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A Publication of the Georgia Office of Dispute Resolution

Case Watch: For Arbitrators
Contract to Arbitrate Can be Struck as Sanction for Discovery Abuses

The Georgia Court of Appeals has issued one in a series of opinions providing interpretations of Georgia’s Pay Day Lending laws.  In this case, Georgia Cash Am. Inc. v. Greene, A12A1015 (11/6/2012), the plaintiffs sued Georgia Cash and its president and CEO for allegedly charging interest on loans at a rate greater than the lawful interest rate.  This case was the fourth in a series related to these parties.

The trial court had denied Cash America’s motion for summary judgment on the issue of whether Cash America was the de facto lender of payday loans made to the plaintiffs.  Cash America is a Georgia company that holds a contract with the Community State Bank of South Dakota [CSB] to offer “payday” loans in Georgia.  The plaintiffs had borrowed money from Cash America/CSB on August 6, 2004, and subsequently had filed suit alleging conversion of funds through a predatory lending scheme in violation of Georgia law.  The loan documents identified CSB as the lender, but the complaint alleged that Cash America and CSB had entered into a sham partnership so that Cash America could avoid Georgia usury laws under a claim of federal preemption.  The plaintiffs claimed that Cash America was the de facto lender and that as a Georgia company, it was prohibited from making payday loans.  Further, the plaintiffs alleged that the loans were null and void as unconscionable contracts of adhesion.  See Georgia Cash America v. Strong, 286 Ga. App. 405 (649 S.E.2nd 548) (2007).

In the 2007 case, Cash America was held in contempt for discovery abuses, and the trial court struck a defense asserted by Cash America based on an arbitration requirement in the loan agreement.  Cash America moved to compel arbitration, and the trial court denied the motion.  The Georgia Court of Appeals dismissed Cash America’s appeal for lack of jurisdiction.  Later, the Court of Appeals granted a class action certification to the plaintiffs to represent Cash America borrowers in Georgia. 

At the trial level in this most recent case, Cash America filed a motion for summary judgment on all of the plaintiffs’ claims, and the plaintiffs opposed the motion by asserting that Cash America was the de facto lender.  Plaintiffs also asserted RICO claims.  The trail court denied Cash America’s motion and granted a partial summary judgment to the plaintiffs by determining that Cash America was, based on the evidence, the de facto lender.

In this most recent appeal, the court addressed the renewal of Cash America’s request to require arbitration of the issues.  The Court of Appeals confirmed that the trial court had struck the arbitration assertions as a sanction against Cash America for discovery abuses under OCGA § 9-11-37.  When in the subsequent hearing Cash America again filed a motion to compel arbitration based on the language in the loan documents, the trial court ruled that the motion to compel was moot, based on its prior order:

The plaintiffs argue that the trial court’s earlier ruling striking Cash America’s arbitration defense was an adjudication on the merits and carries a res judicata effect.  We agree.

Cash America cannot move to compel an action that the trial court foreclosed as a penalty.  In striking Cash America’s arbitration defense, the trial court essentially ruled that Cash America could not compel arbitration.  And this court’s affirmance of that ruling is binding in all subsequent proceedings.  See OCGA § 9-11-60 (h)

The Court of Appeals went on to find that it was an issue of fact whether Cash America was the de facto lender for loans made after the effective date of May 1, 2004, of the Payday Lending Act and was therefore in violation of the Georgia Code § 7-4-2 and 16-17-2(b)(4):

As noted by this court, [i]n an attempt to circumvent state usury laws, some payday lenders have contracted with federally chartered banks … to take advantage of federal banking laws that allow such banks to make loans across state lines without regard to that state’s interest and usury laws in “rent-a-charter” or “rent a bank” contracts.”        

The trial court had granted plaintiffs partial summary judgment, finding that Cash America retained 88 percent of the gross revenues and therefore retained “virtually all the benefits, risks and revenues of the loans and was responsible for virtually all the expenses and liabilities.” But the Court of Appeals declined to find based strictly on the evidence presented to the trail court that as a matter of law Cash America was the de facto lender:

Under this evidence a jury issue remains as to whether Cash America sought to obtain an amount greater than lawful interest prior to May 2004 and was therefore the true lender.

The Court of Appeals also affirmed the trial court’s denial of a defense motion for summary judgment as to the CEO’s personal liability.

Note to Georgia Arbitrators:  This case denies enforcement of an arbitration agreement in the contract between the parties because the parties had, prior to the assertion of the arbitration provision, been engaged in litigation and at some level apparently in the discovery process.  The trial court sanctioned Cash America for discovery abuses by refusing to enforce the arbitration agreement.  It is not clear in this decision how far the parties had gone into discovery and whether or not by their actions waived the arbitration provision.  Whether a waiver argument could have been made as well, i.e., the parties had engaged too much or too long in litigation to the point that they had waived their arbitration, is not clear.  Georgia courts have applied the waiver concept to override an arbitration provision where by their behaviors the parties have acted in contradiction to a desire to bring the matter to the arbitration forum.  Discovery is often the point in time at which Georgia courts will indicate waiver has occurred, but that line is not entirely clear.  Nor is it entirely clear whether the party disputing enforcement of an arbitration agreement must show prejudice.  While it is difficult to imagine a circumstance that would put the issue of waiver in front of an arbitrator for decision, arbitrators do have the power to determine as a preliminary matter a challenge to their jurisdiction and whether or not arbitration on the merits should proceed or not. The idea of suspending the arbitration provision as a sanction for litigation abuse is beyond the scope of arbitrator authority.  However, increasingly the authority of arbitrators to impose sanctions on parties who fail to follow the arbitration process as intended is being recognized in provider rules and by the courts.



John Allgood is of counsel at Ford & Harrison.  For more than 20 years he has arbitrated and mediated cases in commercial, employment, construction and securities law, as well as in real estate and anti-trust matters.  An adjunct professor of ADR at Emory University School of Law, he was a member of the U.S. Olympic Committee panel of arbitrators during the 1996 and 1998 Olympic Games.

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