Public Citizen and Arbitration: the case of Alex Karakhanov

by Ted Frank on June 3, 2008

Public Citizen’s attack on arbitration highlights the case of Alex Karakhanov. Public Citizen’s take on the anecdote demonstrates why Public Citizen has no business calling itself a consumer advocacy group.

Karakhanov used credit cards to buy a time-share in Mexico, and then changed his mind when he returned to the US. The seller refused to give him a refund. Karakhanov asked MBNA to cancel his $3972.20 credit-card payment; MBNA investigated, found that the seller had stood on its contractual rights, and resolved the dispute in favor of the seller. Instead of paying MBNA and suing the time-share, Karakhanov simply refused to pay his credit-card debt. MBNA shrugged and reported the failed debt payments, and other vendors rejected Karakhanov for credit (though Karakhanov was still able to successfully refinance his mortgage).

Karakhanov, who brought all of this on himself, responded by suing MBNA (rather than the time-share) for $200,000 over the $4,000 debt. MBNA successfully required Karakhanov to bring his lawsuit in front of an arbitrator, who found the Karakhanov claims meritless. Public Citizen’s complaint? NAF billed $8,175 for the arbitration (though MBNA agreed to pay the arbitration expense). But NAF’s arbitration fees are based on the size of the claim. Had Karakhanov asked for actual damages rather than a windfall, the fees would have only been $470.

This is not an example of the problems of arbitration, but an example of the problems of abusive litigation and why they raise costs to consumers. Perhaps Karakhanov is worse off because he had to arbitrate his claims; if he were allowed to bring his lawsuit in court, he could have imposed tens of thousands of dollars of legal expense on MBNA, and MBNA might have been successfully extorted into settling a meritless claim. (As it was, he sued MBNA again after losing the arbitration. The arbitration decision permitted the court to dismiss the case relatively cheaply.) But what is quite clear is that other MBNA customers are substantially better off because Karakhanov was forced to arbitrate his claims. While Karakhanov, without consequence, forced MBNA to spend thousands of dollars defending itself, the mandatory binding arbitration clause prevented Karakhanov from using his unreasonably litigious behavior to impose even more costs on reasonable consumers.

The Karakhanov example demonstrates why arbitration clauses must be mandatory to save consumers money: Karakhanov would have been able to extort MBNA if the arbitration clause was voluntary by insisting on wasting time and money in court, and MBNA would not be able to lower costs to consumers because it would not be able to guarantee that abusive litigants like Karakhanov could not impose gigantic legal expenses upon it. Arbitration clauses protect honest consumers at the expense of the dishonest ones.

If Public Citizen were interested in advocating for consumers rather than for trial lawyers, they would recognize that the Karakhanov case demonstrates the benefits of mandatory binding arbitration.

{ 21 comments }

1 Jenn 06.03.08 at 10:37 am

A consumer advocacy group, indeed. Thank you for calling Public Citizen out on this.

2 Mahlon 06.03.08 at 12:06 pm

I do not care for mandatory arbitration in consumer transactions at all. However, this was not a good case for anyone to use as a post-child for the abuses that can occur in the arbitration mills, like NAF. It does point out, though, a major problem should a consumer have a legitimate, big-dollar claim. Mandatory arbitration can be cost prohibitive. I know . . . I know! Let the consumer contract out of the provision.

3 Bumper 06.03.08 at 1:47 pm

Mahlon,

If the basis for arbitration is saving money, and we assume that at least some portion of that savings in going to the consumer in lower prices, how would you propose that the vendor recoup the difference. If I sell you a widget and my bean counters have deduced that if I require you to accept mandatory arbitration we save $10 per widget. So if the cost of being drug into court is, let’s say, ten times more than MA I would have to charge you $90 more for the same widget to break even. Is this how you think it should work? Do you see any potential problems at the cash register? Do you think anyone outside the ATLA (or whatever their acronym is this month) would pony up the difference in the price. Would you support loser pays to re-level the playing field?

Note: you can substitute service for widget and get a better representation of the actual cases, however, the one business class I took in college was taught by a professor who seemed to be obsessed with widgets, so in his honor I went with widgets.

4 dustydog 06.03.08 at 2:47 pm

MBNA was clearly in the wrong, in not honoring his request to cancel the debt. They are not a branch of government, to be weighing the legal merits in a contract dispute. They fradulently represented themselves to Karakhanov, by claiming to be his company, when in fact they are agents of sellers.

