Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_19-cv-01442/USCOURTS-casd-3_19-cv-01442-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 15:1679 Violation of Credit Repair Organizations Act

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UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA 

IRMA FERNANDEZ and PATRICIA 

FERNANDEZ, 

Plaintiffs, 

v. 

DEBT ASSISTANCE NETWORK, LLC, 

Defendant. 

 Case No. 19-cv-1442-MMA (JLB) 

ORDER DENYING DEFENDANT’S 

MOTION TO COMPEL 

ARBITRATION OR, 

ALTERNATIVELY, TO DISMISS 

FOR IMPROPER VENUE 

[Doc. No. 17] 

On August 1, 2019, Irma Fernandez and Patricia Fernandez (collectively, 

“Plaintiffs”) filed a Complaint against Debt Assistance Network, LLC (“Defendant”). 

Doc. No. 1 (“Compl.”).1

 Plaintiffs allege seven causes of action: (1) violation of the 

Credit Repair Organization Act (“CROA”); (2) violation of the California Credit Services 

Act (“CCSA”); (3) violation of the California Consumers Legal Remedies Act 

(“CLRA”); (4) violation of the California Unfair Competition Law (“UCL”); (5) breach 

of contract; (6) negligence; (7) negligent misrepresentation; and (8) intentional 

                                               

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 All citations refer to the pagination assigned by the CM/ECF system. 

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misrepresentation. Id. Defendant answered Plaintiffs’ allegations on November 13, 

2019. Doc. No. 10. 

On December 12, 2019, Defendant filed a motion to compel arbitration or, 

alternatively, to dismiss for improper venue pursuant to Federal Rule of Civil Procedure 

12(b)(3). Doc. No. 17. Relatedly, Defendant also seeks leave to file a motion for an 

award of attorneys’ fees, arguing that Plaintiffs have no good faith objection to 

arbitration. Id. at 20–22. Plaintiffs filed an opposition to Defendant’s motion, and 

Defendant replied. See Doc. Nos. 22, 23. The Court found the matter suitable for 

determination on the papers and without oral argument pursuant to Federal Rule of Civil 

Procedure 78(b) and Civil Local Rule 7.1.d.1. Doc. No. 24. 

For the reasons set forth below, the Court DENIES Defendant’s motion to compel 

arbitration and DENIES Defendant’s request for attorneys’ fees. 

I. BACKGROUND2

Plaintiffs purchased credit repair services from Defendant. Compl. ¶ 1. Defendant 

“represents that it provides debt relief, debt negotiation, and debt management services to 

Plaintiffs . . . to eliminate or reduce their debts.” Id. ¶ 2. Plaintiffs allege “Defendant 

operates an elaborate scheme to defraud debtors that preys on consumers who are 

drowning in credit card and unsecured debt.” Id. ¶ 6. 

 Before November 2016, Plaintiffs incurred debt to several creditors. Id. ¶ 21. On 

November 18, 2016, Plaintiffs signed “a contract with Defendant entitled ‘Consumer 

Tender Of Offer and Debt Assumption Agreement’ [‘Debt Agreement’] to receive 

Defendant’s assistance with debt settlement and to improve Plaintiffs’ consumer credit 

record, history, or rating with credit reporting agencies.” Id. ¶ 23; see also Doc. No. 17-1 

6–9. On the same day, Plaintiffs also signed an Automatic Clearing House Agreement 

                                               

2

 These facts are taken from the Complaint as well as related declarations and exhibits. 

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(“ACH Agreement”) with Secure Account Service (“SAS”) titled “Account Agreement 

and Disclosure Statement.” Doc. No. 17-1 at 11–12. 

A declaration signed by a principal member of Defendant provides that 

Defendant’s “acceptance of Plaintiffs’ offer was conditioned on Plaintiffs agreeing to 

execute both the [Debt Agreement] and the ACH Agreement.” Id. at 3. Further, without 

the ACH Agreement, Defendant claims that it “would not have received any payments 

from Plaintiffs.” Id. The ACH’s “Scope of Services and Limitation of Liability” section 

states that “SAS is a third-party processor.” Id. The section continues: “[SAS] is not a 

party to the agreement between Client and [the Referring Company] and SAS does not 

participate in the underlying debt negotiations.” Id. 

The Debt Agreement states “[a]ll sums paid according to the terms shown on the 

ACH AGREEMENT, which is included as part of this AGREEMENT.” Id. at 8. The 

ACH Agreement contains the following arbitration clause: 

6. BINDING ARBITRATION, GOVERNING LAW, AND 

ATTORNEY’S FEES. Client agrees that any dispute or claim arising out 

of this Agreement or otherwise, related to SAS’s services to Client, shall be 

resolved through binding arbitration with the American Arbitration 

Association in Phoenix, Arizona and the decision of the arbitrator shall be 

final and enforceable by a court of competent jurisdiction. Client further 

agrees that this Agreement, and any claims it may bring against SAS, shall 

be construed according to the laws of the State of Arizona. Further, Client 

agrees that the successful party to any action between SAS and Client shall 

be entitled to the recovery of its reasonable attorneys’ fees and costs. 

