Second Circuit Eyes On Supreme Court, AT&T Mobility

A recent news story published in The AM Law Daily highlights an interesting arbitration case from the Second Circuit. The case involves a young attorney named Joshua Fensterstock who, after graduating with over $100,000 in student loans in 2003, consolidated his student loans in 2006 with Education Finance Partners (EFP), a student loan company serviced by Affiliated Computer Services (ACS). By August 2007, Fensterstock noticed that his loan balance was increasing rather than decreasing despite making regular payments. He contacted ACS and was told that unless he made his payments exactly on the 14^th of each month, his payment was not applied to the principal amount, but solely to the interest. Fensterstock filed suit seeking class status, alleging fraudulent and deceptive practices and challenging a class-wide arbitration waiver contained in the agreement.

Although EFP’s counsel argued that Fensterstock had the capacity and responsibility to read and understand the terms of the loan contract he was signing since he was an attorney, the Second Circuit was not persuaded. In Fensterstock v. Education Finance Partners, 611 F.3d 124 (2d Cir. 2010), the Second Circuit held that the class action waiver and class-wide arbitration waiver clauses were unconscionable and unenforceable under California law, the relevant law under the agreement’s choice of law provisions. The Court based the holding on its reading of California unconscionability law which allows a court to find that a contract clause offered on a take-it-or-leave-it basis to a much weaker party is oppressive and, as such, supports a minimal showing of procedural unconscionability. Further, despite his status as a practicing attorney who advises clients in financial matters, the court saw nothing in his education, expertise, or experience prior to the contract to provide Fensterstock with a meaningful opportunity to negotiate the class waiver and class-wide arbitration waiver clauses out of the loan agreement.

EFP’s counsel filed a petition for a rehearing on the grounds that the Federal Arbitration Act (FAA) preempts California law in this matter, but EFP believes the Second Circuit may wait until the U.S. Supreme Court renders an opinion in AT&T Mobility, LLC v. Concepcion, 09-893. In AT&T Mobility, set for argument on November 9, 2010, the Supreme Court will decide if the FAA preempts the states from conditioning the enforcement of an arbitration agreement on the availability of certain procedures even if those procedures are not necessary to vindicate a party’s claims in a specific dispute. Although certiorari was granted out of the Ninth Circuit, AT&T Mobility is particularly relevant to the Fensterstock case because it also involves underlying issues of California contract law and a class-wide arbitration waiver.

You can read the full news story here.

Disputing has recently blogged about the AT&T Mobility, LLC v. Concepcion case here and here.

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