Judge Splits the Baby in Credit Card Spat

SAN FRANCISCO (CN) - A federal judge dismissed in part a California woman's claims against affiliates of a prominent debt servicer for their alleged failure to settle her credit card debts.

Heather Newton, representing a putative class, claimed in 2011 that American Debt Services agreed to settle her debts for half the balance owed.

Newton said the company and its three affiliates, however, kept a hefty portion of her fees, allowed her to retrieve only about half of the money to pay a bank, and gave her a $70 refund.

Newton claimed she was originally contacted by American Debt Services, and received a welcome packet from Quality Support Services, plus account application and debit instructions from Global Client Solutions and Rocky Mountain Bank & Trust.

She said the companies told her to register for a "special purpose account" with Rocky Mountain, and to authorize Global Client Solutions to withdraw three, non-refundable fees from her banking account.

Newton said she eventually discovered that the defendants had not contacted any of her creditors, including Chase and Bank of America. So she terminated ADS's services and requested a refund.

The debt servicers refunded only $70 of $4,200 that Newton had paid them, she said, and she used $2,200 from her special purpose account to pay Bank of America. She said the remaining $1,900 was pocketed by the servicers.

U.S. District Judge Edward Chen denied ADS's motion to compel arbitration of the class action in 2012, citing three reasons.

"[T]he arbitration clause shortens the statute of limitations ... the arbitration clause would prevent a customer from recovering attorney's fees ... [and] the arbitration clause requires arbitration in Orange County, Calif., the home town of defendant ADS," Chen ruled.

"Taken together, the arbitration clause has three provisions that would impermissibly limit a customer's ability to bring a claim, whether by shortening the statute of limitations, forcing a customer to bear attorney's costs they would not have to under the statutes, or requiring the customer to arbitrate in a distant forum."

Following default by ADS and QSS, Newton filed a second amended complaint against defendants RMBT and Global.

Newton claimed RMBT violated all three prongs of California's Unfair Competition Law by breaching a 2009 cease and desist order between the bank and Federal Deposit Insurance Corporation.

The remaining co-defendants, RMBT and Global, aided and abetted ADS's and QSS's violation of California's Proraters Law, Newtown said.

On Tuesday, Chen dismissed the lawsuit in part, ruling Newton's "unlawful" and "unfairness" prong claims failed because the FDIC order could not be enforced based on lack of jurisdiction, or otherwise "borrowed" to serve as a predicate law violation under the Unfair Competition Law.

Newton's "fraudulent" prong claim failed, Chen said, because she did not specifically respond to the defendants' summary judgment motion.

"Newton argues that if this court finds (as it has) that it cannot adjudicate whether RMBT actually violated the FDIC order, that she be allowed to amend her complaint to allege that RMBT acted unfairly simply by continuing its business relationship with its co-defendants irrespective of the commands of the FDIC order," the 21-page order states. "Such an amendment could possibly salvage Newton's claim. But such an amendment cannot be permitted at this late stage of the litigation."

It was not all rosy for the defendants, as Chen denied their motion regarding Newton's aiding-and-abetting claims.

"Not only did the court previously find that both Global and RMBT can be held liable under the UCL for aiding-and-abetting ADS's and QSS's violations of the Proraters Law, the court further held that Newton had submitted sufficient evidence to proceed to trial on these claims," Chen wrote.

"RMBT and Global never filed a motion for reconsideration of this court's earlier orders. Their attempt to get a third bite at the apple is untimely, in violation of this court's standing orders, and ultimately unpersuasive."

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