum processed more than 214,000 consumer collection arbitration claims, of which the aforementioned law firms filed 125,000. Swanson contends the Forum was aware of the affiliation problem in 2006 when it negotiated its relationship with Accretive. She pointed to an e-mail from an officer of the Forum to the hedge fund stating: "…we should certainly plan for unwinding any deal in the event shared ownership becomes an acute issue."

The Forum states on its Web site that there are no institutional investors in the company. "Like many companies, Forthright, who provides the back office administration on behalf of the Forum, has a multitude of minority investors as wide ranging as University endowments and private equity funds who also have a myriad of other separate investments. At no point does any minority shareholder or fund have any role or influence over the impartial arbitration process." Forthright is a Minneapolis-based provider of transaction processing and resolution solutions.

Richard Neely, retired Chief Justice of the West Virginia Supreme Court of Appeals, joined Swanson at the announcement of the lawsuit. Upon retirement, Justice Neely was appointed as an arbitrator by the Forum but stopped receiving cases after he refused to award attorneys' fees to creditors that he did not believe were allowed under West Virginia law, according to the news release.

"I am happy that a government official has stepped in to try and address this problem. This company tilts the playing field toward creditors and makes a mockery of our legal system," Neely said of the lawsuit.

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry