Case 3:11-cv RJB Document 95 Filed 10/24/11 Page 1 of 14

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1 Case :-cv-00-rjb Document Filed // Page of UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT TACOMA ROSITA H. SMITH, individually and on behalf of all similarly situated Washington State Residents, v. Plaintiffs, LEGAL HELPERS DEBT RESOLUTION, LLC, a Nevada limited liability company, JEM GROUP, INC., a Nevada corporation, MARSHALL BANKS, LLC, a California corporation, JOHN and JANE DOES -, Defendants. CASE NO. -0 RJB ARBITRATION This matter comes before the Court on Defendants Legal Helpers Debt Resolution, LLC s ( Legal Helpers ) Renewed Motion to Compel Arbitration (Dkt. ), JEM Group, Inc. s ( JEM ) Renewed Motion to Compel Arbitration (Dkt. ), and Marshal Banks, LLC s ( Marshal Banks ) Joinder, in part, in Defendant JEM Group s Motion to Compel Arbitration (Dkt. ). The Court has considered the pleadings filed regarding the motions, the remaining record and is fully advised. Oral argument was requested, but would not be useful to the Court in deciding the motions. ARBITRATION-

2 Case :-cv-00-rjb Document Filed // Page of On January,, Plaintiff filed this putative class action against Defendants, who Plaintiff alleges are for-profit debt-relief companies that solicit consumers for debt settlement programs. Dkt.. Plaintiff asserts that Defendants charged her, and other similarly situated Washington consumers, fees that exceed % of the total debt - the limit set by the Washington Debt Adjusting Act, RCW., et seq., ( DAA ). Id. Plaintiff makes claims for violations of the DAA and Washington s Consumer Protection Act, RCW., et. seq., ( CPA ), for breach of fiduciary duty, unjust enrichment, aiding and abetting violations of the DAA and CPA, and civil conspiracy. Id. Plaintiff seeks injunctive and declaratory relief, damages, attorneys fees, and costs. Id. In the pending motions, Defendants seek an order compelling arbitration. Dkts.,, and. Plaintiff opposes the motions, arguing that the arbitration clause is procedurally and substantively unconscionable and should be stricken. Dkts. -. For the reasons set forth below, the arbitration clause should be stricken from the contract as unconscionable, and the motions to compel arbitration denied. I. FACTS AND PROCEDURAL HISTORY A. FACTS According to the Complaint, Defendant Marshal Banks is a front end debt relief company, who markets debt relief programs to consumers in Washington and provides lead generation for other for-profit debt relief companies. Dkt., at. The Complaint alleges that on March,, Marshal Banks, representing itself as Kazlow and Tucker Debt Relief, LLC, sent Ms. Smith a Debt Settlement Agreement and associated documents. Dkt., at. The Debt Settlement Agreement provided that Marshal Banks would attempt to reduce the principal balance of Ms. Smith s unsecured debts and settle those debts. Id. at. The Debt Settlement Agreement required Ms. Smith to designate a third-party custodian to receive payments and then ARBITRATION-

3 Case :-cv-00-rjb Document Filed // Page of those funds would be used to pay off her debts and for various fees associated with participation in the program. Id. The Complaint alleges that the Debt Settlement Agreement required the payment of several fees, including a service fee, equal to % of the total debt, in addition to other charges. Id., at -. The Debt Settlement Agreement is alleged to have a provision allowing Marshal Banks to assign the services to be provided under the contract. Id., at. On March,, Ms. Smith signed the Debt Settlement Agreement and returned it to Marshal Banks. Id., at. The Complaint alleges that a few days later, Marshal Banks sent Ms. Smith another multiple page standardized enrollment packet. Id., at. Marshal Banks purportedly instructed Ms. Smith to execute all the documents and return them. Id. Included in the packet was an Attorney Retainer Agreement ( ARA ). Id. The ARA, a copy of which is filed in the record by both parties, was an agreement for legal services entered into between Defendant Legal Helpers, also known as the law firm of Macey, Aleman, Hyslip & Searns and Ms. Smith. Dkt. -, at. (The footer at the bottom of the ARA reads Enrollment Documents (... Kazlow & Tucker Debt Relief) the entity the Complaint alleges is Marshal Banks.) Id. The ARA provides that [t]his contract is solely between [Legal Helpers], any assigns or related entities that may be formed in the future. Id. The ARA explains that Legal Helpers is a debt relief agency and law firm that provides debt resolution services to its clients. Id. The ARA further provides, Limited Retention. [Legal Helpers] will review Client s current unsecured debt burden and thereafter negotiate and attempt to enter into settlements with creditors of Client in an effort to modify and/or restructure Client s current unsecured debt. Id. The ARA further provides that [i]n the event a creditor or collector sues Client, whether related to a debt obligation or any other claim, [Legal Helpers] is ARBITRATION-