By acting as a debt-collection agency on behalf the time share, they deserved to have a jury find against them.

5 Mahlon 06.03.08 at 3:05 pm

I question the premise on which your comment is based. Proponents of arbitration tout cost savings. That sounds good in theory, but private arbitration can cost much more than traditional litigation, and I’m not talking about attorneys fees. My firm once handled a contractor’s claim against a municipality. The claim was worth about $400,000. The parties had contracted to arbitrate any disputes, and, in fact, had started down the arbitration path. They stopped, however, and agreed to let the judicial system handle the case. Why? The roughly $25,000 out of pocket for each side to pay the arbitration fees.

Maybe it’s me, but I think litigating disputes in court is not expensive, and is much more predictable than arbitration. Small cases – certainly those less than $25,000 – are quick and inexpensive to resolve in court. There are two reasons I think this. First, I assert claims which are clean. Second, I abhor the concept of the lawsuit lottery – the big score based on fictional injury. I restrain my clients’ expectations and when it comes time for my fees to be paid, I’m embarrassingly cheap.

My biggest problem with arbitration is the nearly complete lack of accountability. By and large, arbitrators need not follow the law. Well, in theory they should, but there is no reliable way to seek correction of legal errors, so the arbitrator can apply his own rules with impunity (at least absent some clearly bad conduct by the arbitrator). I once had a company admit to violating a consumer protection statute during an arbitration. The facts were admitted, the duty was clear. The arbitrator simply said. “I find no violation.” My client’s had no recourse.

Yes, there are plenty of abuses of the litigation system. I think the abusers should be drawn and quartered. Rule 11 isn’t used nearly often enough against those bringing frivolous cases. But not all of those attorneys represent consumers. There are many abuses by lawyers who work for corporations. (BTW, I do that, too.)It is not a one-sided problem. Frankly, the standards of the legal industry, as a whole, have fallen too low.

6 Ted Frank 06.03.08 at 4:42 pm

MBNA was clearly in the wrong, in not honoring his request to cancel the debt. … They fradulently represented themselves to Karakhanov, by claiming to be his company, when in fact they are agents of sellers.

You greatly misunderstand the nature of a credit-card agreement.

I question the premise on which your comment is based. Proponents of arbitration tout cost savings.

Again, if arbitration didn’t produce cost savings then vendors in a competitive market would have no incentive to ask for arbitration clauses. Empirically, the market has spoken, and firms that ask for mandatory arbitration apparently have a competitive advantage.

(Discover says in court papers that it does not have a mandatory arbitration clause. I have not confirmed this, but one notes that neither Discover nor Public Citizen advertises this fact.)

7 Mitchell B. Stoddard 06.03.08 at 7:40 pm

I was Alex’s attorney. Of course, you are free to analyze Alex’s case however you want, but I find your conclusions to be totally disingenuous. Alex paid $10,000 on two separate credit cards (roughly $6,000 on a Citibank card and $4,000 on his MBNA card). Citibank immediately agreed to charge back Alex’s account when requested; MBNA refused to do so. When you state that Alex “changed his mind” about the time-share contract, the fact is that Alex negotiated a 10-day right to rescind where the contract initially gave him only 3 days. Alex exercised his right to rescind within the 10-day negotiated timeframe, only to have it ignored by the time-share company. At this point, you could say that BOTH Alex and MBNA had been duped by the time-share company — Alex for signing the contract and MBNA for paying it $4,000. Since MBNA could not get the money back from the time-share company, Alex became a logical (and easy) alternative. Had MBNA filed a lawsuit against Alex to recover the money (which it had every right to do), Alex could have defended himself by offering evidence the time-share company breached the contract (or outright defrauded him). However, MBNA chose to report Alex to the credit bureaus instead, where Alex was powerless to defend himself.

If under these facts you honestly believe Alex should have paid $4,000 to MBNA, I see no possibility of having a constructive dialogue with you. By contrast, if you do not believe that Alex owed $4,000 to MBNA, then what could he have done if not sue MBNA to get the adverse credit item removed from his credit report? In this instance, you are correct that MBNA would not want the case heard in front of a jury; however, the costs of trial have nothing to do with it. It is the fact a jury would have been incensed by the way MBNA treated Alex (and whatever countless other customers) that was the motivating factor in MBNA’s decision to require binding arbitration. In short, a jury would have nailed MBNA to the wall for this type of behavior. THIS is why MBNA and countless other companies require arbitration.

