U.S. District Judge Madeline Cox Arleo. Photo: Carmen Natale/ALM

A federal judge in Newark has rebuffed a collection agency's attempt to compel arbitration in a dispute with a debtor based on an arbitration clause in Citibank's cardholder agreement.

New Jersey resident Nestor Saroza, whose underlying lawsuit claimed Missouri-based debt collector Client Services violated the Fair Debt Collection Practices Act, said the company could not compel arbitration under Citibank's cardmember agreement because it was a nonsignatory.

Client Services, which got involved after Citibank referred Saroza's Sears Charge Plus account to collection, claimed it should be able to compel arbitration because the cardmember agreement said it applied to "claims made by or against anyone connected with us or you or claiming through us or you, such as a co-applicant or authorized user of your account, an employee, agent, representative, affiliated company, predecessor or successor, heir, assignee, or trustee in bankruptcy." Client Services said its claims fall in this category because it is an entity "connected with" Citibank.

But U.S. District Judge Madeline Cox Arleo on Thursday rejected that argument, saying the cardmember agreement only permitted Citibank or Saroza to compel arbitration. If they had intended to allow a connected party to invoke arbitration, they could have included a clause to that effect, Arleo said. She cited a 2017 ruling from the U.S. Court of Appeals for the Third Circuit, which concerned an identically worded Citibank cardholder agreement.

In that case, a suit accused Sunoco of allegedly failing to honor a marketing promise for a discount on gasoline purchased with a Citibank card. The court said a "connected" entity that was not a signatory to the agreement could not compel arbitration, finding that "nowhere does the agreement provide for a third party, like Sunoco, the ability to elect arbitration or to move to compel arbitration."

Consumer litigation has seen a trend toward debt collectors seeking to push suits toward arbitration, said Lawrence Hersh, a solo practitioner in Rutherford who represents Saroza. If Client Services had been able to rely on the Citibank arbitration clause, a class action waiver in the clause would have required Saroza's case to proceed individually, rather than as a class suit, said Hersh.

Client Services also argued that it was a third-party beneficiary of the agreement, but Arleo disagreed. Applying South Dakota law, Arleo said only intentional third-party beneficiaries are permitted to enforce contracts to which they are not a party.

In addition, Client Services argued it was entitled to enforce the arbitration agreement because it is an agent of Citibank. Arleo rejected that reasoning, citing a 2019 Third Circuit decision, which requires Client Services to show that all Saroza's claims are based on substantially interdependent misconduct by Citibank and Client Services, or that Saroza's claim arises from the cardmember agreement. Since Client Services cannot make either showing, it cannot compel arbitration under the agency theory, Arleo said.

In July 2019, U.S. Magistrate Judge Steven Mannion recommended that Client Services' motion to compel arbitration be denied based on its failure to present sufficient evidence to invoke a presumption that Citibank mailed the cardholder agreement to Saroza. But in August 2019, Arleo vacated that recommendation, finding that CSI had demonstrated that Citibank had mailed the cardholder agreement to plaintiff and that he was bound by its terms. That ruling left open the question of whether Client Services could enforce the arbitration agreement, Arleo said.

Daniel McKenna of Ballard Spahr, representing Client Services, declined to comment on the ruling.