4 Case :-cv-00-rjb Document Filed // Page of under no obligation to provide representation. [Legal Helpers] will discuss specific debt related issues with Client and, if appropriate, offer additional legal services in regard to bankruptcy or other debt resolution services for Client s consideration. Id. The ARA states that Legal Helpers shall subcontract certain tasks including negotiations with creditors and collectors and certain customer support responsibilities to a third party. [Legal Helpers] and other legally trained, licensed personnel will supervise all negotiations and customer support and ensure that these services comply with established procedures. Id. The ARA required Ms. Smith to pay Legal Helpers a flat fee retainer of $00.00, a maintenance fee of $.00 per month, and where Legal Helpers obtained a % or greater reduction of a debt, an additional % contingency fee in the amount of the reduction. Id., at. The ARA further provides: The implementation, management and maintenance of a debt resolution plan by [Legal Helpers] shall be performed under the direct supervision of [Legal Helpers] by JEM Group, Inc. (JEM) at a cost of fifteen percent (%) of the Client's total scheduled debt (hereinafter referred to as Service Cost). [Legal Helpers] has a non-exclusive reciprocal referral agreement with JEM to provide these services under [Legal Helpers ] direct supervision. These are services required for the debt resolution plan, but are not legal services. There is no attorney-client relationship between Client and JEM in regard to these services and any specific communications between client and JEM are not protected by attorney-client privilege. JEM cannot and will not provide any legal advice to the Client other than as communicated through JEM by [Legal Helpers] and under [Legal Helpers ] supervision. The Service Cost shall be paid by Client per Exhibit B - Payment Schedule commencing immediately following the preparation of the debt resolution plan. Client understands and agrees to set aside as per Exhibit B - Payment Schedule in an F.D.I.C. insured bank account for [Legal Helper's] to withdraw this Service Cost for JEM's work in the management of the debt resolution plan and for Client to accumulate settlement funds to be used for settlement purposes. Client agrees to have their payments of Service Cost to be automatically drafted by [Legal Helpers] (or its designees) from an authorized F.D.I.C. insured bank account.... Id. JEM, according to the Complaint then is a back end debt adjustment company that implements, manages and maintains debt relief programs. Dkt.. In any event, the ARA further states that [t]his agreement and all schedules are the complete and exclusive statement of the ARBITRATION-