Of course, some people are far too intellegent to ever get defrauded by a shady company (after all, Alex is only a mechanical engineer). Perhaps Alex should have negotiated a 30-day right to rescind instead of just a 10-day right to rescind (maybe then he could be forgiven for “changing his mind” about an ill-conceived, high pressure sales ploy). It is easy and often convenient to turn a bad result back on the consumer and point out what he or she could have done differently under the circumstances. If Alex was naive for signing the contract, MBNA was just as naive for paying money to a company it knew nothing about. It is not so much a matter of “fault” as it is about deciding who should bear the consequences of the mistake. If you believe the mistake was Alex’s alone, the lawsuit of course was frivolous. If, however, you are willing to admit that MBNA had a part in permitting the time-share company to perpetrate its scam on consumers, then you will have to drop the adjective in front of the word “lawsuit” (sorry).

During the arbitration hearing, even the arbitrator could barely believe his ears when we heard the MBNA representative testify that in order to properly cancel the contract, Alex had to travel back to Mexico to “personally hand-deliver” the cancellation notice to the time-share company. In other words, even though Alex had faxed AND Fed-Ex’d a written cancellation notice within the 10-day rescission period, MBNA was still justified in holding Alex to the contract because he failed to personally hand-deliver it. This, folks, was the testimony of MBNA’s representative, and, according to this nice lady, this is the long-standing policy at MBNA for EVERYONE ELSE who tries to cancel a similar contract. Sometimes, consumers ARE stupid and deserve what they get. By contrast, there really are times where companies act heavy handedly and deserve to be put in front of a jury. In case anyone has forgotten, a jury would not have been paid by MBNA for its time; NAF was paid handsomely. Maybe we just have to endure some frivolous lawsuits like Alex’s to make certain the meritorious ones get the fair hearing they deserve.

8 Ted Frank 06.03.08 at 8:32 pm

Mr. Stoddard seems to think a “rescission” is something different than “changing one’s mind.” Of course, that’s not so. (And, in any event, the Mexican time-share presented evidence to MBNA that Karakhanov did not meet the ten-day deadline.)

Mr. Stoddard takes the position that the credit card company has a legal responsibility to act as a parent to its cardholders, and vet every business the cardholder seeks to purchase goods or services from. The proposition is self-refuting, as it would make the entire credit-card business infeasible.

Mr. Stoddard also apparently takes the position that the banking laws permit courts to second-guess reasonable decisions of third-party credit card company investigations of disputes between purchasers and sellers. That’s clearly legally incorrect.

I don’t doubt that the Mexican time-share company was shady; “time-share” is virtually synonymous with “shady,” especially in a land with as thin a view of property rights and the rule of law as Mexico. Perhaps the time-share is even guilty of fraud or breach of contract. But that’s not the credit card company’s fault. I paid $22 for two tickets to see the awful Indiana Jones movie, and I’m quite unhappy with it, but I don’t indicate my dissatisfaction with George Lucas by stiffing my credit card company when I get the bill–even though it was surely in the credit card company’s power to figure out that I might be unhappy with the movie.

Karakhanov’s remedy, if any, was with the Mexican time-share. The top two responsible for blame were the time-share and Karakhanov, in one order or another. That Karakhanov instead sued the innocent third party–and sought a windfall–does indicate a socially wasteful lawsuit.

Citibank did pay Karakhanov back–but Citibank explicitly offers that sort of satisfaction-guaranteed protection as part of its services to cardholders. That is perhaps a reason for a consumer to choose a Citibank credit card over an MBNA credit card (though, of course, that Citibank service comes at the expense of cardholders in other ways), but it is not a reason to bring a lawsuit to add requirements to the MBNA contract that MBNA did not agree to or charge for, much less demand 50-fold damages.

(And even if MBNA were somehow in the wrong, Mr. Stoddard provides no justification for Karakhanov waiting until his debt was written off and reported to credit agencies to complain about MBNA continuing to bill him. Instead, Karakhanov played ostrich, and sought to blame MBNA for the problems caused by his own inaction.)

