Class Action Against Lending Club and WebBank Headed to Defeat

Financial Industry Alert

| January.31.2017

On Monday, a federal district court in the Southern District of New York granted a motion to compel arbitration in Bethune v. Lending Club Corporation, et al., a closely watched putative class action raising important issues for the fintech industry.

The plaintiff filed the complaint in this action in April 2016 against Lending Club and WebBank, challenging a loan obtained through Lending Club's online platform and issued by WebBank. He alleged, on behalf of himself and other similarly situated individuals, that the defendants violated state usury laws, state consumer protection laws, and the federal Racketeer Influenced and Corrupt Organizations Act by lending to borrowers at interest rates above the usury caps in the borrowers' home states. The plaintiff alleged that these laws applied notwithstanding WebBank's status as an FDIC-insured, state-chartered bank presumptively entitled to preemption of state usury laws. He relied on the Second Circuit's 2015 decision in Madden v. Midland Funding (discussed here and here)—which declined to apply federal preemption in the context of a non-bank holder of defaulted debt—and he further alleged that Lending Club, and not WebBank, was the "true lender" with respect to the loans at issue.

The defendants moved to compel arbitration based on the arbitration clause in the loan agreement between the plaintiff and WebBank. That clause provided that "[e]ither party to this Agreement, or LendingClub, may … require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration." And importantly, it defined "Claim" to encompass "any past, present, or future claim, dispute, or controversy … including … the validity or enforceability of this Arbitration Provision." The defendants argued that the arbitration clause required arbitration of all issues, including the enforceability of the arbitration clause itself.

The district court has now agreed, finding that the threshold question of arbitrability of the dispute was for the arbitrator to resolve. Noting the "emphatic federal policy in favor of arbitral dispute resolution," the court found that there was "clear and unmistakable evidence from the arbitration agreement" that the parties had intended to arbitrate the question of the arbitration clause's enforceability. The court also made quick work of the plaintiff's "perfunctory" suggestion that the arbitration agreement was itself unconscionable. And crucially, the court compelled arbitration on a purely individual—rather than class action—basis, citing language in the arbitration clause that specifically stated that "no arbitration shall proceed on a class, representative, or collective basis."

Under the Federal Arbitration Act, the court's decision is potentially subject to immediate appeal to the Second Circuit under § 1292(b). The decision, especially if it is affirmed, may provide increased certainty and comfort for the marketplace lending industry and investors.

  • Although the court resolved only the threshold question of whether the enforceability of the arbitration clause is a question for the court or an arbitral tribunal, the court's reading of the plain language of the arbitration clause and rejection of the plaintiff's unconscionability argument suggest that an arbitrator is likely to find the entire dispute arbitrable.
  • The right to arbitrate a dispute is, of course, not a resolution of the underlying legal claims. Typically, however, arbitration is a less expensive form of dispute resolution, with modified discovery rules, accelerated timetables, and confidentiality restrictions not applicable or available in federal court.
  • Also highly significant is the court's decision to compel arbitration only on an individual basis. By confining the dispute to the plaintiff's individual claims, the arbitration clause dramatically reduces the defendants' potential exposure even if the claims are resolved adversely.

We will continue to monitor this case if it proceeds to appeal.