5 Case :-cv-00-rjb Document Filed // Page of Agreement of the parties and supersede any proposal, prior agreement, oral or written, and any other communication related to this matter. Dkt. -, at. As is relevant for the pending motions, the ARA also contains an arbitration and severability provision. Id. The arbitration provision provides: Id. Arbitration: in the event of any claim or dispute between Client and [Legal Helpers] related to the Agreement or related to any performance of any services related to the Agreement, such claim or dispute shall be submitted to binding arbitration upon the request of either party upon the service of that request. The parties shall initially agree on a single arbitrator to resolve the dispute. The matter may be arbitrated either by the Judicial Arbitration Mediation Service or American Arbitration Association, as mutually agreed upon by the parties or selected by the party filing the claim. The arbitration shall be conducted in either the county in which the Client resides, or the closest metropolitan county. Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction. The conduct of the arbitration shall be subject to the then current rules of the arbitration service. The costs of arbitration, excluding legal fees will be split equally or be borne [sic] by the losing party, as determined by the arbitrator. The parties shall bear their own legal fees. B. PENDING MOTIONS Defendant Legal Helpers now move the Court for an order compelling arbitration. Dkt.. Legal Helpers argue that the Federal Arbitration Act and Washington law require arbitration of this matter. Id. It asserts that: ) the arbitrator decides the enforceability of the ARA, ) the arbitration provision is valid and enforceable, and ) there can be no class arbitration here. Dkt.. Defendant JEM also moves for an order compelling arbitration, arguing that [u]nder the terms of the written agreement between Smith and [Legal Helpers], Smith is obligated to submit any disputes she may have which arise under that agreement, including those against JEM, to binding arbitration. Dkt., at. JEM asserts that even though it was not a signatory to the ARA, it may still seek to enforce the arbitration provision as third party beneficiary of the ARA ARBITRATION-

6 Case :-cv-00-rjb Document Filed // Page of and under a theory of estoppel. Id., at -. JEM argues that federal and state law require arbitration, reiterating Legal Helpers arguments that the arbitrator decides the enforceability of the ARA, the provision is valid and enforceable, there can be no class arbitration here. Id. Defendant Marshal Banks joins in the motions to compel arbitration, arguing that even though it was not a signatory to the ARA either, Plaintiff s claims against all Defendants arise from and are directly related to that agreement. Marshall Banks as a non-signatory, is still entitled to enforce the arbitration provision contained in the agreement between [Legal Helpers] and Plaintiff because of the fact that Plaintiff s claims arise out of and relate directly to the agreement and the terms thereof. Dkt., at (citing JEM s pleading Dkt., at - ). Marshall Banks joins in the legal arguments advanced by the other two Defendants. Id. Plaintiff opposes the motions to compel arbitration. Dkts. and. She argues that the decision of whether the arbitration clause is enforceable is for this Court to decide. Id. She argues that the arbitration clause is unenforceable because it is both procedurally and substantively unconscionable because it: ) was entered into without the disclosures required of Washington attorneys, ) precludes her from obtaining meaningful redress and imposes unfair and substantial costs on her, ) conflicts with her rights under the CPA to seek an order enjoining Legal Helpers unfair and deceptive business practices. Id. Legal Helpers reply and argue that an arbitrator must decide Plaintiff s challenges to the ARA and that the arbitration provision is neither procedurally nor substantively unconscionable. Dkt.. JEM and Marshal Banks both reply and argue that Plaintiff s challenges are to the ARA as a whole, and are for the arbitrator to decide. Dkts. and. They argue that they are both ARBITRATION-

7 Case :-cv-00-rjb Document Filed // Page of entitled to enforce the arbitration provision as third party beneficiaries and under a theory of equitable estoppel. Id. In Marshal Banks Reply, it further states [t]here is only one contract at issue in this case, and that is the contract between Plaintiff and [Legal Helpers]. Dkt., at. Marshall Banks acknowledges it sent Plaintiff two sets of documents and states that the March, documents sent to Plaintiff were sent in error and, based on Marshal Banks information and belief, not implemented. Dkts., at -; and at. It states that, [i]t believes the documents were sent to Plaintiff in error over employee confusion arising from Marshal Banks business with [Legal Helpers] verses its business with NationWide, (another firm for which it acts as a marketer). Dkts., at and, at -. Marshal Banks then argues that to the extent that Plaintiff asserts that the contract with Marshal Banks is at issue in this case, the Court should enforce the arbitration provision appearing in that contract. Id., at. Plaintiff files Sur-Replies to JEM and Marshal Banks replies, arguing that ) she cannot be compelled to arbitrate against a non-signatory because the arbitration provision in the ARA is unenforceable, ) her claims against JEM and Marshal Banks do not arise out of the ARA, and ) these Defendants are not entitled to seek equitable relief with unclean hands. Dkts., and. She further argues that she cannot be compelled to arbitrate her claims against Marshal Banks based upon the March paperwork which was apparently sent to her in error. Dkt.. This opinion will first address the motion to compel arbitration based on the ARA, and then, to the extent one is made, Marshal Banks motion to compel arbitration based on the first set of documents they sent Plaintiff in error. II. DISCUSSION A. FEDERAL ARBITRATION ACT AND THE ARA S ARBITRATION CLAUSE ARBITRATION-