MBNA’s other customers were made better off because of the mandatory binding arbitration agreement. If a court had let this get to a jury when there was no breach of contract by MBNA, it would have spoken poorly of the court.

If Stoddard thinks consumers would be better off with credit cards that do not have mandatory binding arbitration agreements, nothing prevents him from presenting a business plan to investors to create such a product. But don’t deprive consumers like me of the choice to have cheaper products because we prefer the lower costs that pre-commitments to arbitration provide.

By contrast, if you do not believe that Alex owed $4,000 to MBNA, then what could he have done if not sue MBNA to get the adverse credit item removed from his credit report?

One can readily fix errors on a credit report. Of course, Karakhanov’s problem was that the credit report of a bad debt was not erroneous.

9 Tom Domonoske 06.03.08 at 9:59 pm

Dear Ted: You write in part “Karakhanov’s remedy, if any, was with the Mexican time-share.” I do not know if this means you are familiar with the federal laws regarding disputing credit card charges or if you have determined they do not apply in this situation.

As for the comment that MBNA investigated the situation, are you familiar with the Johnson v. MBNA case out of the United States District Court for the Eastern District of Virginia. The facts of that case, and the defense that MBNA asserted even up through the United States Court of Appeals for the Fourth Circuit is a good example of what MBNA means by the word “investigate.”

10 Ted Frank 06.03.08 at 10:22 pm

The FCRA requires MBNA to perform an investigation. They did so. Johnson v. MBNA, where the court held that MBNA did not check the application at issue and thus violated 15 U.S.C.A. § 1681i(a)(5)(A) when it failed to report to a credit agency that it could not verify the obligation, is not on point, and certainly does not stand for the proposition that every investigation MBNA ever performed again would be prospectively judged unreasonable. Indeed, the court explicitly addressed the issue here, which was that there was no civil liability for a credit card company failing to get an investigation correct, only that it perform a reasonable investigation; citing it is a non sequitur.

11 Mitchell B. Stoddard 06.04.08 at 9:42 am

I can quickly see this becoming a “tit-for-tat” with each side taking pot shots at the other. While I strongly disagree with 90% of the points raised by Mr. Frank, I wish to respond only to two of them. First, Alex did not stick his “head in the sand” waiting until the moment was ripe to file a lawsuit against MBNA. Rather, Alex did exacly the same thing he did with Citibank, which is dispute the charge and wait for the investigation to unfold. Citibank doesn’t offer specific services whereby it will write off a debt if you get defrauded by a Mexican time-share company. Rather, Citibank obviously realized Alex was right to dispute the debt and thereby acted accordingly by charging it off. Citibank behaved the way a good and decent corporate citizen is supposed to behave.

Second, the statement that the time-share company presented evidence to MBNA that Alex did not meet the 10-day deadline is patently false. As someone who was actually present at the arbitration hearing, I can state first-hand that MBNA never once tried to refute our evidence that Alex sent his rescission notice within 10 days (we had a copy of the FedEx delivery receipt to prove it). Rather, MBNA relied exclusively on its own interpretation of the contract that Alex was required to personally travel back to Mexico to hand-deliver his rescission notice to the time-share company. The MBNA representative admitted this interpretation was reached despite the fact she had no legal training and did not consult anyone in MBNA’s legal department in making it. When the arbitrator decided MBNA had acted “reasonably,” he was basing his decision on MBNA’s interpretation that the contract required Alex to personally travel back to Mexico to hand-deliver the rescission notice.

Mr. Frank, Alex lost his case in arbitration, so you should rejoice. The system worked as you envisioned it, so now you’re simply “piling on.” However, if MBNA could have gotten the same result in front of a jury and saved itself thousands of dollars in the process, wouldn’t that have been a wiser business model to follow? I would like to see your proof that consumer cases like Alex’s are more expensive to try in court than in arbitration (especially NAF arbitration). One last thing . . . even though the arbitrator ruled against Alex, he still ordered MBNA to pay the arbitration fees. Why do you think that is Mr. Frank?

12 Ted Frank 06.04.08 at 10:43 am

First, Alex did not stick his “head in the sand” waiting until the moment was ripe to file a lawsuit against MBNA.