Id. at 11. 

II. LEGAL STANDARD

The Federal Arbitration Act (“FAA”) permits “[a] party aggrieved by the alleged 

failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration 

[to] petition any United States district court . . . for an order directing that . . . arbitration 

proceed in the manner provided for in [the arbitration] agreement.” 9 U.S.C. § 4. Upon a 

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showing that a party has failed to comply with a valid arbitration agreement, the district 

court must issue an order compelling arbitration. Id. The Supreme Court has stated that 

the FAA espouses a general policy favoring arbitration agreements. AT&T Mobility v. 

Concepcion, 563 U.S. 333, 339 (2011). Federal courts are required to rigorously enforce 

an agreement to arbitrate. See id. 

 In determining whether to compel a party to arbitration, the Court may not review 

the merits of the dispute; rather, the Court’s role under the FAA is limited to determining 

“(1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the 

agreement encompasses the dispute at issue.” Kilgore v. KeyBank, Nat. Ass’n, 718 F.3d 

1052, 1058 (9th Cir. 2013) (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 

F.3d 1126, 1130 (9th Cir. 2000)); see also 9 U.S.C. § 4. If the Court finds that the 

answers to both questions are “yes,” then the Court must compel arbitration. Chiron 

Corp., Inc., 207 F.3d at 1130. A court’s circumscribed role in making these inquiries 

“leav[es] the merits of the claim and any defenses to the arbitrator.” Id. (quoting 

Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 478 (9th Cir. 1991). 

As to the first inquiry—whether the parties agreed to arbitrate—courts adopt a 

standard similar to summary judgment. See Three Valleys Mun. Water Dist. v. E.F. 

Hutton & Co., 925 F.2d 1136, 1141 (9th Cir. 1991); Lopez v. Terra’s Kitchen, LLC, 331 

F. Supp. 3d 1092, 1097 (S.D. Cal. 2018); Cordas v. Uber Techs., Inc., 228 F. Supp. 3d 

985, 988 (N.D. Cal. 2017). Agreements to arbitrate are “valid, irrevocable, and 

enforceable, save upon such grounds as exist at law or in equity for the revocation of any 

contract.” 9 U.S.C. § 2. Courts must apply ordinary state law principles in determining 

whether to invalidate an agreement to arbitrate. Ferguson v. Countrywide Credit Indus., 

Inc., 298 F.3d 778, 782 (9th Cir. 2002). As such, arbitration agreements may be 

“invalidated by ‘generally applicable contract defenses, such as fraud, duress, or 

unconscionability.’” Concepcion, 563 U.S. at 339–41 (quoting Doctor’s Assocs., Inc. v. 

Casarotto, 517 U.S. 681, 687 (1996)). In assessing whether there is an agreement to 

arbitrate, the presumption and policy in favor of arbitration does not apply, and instead, 

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the issue is determined through standard contract law principles. See Comer v. Micor, 

Inc., 436 F.3d 1098, 1104 n.11 (9th Cir. 2006); see also E.E.O.C. v. Waffle House, Inc., 

534 U.S. 279, 293 (2002). 

As to the second inquiry—whether the agreement encompasses the dispute at 

issue—courts resolve any “ambiguities as to the scope of the arbitration clause itself . . . 

in favor of arbitration.” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 

489 U.S. 468, 475–76 (1989); see also Moses H. Cone Mem’l Hosp. v. Mercury Constr. 

Corp., 460 U.S. 1, 24–25 (1983) (“[A]ny doubts concerning the scope of arbitrable issues 

should be resolved in favor of arbitration, whether the problem at hand is the construction 

of the contract language itself or an allegation of waiver, delay, or a like defense to 

arbitrability.”). Moreover, “the party resisting arbitration bears the burden of proving 

that the claims at issue are unsuitable for arbitration.” Green Tree Fin. Corp.-Alabama v. 

Randolph, 531 U.S. 79, 91 (2000). Absent contractual ambiguity, “it is the language of 

the contract that defines the scope of disputes subject to arbitration.” Waffle House, Inc., 

534 U.S. at 289. 

III. DISCUSSION

A. Evidentiary Objections

 As a preliminary matter, Defendant objects to the Declaration of Irma Fernandez 

(Doc. No. 22-2) and Declaration of Patricia Fernandez (Doc. No. 22-1) provided in 

support of Plaintiffs’ opposition brief. Doc. No. 23-1; Doc. No. 23-2. Both declarations 

contain almost identical content. Compare Doc. No. 22-1, with Doc. No. 22-2. 

Defendant argues that the content is “irrelevant, argumentative, speculative and selfserving, lacks foundation, and constitutes improper legal opinion.” Doc. No. 23-1 at 4–6; 

Doc. No. 23-2 at 4–6. 