8 Case :-cv-00-rjb Document Filed // Page of The principal purpose of the Federal Arbitration Act ( FAA ) is to ensure that private arbitration agreements are enforced according to their terms. AT&T Mobility LLC v. Concepcion, S.Ct. 0, (). Section of the FAA requires courts to compel arbitration upon the motion of either party to the agreement (assuming that the making of the arbitration agreement or the failure... to perform the same is not at issue). Id. (quoting U.S.C. ) Under Section of the Federal Arbitration Act, A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. U.S.C.. The final phrase of Section, the saving clause, permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. AT&T Mobility LLC v. Concepcion, S.Ct. 0, ().. Whether an Arbitrator or this Court Should Decide the Enforceability of the Arbitration Provision at Issue Here? Challenges to the validity of arbitration agreements upon such grounds as exist at law or in equity for the revocation of any contract can be divided into two types. One type challenges specifically the validity of the agreement to arbitrate. Buckeye Check Cashing, Inc. v. Cardegna, U.S. 0, (0)(internal citations omitted). The second type challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid. Id. [U]nless the challenge is to the arbitration ARBITRATION-

9 Case :-cv-00-rjb Document Filed // Page of clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance. Id., at -. Conversely, when a plaintiff argues that an arbitration clause, standing alone, is unenforceable-for reasons independent of any reasons the remainder of the contract might be invalid-that is a question to be decided by the court. Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., F.d, 00 (th Cir. ). The question of whether the arbitration clause itself is valid is a question to be decided by this Court. Id. Plaintiff here challenges the validity of the agreement to arbitrate on different grounds than the grounds on which she challenges the ARA as a whole. Plaintiff argues in her Responses that the arbitration provision itself is procedurally and substantively unconscionable. Dkts. and. Plaintiff alleges in her Complaint, in part, that the ARA s fee provisions violate Washington State consumer protection laws. Dkt.. The rule that the contract's validity is considered by the arbitrator in the first instance does not apply because Plaintiff makes distinct challenges the arbitration clause itself. Bridge Fund, at 0-0. The fact that she did not specifically plead the arbitration provision s invalidity in her Complaint is not determinative of whether the Court can determine arbitrability. Id., at 0. In the Ninth Circuit, independent challenges to an arbitration provision are relevant only at the point plaintiff is required to oppose a motion to compel. In such a case, like the present one, the challenge to the validity of the arbitration provision would usually appear not in the complaint, but in the pleadings resisting a motion to compel arbitration. Id. Legal Helpers and the other Defendants argue in their Replies that the Ninth Circuit s holding in Bridge Fund is not supported by the earlier Supreme Court decisions like Buckeye Check Cashing and Rent-A-Ctr. W., Inc. v. Jackson, 0 S.Ct. (). Dkt., at. Legal Helpers argue that the Ninth Circuit cannot overrule the U.S. Supreme Court decisions and ARBITRATION-