This is absolutely false, as MBNA does not write off “bad debts” instantaneously. Karakhanov, faced with a bill from MBNA, refused to pay it. MBNA reported it as past due, then reported it as a bad debt. Then Karakhanov sued for $200,000 over the $4000 he had refused to pay.

Many other false statements in Mr. Stoddard’s account are refuted in the MBNA brief; shortly after the brief was filed, Karakhanov withdrew his lawsuit rather than risk sanctions.

even though the arbitrator ruled against Alex, he still ordered MBNA to pay the arbitration fees. Why do you think that is Mr. Frank?

Arbitrators typically split the baby in this fashion. It’s one of many reasons why consumers are better off with arbitrators than in court. Vendors put up with the baby-splitting because the procedure is so much more efficient and avoids the extortionate aspects of litigation.

I would like to see your proof that consumer cases like Alex’s are more expensive to try in court than in arbitration

The proof is in the market: companies would not choose the more expensive option of arbitrating if litigation were cheaper. But there’s also direct empirical evidence that we’ve regularly posted about on Overlawyered.

Alex lost his case in arbitration, so you should rejoice.

Unfortunately, the litigation lobby is misusing Alex’s case to try to deprive consumers of choice and lower prices. It’s important to set the record straight, since Public Citizen isn’t going to do it.

13 Taylor Lincoln 06.04.08 at 11:36 am

Alex Karakhanov’s case provides a vivid illustration of why we do need to preserve individuals’ access to the courts. In arbitration, he received an unfavorable ruling that was rife with hyper-technical legalisms and devoid of common sense. In court, a much more level playing field, he received a semblance of justice.

These are the facts of his case. In June 2002, on a visit to Mexico, Karakhanov purchased a time share for about $10,200. The contract permitted him to cancel and receive a full refund by providing notice in “writing at the domicile of the supplier” within 10 working days.

Karakhanov returned to the United States, consulted a lawyer and decided to cancel the contract. Six calendar days after making the purchase, he sent a cancellation notice to the time share company by fax and Federal Express. On the same day, Karakhanov notified credit card company MBNA (whose card he had used to make a portion of the purchase) that he was attempting to cancel the contract.

The time share company refused to accept Karakhanov’s FedEx letter until the 10-day deadline had passed and refused to cancel the contract. Karakhanov complained to the two credit card companies he used to make the purchase. Citibank charged its $6,200 portion back to the seller. MBNA balked at charging back its $3,972 portion, making the absurd argument that Karakhanov was obligated to *personally* deliver the cancellation letter to the time share company in Mexico.

Karakhanov set out to clear the debt. Rather than relenting on sticking Karakhanov with the roughly $4,000 charge, MBNA chose to chart a litigious course that would end up costing many times more than the amount at issue. MBNA first took advantage of a clause in its agreement with Karakhanov to force him to litigate the dispute in binding mandatory arbitration – a process to be handled by a private company hired by MBNA. The arbitrator ruled that MBNA was not liable. This is a precious bit of legalese he used to justify his decision: MBNA, the arbitrator wrote, had determined that the time share company “had a legally and factually colorable, if not necessarily conclusive or ethical, reason to disallow the cancellation under the terms of the contract.” (Fees for the arbitration alone amounted to more than $8,000.)

Karakhanov went to court to try to get the arbitration ruling tossed out. He put forth several arguments, starting with the fact that the written opinion was signed by a different arbitrator than the one who heard the case. MBNA’s defense of the arbitration ruling lent insight into how little protection the process affords individuals. For example, the MBNA’s lawyers cited precedent that an arbitration award “must be confirmed even if a court is convinced the arbitrator committed a serious error, so long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.” The arbitration ruling was upheld.

Karakhanov had one other avenue to seek redress: to challenge the reporting agencies that were holding his credit rating hostage. Here, he was not bound by an agreement to settle his dispute in arbitration. And it was through this process that Karakhanov was able to win a settlement. Subsequently, MBNA stopped billing him for the $3,972 debt.

And this case is the poster child for the fairness of binding mandatory arbitration?

14 Taylor Lincoln 06.04.08 at 11:39 am

Please note: the above comment is from Public Citizen, in response to the request that we set the record straight.

15 Mahlon 06.04.08 at 12:18 pm

Ted: I did not say there was not a cost savings for the credit card company. I said the cost of pursing many claims was cheaper in court. The real savings for the credit card companies is in the results. They can effectively stave off liability for legitimate claims using arbitration providers who make a living off of doing these arbitrations.

