National Arbitration Forum Alleged to have Extensive Ties to Collection Industry

Virginia consumers may not know it, but most of the contracts they sign with credit card companies, banks and retail lenders contain mandatory arbitration provisions that keep any dispute out of the courts. Disputes arising under the contract are resolved by a supposedly neutral arbitrator.

One of the largest arbitration agencies, the National Arbitration Forum, goes so far as to hold itself out to the public as operating like an impartial court system. Yesterday, Minnesota Attorney General Lori Swanson alleged that this is all a lie in a suit filed against NAF contending that it has "extensive ties to the collection industry--ties that it hides from the public."

The lawsuit claims that NAF, while trying to appear impartial, works behind the scenes to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and to appoint it to decide their disputes. The lawsuit alleges NAF does this to generate business--arbitration filings--which translates to revenue for itself.

How it allegedly did this is through a complicated web of interrelated corporations. Beginning in 2006 and through 2007, Accretive--a family of New York private equity funds--set up two transactions. In the first, it formed several equity funds that invested $42 million in NAF. In the second, three major debt collection law firms--Mann Bracken of Georgia, Wolpoff & Abramson of Maryland, and Eskanos & Adler of California--merged into one large national law firm called Mann Bracken. Accretive then purchased a majority interest in a debt collector called Axiant, which acquired the collections operations of Mann Bracken. Thus, Accretive gained control of one of the largest debt collection enterprises in the country and at the same time became affiliated with NAF. Accretive principals allegedly remained actively involved with NAF. What makes this worse is that in 2006, the NAF processed over 214,000 consumer collection arbitration claims. Of those 125,000, or nearly 60 percent, were filed by the three law firms that became Mann Bracken.

In short, the lawsuit assets complex financial relationship between NAF and the collection industry whose cases its arbitrators decide.

One executive wrote in an email attached to the complaint that "We remain deeply concerned about walling any deal off any deal from Mann Bracken. The shared ownership issue concerns us on many levels." No kidding. He also spoke of a Chinese wall, which presumably would separate Mann Bracken information from NAF, but that would hardly matter if NAF went about selecting arbitrators based on their performance favoring creditors. Unfortunately, the lawsuit suggests that's just what happened when Richard Neely, an NAF arbitrator--and newly retired Chief Justice of the West Virginia Supreme Court of Appeals-- stopped receiving cases after he denied attorneys' fees for creditors believing they were not allowed under West Virginia law.

If you've lost a case in an NAF forum, let me know.