In an 8-0 decision, the Texas Supreme Court ruled that a payday lender did not waive civil litigation arbitration agreements it had with customers by seeking criminal charges against them — landing some of the borrowers in jail.

The recent ruling in Henry v. Cash Biz blocked a group of plaintiffs from pursuing a class action suit in Texas state district court against Cash Biz, a now bankrupt payday lender that borrowers allege wrongfully used the criminal justice system to collect unpaid loans by filing false criminal charges.

As is normal practice with payday loans, Cash Biz required borrowers to provide a post-dated check in the amount of the loan plus the finance charge. If a borrower defaulted, Cash Biz deposited the post-dated check to satisfy the loan.

As part of the process for obtaining a loan, borrowers signed a written agreement containing an arbitration provision in which they agreed to give up their right to go to court over any dispute involving the loan and prevented the arbitrator from hearing class arbitration cases.

The plaintiffs in the case obtained loans from Cash Biz and subsequently defaulted on their repayment obligations. Cash Biz attempted to deposit their posted-dated checks but the checks were declined for insufficient funds.

Cash Biz later pursued bad check criminal charges against the borrowers. The criminal charges were eventually dismissed against some of the borrowers but several were arrested and detained and were assessed jail time as punishment.

The plaintiffs later filed a class action case against Cash Biz in a Texas state court alleging the payday lender wrongfully used the criminal justice system to collect the payday loans in violation of the Texas Finance Code, malicious prosecution and fraud among other things.

Cash Biz responded by filing a motion to compel arbitration under the contracts they had with the plaintiff borrowers in order to remove the case from state court.

The trial court denied Cash Biz's motion to compel arbitration after concluding the lender had waived its right to arbitration by filing criminal charges against the plaintiffs and participating in criminal trails to collect from them.

But San Antonio's Fourth Court of Appeals reversed the trial court's decision, reasoning that because the plaintiffs' actions fell within the scope of the arbitration agreement that Cash Biz's filing a criminal complaint was not an act that substantially invoked the judicial process.

And the Texas Supreme Court affirmed that Fourth Court's decision after concluding the record did not reflect that Cash Biz had actually filed criminal charges against borrowers. Rather, the high court noted an affidavit from a Cash Biz representative named David Flanagan who stated that “Cash Biz simply left the information entirely to the discretion of the district attorney” and any action was made “completely on his/her own.”

“The borrowers simply provided no evidence of any actions by Cash Biz related to the criminal charges other than evidence that Cash Biz was the complainant in them,” wrote Justice Phil Johnson. “This evidence alone does not meet the borrowers' burden to prove that Cash Biz substantially invoked the judicial process.”

Johnson also noted that their opinion conflicts with Vine v. PLS Financial Services, a 2017 per curiam decision from the U.S. Court of Appeals for the Fifth Circuit that reached the opposite conclusion. In that case the Fifth Circuit ruled that a payday lender had waived its right to an enforce arbitration provision it had with borrowers by submitting bad check affidavits to prosecuting attorneys.

“With due respect, and recognizing that it is important for federal and state law to be as consistent as possible in this area where we have concurrent jurisdiction, we agree with the dissenting justice in Vine,” Johnson wrote. “We conclude, as he did, that although some lenders may be 'gaming the system' by taking actions like the lenders took there and Cash Biz took here, more is required for waiver of a contractual right to arbitrate.”

Ed Hubbard, a Houston attorney who represents Cash Biz on appeal, said the Texas high court made the right call.

“This was an 8-0 opinion. As controversial as some people may have think this was, it really wasn't when it comes to enforcing arbitration law,'' Hubbard said.

“What you have to keep in perspective here is the criminal and civil systems are completely different. And these are two completely different matters,” Hubbard said of the bad-check cases and the plaintiffs civil complaint. “There are parallel civil and criminal proceedings that go on all of the time in this country and if the civil dispute is arbitrable — if it's subject to an arbitration agreement — it is arbitrable.''

Daniel Dutko, a Houston attorney who represents the borrowers in the case, did not return a call for comment.

It's now up to an arbitrator to decide whether the plaintiffs deserve recourse, Hubbard said.

“The arbitrator will decide the plaintiff's claim whether this was an improper method of debt collection — I would assume that would be the central issue in front of the arbitrator,'' he said.