Let me be clear. Based on my personal experience, I do not believe, and cannot accept the assertion that arbitration of consumer disputes is fair to all parties.

If this was not a mandatory arbitration provision then my criticism is misplaced. Also, if this was a knowingly accepted contractual provision, I have no problem with it. My problem is with the guerrilla contracting methods employed by many of these companies. I realize that everyone should read before they accept, and I agree with that in principle. But let’s face it, government schools don;t turn out many truly literate graduates.

16 Ted Frank 06.04.08 at 1:58 pm

Public Citizen’s account (comments 13-14) continues to leave out critical facts, and simply lies when it fails to acknowledge that the reason Karakhanov was in an arbitration at all was because he sued the credit-card company for $200,000 over a $4,000 credit-card bill he refused to pay. Note how Public Citizen has no defense for this meritless claim and continues to falsely portray the arbitration as about the original dispute over the time-share.

The entire point of arbitration is that it avoids the expense of court proceedings. That advantage is nullified if the loser of an arbitration is permitted to relitigate the case in court. The failure of Public Citizen to honestly acknowledge this argument and instead make misleading demagogic claims about the standard of review of arbitration disserves the consumers for whom it purports to advocate, and demonstrates that it is effectively an Astroturf front for trial-lawyers.

Mahlon, again, empirical studies have shown that consumers do better in arbitration than in court on average. Because it’s the marginal consumer that vendors must satisfy, so long as some consumers are not illiterate, all consumers are protected in a free market. Just because some consumers are not “literate” as you put it is no reason to punish all consumers by depriving them of consumer choice.

17 Mitchell B. Stoddard 06.04.08 at 2:27 pm

The “lawsuit” that was withdrawn rather than facing sanctions was actually a motion to vacate the arbitration award. Why did we file a motion to vacate the arbitration award you may ask? Well, the arbitrator who arbitrated the case was MARK MITTLEMAN, a St. Louis attorney. However, the arbitration award itself was signed by MICHAEL MIDDLETON, a law professor at the University of Missouri (120 miles from St. Louis). Why did Michael Middleton sign an arbitration award that was decided by Mark Middleton? I still haven’t received an answer to that question (but I have my suspicions). In order to get to the bottom of this puzzle, I filed a motion to vacate the arbitration award with the Court and noticed up Prof. Middleton’s deposition. In the meantime, Mark Mittleton (the actual arbitrator) signed an amended arbitration award which did have his name on it. The Judge then granted MBNA’s motion to quash the notice of deposition of Prof. Middleton without explanation. At that point, MBNA threatened to go after me for sanctions unless I dismissed the case. After reading the tea leaves, I decided to cave and go away quitely into the sunset. It seems nobody but me found it significant that the wrong arbitrator (with a similar name) signed the arbitration award.

By the way,the name “Michael Middleton” was typed on the initial award, right above the signature line. I have always wondered by Mark Mittleman (who supposedly drafted the arbitration award) would type somebody’s else name on it and then give it to that other person to sign. I have also wondered why the person who received somebody’s else’s arbitration award would nevertheless sign it, even though he was never involved with the case. One thought has occurred to me though — perhaps somebody at NAF headquarters prepared the award and then sent it to Prof. Middleton, who was mistaken for Mark Mittleton, for signature. It would explain why a similar sounding name was placed on the arbitration award and sent to the wrong arbitrator. However, it does not explain whether the NAF employee who prepared the award also drafted substantive findings, and it certainly does not explain how Prof. Middleman could proceed to sign the award without being much more than a rubber stamp. If you honestly think about what happened, I think any objective person would be appalled.

NAF’s handling of this case smacks of fraud; however, since there was no “smoking gun” or whistle-blower, NAF got away with it. If you like the system as it is, you’ll always find ways to explain away that which is truly indefensible. It would just be nice to hear those on the other side admit for once that between consumers and corporations, they would rather see the consumer get screwed. This is EXACTLY what happened to Alex Karakhanov.

18 Tom Domonoske 06.04.08 at 2:32 pm

Dear Ted: I think we are miscommunicating. In response to my earlier post, you responded in part:

“The FCRA requires MBNA to perform an investigation. They did so. Johnson v. MBNA, . . . is not on point, and certainly does not stand for the proposition that every investigation MBNA ever performed again would be prospectively judged unreasonable. . . . there was no civil liability for a credit card company failing to get an investigation correct, only that it perform a reasonable investigation . . . .”

