NY Federal Court Refuses to Compel Arbitration in Case Involving Law Student Loans

The U.S. District Court for the Southern District of New York decided recently Fensterstock v. Education Finance Partners, Inc., No. 08-CV-3622, 2009 U.S. Dist. LEXIS 30457 (S.D.N.Y. 2009). Plaintiff Fensterstock claims, on behalf of a class, that defendants Education Finance Partners (“EFP”) and Affiliated Computer Services (“ACS”) improperly applied an undisclosed fee to his law student loans. EFP and ACS filed a motion to compel arbitration, on the basis of the arbitration clause found in the Promissory Note.

The court, pursuant to a choice-of-law clause, applied California law to determine whether the arbitration provision is unconscionable. Citing Discover Bank v. Superior Court, 113 P.3d 1100 (2005), the court set out a three prong test to decide when an arbitration clause requires a consumer to waive the right to bring claims on behalf of a class, that waiver is unconscionable:

1. The waiver is found in a contract of adhesion.
2. In a setting in which disputes between the contracting parties predictability involve small amounts of damages.
3. It is alleged that the party with the superior bargaining party has carried out a scheme to deliberately cheat large number of consumers out of individually small sums of money.

The court concluded that the arbitration clause is unconscionable under California law, thus, leaving an open door for a class action suit against the student loan providers EFP and ACS.

Related Posts:

• Federal Court Bars Arbitration Over Student Loan Terms, Mark Hamblett, New York Law Journal.

• Houston Lawyer Loses License Because of Failure to Pay Debts, Debra Cassens Weiss, ABA Journal.

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