Education Finance Partners

The complaint alleges that defendants Education Finance Partners (a private student loan consolidation company), and Affiliated Computer Services, Inc. (the servicer of Plaintiff’s loan), apply an improper, undisclosed penalty (the “Amortization Penalty”) to Plaintiff’s private consolidation loan. The Amortization Penalty, which was not mentioned in Plaintiff’s promissory note and never disclosed to Plaintiff before he consolidated his loans, allows defendants to apply plaintiff’s entire payment to interest despite the existence of an amortization schedule that dictates the amount by which interest and principal are paid down. As a result of the Amortization Penalty, almost all of Plaintiff’s payments were applied entirely to interest. At this pace, Plaintiff will never be able to pay back his loan principal. On April 15, 2008, Plaintiff commenced this class action for violation of Cal. Bus. & Prof. Code §§17200 and 17500, for breach of contract and for common law fraud.

On June 5, 2008, defendants moved, under the Federal Arbitration Act, 9 U.S.C. §1, et. seq., to compel arbitration pursuant to an arbitration clause and class action waiver in Plaintiff’s promissory note. Plaintiff argued that the arbitration clause and class action waiver were unconscionable and therefore void as against public policy under California law. Since Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), it has been settled under California law that:

when [a class action] 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 when 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 sums of money, then . . . such waivers are unconscionable under California law and should not be enforced.

Relying on Discover Bank, Judge Griesa held that the complaint adequately alleged that the arbitration clause and class action waiver in Plaintiff’s promissory note were unconscionable and unenforceable under California law.

Discover Bank is one of many court decisions in recent years that has put an end to an unfair practice—the insertion of an arbitration clause and class action waiver into consumer contracts—that has the effect of denying redress to consumers who have been harmed in small amounts by large companies with substantial bargaining power. Many state courts have held that arbitration clauses and class action waivers are unenforceable in similar situations, and, recently, the Third Circuit held the same in Homa v. American Express Co., 558 F.3d 225 (3d Cir. 2009). Abbey Spanier is proud to contribute to the downfall of these unfair practices.

Affiliated Computer Services has appealed Judge Griesa’s decision.

If you would like more information concerning this case, or a copy of any court document, please contact:

Orin Kurtz
212.889.3700
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