I respond as follows: When you write that the Johnson case is not on point, I am not sure what point you mean. When you write that MBNA is required to perform an investigation and that it did so, I wonder why you do not first identify what you later admit: that it is required to perform a “reasonable investigation.” You have not yet stated whether you believe MBNA’s investigation was reasonable or why, and whether it performed this reasonable investigation within the timeframes required by the Truth in Lending Act. This seems the point and I do hope you will address it. Your failure to state the facts about what investigation was done within the required timeframe makes me think we are miscommunicating about the point in issue. As for the Johnson case, the defense taken by MBNA does reveal what MBNA at that time thought was a reasonable investigation and thus does have relevance regarding its ideas on the point in issue. Will you take up the task of presenting the facts of the investigation that MBNA did within the required timeframe? By this I mean I am still not clear if during the required timeframe MBNA made the decision about the notice needing to be hand-delivered, or if that is an after-the-fact justification. Also, I do not how that required timeframe sits in relation to the defense mounted in Johnson.

Assuming that MBNA made the contract interpretation decision during the required timeframe, I am not sure why you have not posted the exact language in the contract that it was construing when it reached this decision. Such facts are the way to present that the required investigation was done. Without such facts, all that happens is that people talk past each other and miscommunicate.

19 Ted Frank 06.04.08 at 3:41 pm

Mr. Stoddard acknowledges that he withdrew his suit because feared his lawsuit against MBNA would not meet even the most minimal good-faith requirements of Rule 11 and that he faced sanctions for bringing his legal action. Since he wasn’t willing to put his money where his mouth was when it counted, I fail to see why we should give his arguments stronger weight here — especially when he continues to fail to address the centerpiece of my argument: consumers as a whole are better off because Karakhanov was not able to extort MBNA by bringing a $200,000 lawsuit (which Stoddard also fails to defend).

Tom, my original post cites and links to all of the relevant documents and speaks for itself.

20 Taylor Lincoln 06.04.08 at 5:36 pm

A follow-up from Public Citizen:

This whole debate seems to be dancing around the central issue which, as Tom Domonoske pointed out, is whether MBNA’s actions were “reasonable.” Is it a reasonable interpretation to assume that a company can avoid a cancellation notice on a contract by refusing to accept a letter or that language requiring written notice at the “domicile” of a provider means the letter must actually be *delivered* by the person asking for a cancellation?

If one accepts that these interpretations are not reasonable, then one must accept that MBNA brought this whole mess upon itself. The rest of this discussion centers on whether an individual stands a better chance of winning a just result from a neutral court or an arbitration firm hired by the business with whom he is in dispute. I would put forth that the court/arbitration question is not particularly difficult to answer.

MBNA’s defense relies hyper-technical interpretations to avoid accountability. Such an approach may be successful in avoiding liability but only after accepting great costs that could be avoided simply by taking a common sense approach to justice and fairness.

21 Ted Frank 06.04.08 at 5:44 pm

The central issue is that Karakhanov attempted to extort MBNA by bringing a meritless $200,000 lawsuit over a $4,000 dispute. Such lawsuits raise costs to all consumers. Other MBNA consumers benefited because of the mandatory binding arbitration agreement, which limited the ability of Karakhanov to impose costs on and extract money from an innocent third party over his decision to purchase a time share. (The fact that Karakhanov never sued the time share company, and instead pursued a variety of fruitless legal maneuvers against the deep pocket seeking a windfall, shows that he doesn’t think he is legally in the correct about the contract dispute.) Public Citizen continues to fail to address the central issue, and continues to side with trial lawyers over the consumers for whom they purport to advocate.

Public Citizen and Karakhanov’s attorneys have now had multiple opportunities to address this issue, and refuse to do so, instead repeating irrelevancies and trying to change the subject, and continuing to falsely claim that an American credit-card company stands in the shoes of everyone whom their customers do business with. We can safely assume that they have no justification for Karakhanov’s frivolous litigation and damages claim, and cede the point that mandatory binding arbitration agreements benefit consumers who don’t plan on bringing extortionate litigation.

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