10 Case :-cv-00-rjb Document Filed // Page of argue the Bridge Fund rule cannot stand. Id. Defendants, in essence, invite the Court to disregard binding Ninth Circuit precedent. Id. That invitation will be declined. This opinion will now turn to whether the arbitration provision itself is valid and enforceable.. Whether the Arbitration Provision Is Valid and Enforceable? [I]n assessing whether an arbitration agreement or clause is enforceable, the Court should apply ordinary state-law principles that govern the formation of contracts. Davis v. O'Melveny & Myers, F.d, (th Cir. 0)(internal citations omitted)(applying California law to determine whether an arbitration clause was unenforceable due to procedural and substantive unconscionability); Lowden v. T-Mobile USA, Inc., F.d (th Cir. 0)(applying Washington law to determine if arbitration clause was unenforceable). Under Washington law, a contract, or a provision thereof, is not valid if it is either procedurally or substantively unconscionable. Mattingly v. Palmer Ridge Homes LLC, Wn.App., ()(contract provision unenforceable because of procedural unconscionability); Scott v. Cingular Wireless, 0 Wash.d (0) (holding contract provision invalid because it was substantively unconscionable); See Nelson v.mcgoldrick, Wash.d, (). Plaintiff asserts that the arbitration clause here is invalid because of both procedural and substantive unconscionability. Dkts. and. Because this opinion concludes that the arbitration clause is procedurally unconscionable, Plaintiff s remaining arguments will not be reached. Procedural unconscionability relates to impropriety during the process of forming a contract. Nelson v.mcgoldrick, Wash.d, (). It involves blatant unfairness in the bargaining process and a lack of meaningful choice. Torgerson v. One Lincoln Tower, LLC, Wash.d, (0). Procedural unconscionability is determined in light of the ARBITRATION-

11 Case :-cv-00-rjb Document Filed // Page of totality of the circumstances, including () the manner in which the parties entered into the contract, () whether the parties had a reasonable opportunity to understand the terms, and () whether the terms were hidden in a maze of fine print. Id., at - (internal quotations and citations omitted). These factors should not be applied mechanically without regard to whether in truth a meaningful choice existed. Id., at. Consideration of these three factors here leads to the conclusion that the arbitration clause in was unconscionable. The manner in which Legal Helpers attained Plaintiff s agreement to this arbitration clause was unconscionable. According to the ARA, Legal Helpers is a law firm. In much of their daily work, lawyers act as a fiduciary for the client, in that they have a duty to act in and for the client's best interests at all times and to act in complete honesty and good faith to honor the trust and confidence placed in them. Kelly v. Foster, Wash.App. 0 (). Generally, [t]hese duties require full communication and candor, as well as performance meeting professional standards. Id. In Washington, attorney fee agreements that violate the Washington Rules of Professional Conduct are against public policy and unenforceable. Valley/0th Ave., L.L.C. v. Stewart, Wn.d, (0). Under Washington Rule of Professional Conduct. (a)() a client must receive a reasonable and fair disclosure of material elements of the fee agreement. The Washington State Bar Association Rules of Professional Conduct Committee issues advisory opinions in helping interpret ethical issues. In response to an inquiry, the Committee advises that when including an arbitration provision in a fee agreement with a client,... that it () must be consistent with a lawyer's fiduciary obligations and statutory law... ; and () it properly must be done only with full disclosure to the client. WSBA, Advisory Op. 0 (). Defendants point out that the Washington State Bar advisory opinions are not binding. They are persuasive, however, and there is no reason to ARBITRATION-

12 Case :-cv-00-rjb Document Filed // Page of deviate from WSBA, Advisory Op. 0 here. In a similarly persuasive vein, the American Bar Association Comm. on Ethics and Professional Responsibility, Formal Op. 0- (0) concluded that: It is ethically permissible to include in a retainer agreement with a client a provision that requires the binding arbitration of fee disputes and malpractice claims provided that () the client has been fully appraised of the advantages and disadvantages of arbitration and has been given sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement, and () the arbitration provision does not insulate the lawyer from liability or limit the liability to which she would otherwise be exposed under common and/or statutory law. There is no evidence that Legal Helpers fulfilled their fiduciary obligations as lawyers or made any disclosures to Plaintiff here regarding the rights she was relinquishing when she agreed to arbitration. Marshal Banks mailed her the multiple page enrollment packet which included the ARA and instructions to sign by the X. Dkt. -, at -. There is no evidence that anyone from Legal Helpers, much less an attorney, discussed the arbitration clause with Plaintiff. There is no showing that Legal Helpers gave her a reasonable and fair disclosure of material elements of the fee agreement s arbitration clause, Washington Rule of Professional Conduct. (a)(), or with full disclosure, WSBA, Advisory Op. 0 (). Further, there is no evidence that Plaintiff had a reasonable opportunity to understand the terms of the agreement to arbitrate, or the clause s implications. Torgerson, at. There is no suggestion that Plaintiff was given sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision. ABA Comm. on Ethics and Professional Responsibility, Formal Op. 0- (0). Moreover, the agreement to arbitrate was hidden in a maze of fine print among other several documents. Torgerson, at. ARBITRATION-

