A federal judge has ruled that a student loan company accused of hiding fees in loan agreements can’t force the lead Plaintiff in a putative class action into arbitration. Joshua G. Fensterstock, a 2003 Hofstra University School of Law graduate and now an associate at a law firm in Manhattan, sued the lender and a loan processing company in 2008 over terms in his student loan that he claimed would cost him thousands of unforeseen dollars. The Defendants, Education Finance Partners and Affiliated Computer Services, argued that the arbitration clause in the agreement should be enforced. But Judge Thomas P. Griesa found that the terms of the loan were unconscionable and he refused to compel arbitration.
After deciding that California law applied, Judge Griesa ruled that under the applicable law an arbitration clause requiring a consumer to waive the right to bring a class action is unconscionable:
• where the waiver is found in a consumer contract of adhesion;
• in a setting in which disputes between the contracting parties predictably involve small amounts of damages; and
• where it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small amounts of money.
Judge Griesa first found that Fensterstock’s promissory note was a contract of adhesion because it was presented on a “take it or leave it” basis with no opportunity to negotiate. The Defendants claimed that, as a lawyer, Fensterstock was sophisticated enough to have both understood the arbitration waiver and to have pursued other options. But the judge said there was no showing that Fensterstock could have obtained another consolidation loan that did not have a similar provision. This, he said in his order, was enough to show “procedural unconscionability in the context of class action waivers, where there is a high degree of substantive unconscionability because the waiver allows a company to reap a windfall from small injuries to individual consumers, while avoiding litigation.” The Defendants argued that damages would be large enough to allow individual actions. Judge Griesa didn’t accept that argument, saying:
This contention has no merit. The critical consideration is whether individual consumers will view their damages as sufficient to warrant the cost of individual litigation.
Finally, the judge said the complaint, alleging that a party using superior bargaining power to cheat a large number of consumers out of a small amount of money, was sufficient to justify a class. Education Finance Partners is now in bankruptcy. In 2007, the company agreed to pay $2.5 million to settle charges brought by Attorney General Andrew Cuomo over its business practices. Fensterstock is represented by Alan E. Sash, a very good lawyer with the firm of McLaughlin & Stern located in New York City.
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