13 Case :-cv-00-rjb Document Filed // Page of The arbitration clause in the ARA is procedurally unconscionable under Washington law because of the manner in which the parties entered into the agreement to arbitrate, Plaintiff, the client, not having a reasonable opportunity to understand the clause in the circumstances, and the fact that the arbitration clause was hidden in a maze of fine print in a retainer agreement. Torgerson, at -. The arbitration clause here should be severed from the remainder of the contract. Buckeye Check Cashing, Inc. v. Cardegna, U.S. 0, (0)(holding that as a matter of federal arbitration law, an arbitration provision is severable from the remainder of the contract). Marshal Banks and JEM make no showing that they, as non-signatory parties, are entitled to enforce an unconscionable arbitration provision. B. MOTION TO COMPEL ARBITRATION AND THE FIRST SET OF DOCUMENTS SENT TO PLAINTIFF IN ERROR In its Reply, Marshall Banks acknowledges it sent Plaintiff two sets of documents and states that the March, documents sent to Plaintiff were sent in error and, based on Marshal Banks information and belief, not implemented. Dkts., at -; and at. Marshal Banks then argues that to the extent that Plaintiff asserts that [this March ] contract with Marshal Banks is at issue in this case, the Court should enforce the arbitration provision appearing in that contract. Id., at. To the extent Marshal Banks makes a motion to compel arbitration based on the first set of documents it sent Plaintiff, the motion should be denied. First, the motion is not noted for consideration in accord with Western District of Washington Local Civil Rule of Procedure (d)(), and appears in a Reply. Second, Marshal Banks itself asserts that, [t]here is only one contract at issue in this case, and that is the contract between Plaintiff and [Legal Helpers]. Dkt., at. Third, Marshal Banks acknowledges that the documents were sent in error and were for another of its customers. It states that, [i]t believes the documents were sent to Plaintiff in error ARBITRATION-

14 Case :-cv-00-rjb Document Filed // Page of over employee confusion arising from Marshal Banks business with [Legal Helpers] verses its business with NationWide, (another firm for which it acts as a marketer). Dkts., at and, at -. Fourth, it does not address the ARA provision which provides, [t]his agreement and all schedules are the complete and exclusive statement of the Agreement of the parties and supersede any proposal, prior agreement, oral or written, and any other communication related to this matter. Id., at. To the extent Marshal Banks moves to compel Plaintiff to arbitration based on the March, documents it acknowledges it sent her in error, the motion should be denied. III. ORDER It is hereby ORDERED that: Defendants Legal Helpers Dept Resolution, LLC s ( Legal Helper ) Renewed Motion to Compel Arbitration (Dkt. ), JEM Group, Inc. s ( JEM ) Renewed Motion to Compel Arbitration (Dkt. ), and Marshal Banks, LLC s ( Marshal Banks ) Joinder, in part, in Defendant JEM Group s Motion to Compel Arbitration (Dkt. ) ARE DENIED; Marshal Banks Motion to Compel Arbitration (Dkt. ) IS DENIED. The Clerk is directed to send uncertified copies of this Order to all counsel of record and to any party appearing pro se at said party s last known address. Dated this th day of October,. A ROBERT J. BRYAN United States District Judge ARBITRATION-