 As noted above, in addressing whether there is a valid arbitration agreement, the 

Court adopts a standard akin to summary judgment. See Three Valleys Mun. Water Dist., 

925 F.2d at 114; Lopez, 331 F. Supp. 3d at 1097. “A trial court can only consider 

admissible evidence in ruling on a motion for summary judgment.” Orr v. Bank of Am., 

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NT & SA, 285 F.3d 764, 773 (9th Cir. 2002); see also Fed. R. Civ. P. 56(c). However, 

courts will consider evidence with content that would be admissible at trial even if the 

form of the evidence would be inadmissible. See Celotex Corp. v. Catrett, 477 U.S. 317, 

324 (1986); Fraser v. Goodale, 342 F.3d 1032, 1036–37 (9th Cir. 2003) (admitting a 

diary in considering summary judgment where its contents were within the author’s 

personal knowledge and could be admitted in several ways at trial despite a hearsay 

objection). “That an affidavit is self-serving bears on its credibility, not on its 

cognizability for purposes of establishing a genuine issue of material fact.” United States 

v. Shumway, 199 F.3d 1093, 1104 (9th Cir. 1999). “Only in certain instances—such as 

when a declaration ‘state[s] only conclusions, and not “such facts as would be admissible 

in evidence,”’—can a court disregard a self[-]serving declaration for purposes of 

summary judgment.” S.E.C. v. Phan, 500 F.3d 895, 909 (9th Cir. 2007) (quoting 

Shumway, 199 F.3d at 1104). Moreover, “‘objections to evidence on the ground that it is 

irrelevant, speculative, and/or argumentative, or that it constitutes an improper legal 

conclusion are all duplicative of the summary judgment standard itself’ and unnecessary 

to consider here.” Holt v. Noble House Hotels & Resort, Ltd, 370 F. Supp. 3d 1158, 1164 

(S.D. Cal. 2019) (quoting Burch v. Regents of Univ. of Cal., 433 F. Supp. 2d 1110, 1119 

(E.D. Cal. 2006)). 

The declarations set forth Plaintiffs’ present individual understanding of the 

contracts as it relates back to the execution of the contracts. They are clearly self-serving 

to persuade the Court to find no valid arbitration agreement exists between Plaintiffs and 

Defendant. However, self-serving statements go to credibility—not admissibility. See

Shumway, 199 F.3d at 1104. And Defendant’s arguments based on relevance, 

speculation, argument, and legal opinion are unnecessary to consider here because they 

are “duplicative of the summary judgment standard itself.” Holt, 370 F. Supp. 3d at 1164 

(quoting Burch, 433 F. Supp. 2d at 1119). Additionally, the Court finds “it is 

unnecessary to expressly rule on many of the objections because they would not alter the 

Court’s resolution” of the present motion. White v. Home Depot U.S.A. Inc., No. 17-CVCase 3:19-cv-01442-MMA-JLB Document 25 Filed 02/06/20 PageID.<pageID> Page 6 of 22
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00752-BAS-AGS, 2019 WL 1171163, at *1 (S.D. Cal. Mar. 13, 2019). Accordingly, the 

Court OVERRULES Defendant’s evidentiary objections. 

B. Choice of Law 

Plaintiffs assert that enforcing the Arizona forum selection clause and choice of 

law clause “violate California public policy, jeopardize due process, and deprive 

Plaintiffs access to justice in the appropriate forum.” Doc. No. 22 at 24. Plaintiffs 

elaborate that an Arizona forum would deprive Plaintiffs of rights provided under 

California law, would have no relation to Defendant, and would have no nexus between 

Defendant’s conduct and Plaintiffs’ claims. Id. Defendant replies that the Arizona forum 

selection clause and choice of law clause do not violate California public policy. Doc. 

No. 23 at 10. Defendant asserts that Plaintiffs “have made no showing that (1) applying 

Arizona’s law ‘is contrary to a fundamental policy of California,’ or that (2) ‘California 

has a materially greater interest than [Arizona] in resolution of the issue.’” Id. at 10 

(quoting Ruiz v. Affinity Logistics Corp., 667 F.3d 1318, 1323 (9th Cir. 2012)). 

Defendant further argues that Plaintiffs have failed to show that Arizona law directly 

conflicts with California law. Id. Arguing that Plaintiffs merely assert “that venue would 

have been appropriate in California,” Defendant emphasizes that “Plaintiffs have failed to 

show that there is anything unfair or unreasonable about the mandatory choice of forum 

clause.” Id. at 11. 

“Before a federal court may apply state-law principles to determine the validity of 

an arbitration agreement, it must determine which state’s laws to apply. It makes this 

determination using the choice-of-law rules of the forum state . . . .” Pokorny v. Quixtar, 

Inc., 601 F.3d 987, 994 (9th Cir. 2010) (citing Paracor Fin., Inc. v. Gen. Elec. Capital 

Corp., 96 F.3d 1151, 1164 (9th Cir. 1996)). 

Here, the Court notes that despite Defendant advocating for the validity of the 

Arizona forum selection and choice of law clauses, it relies upon California law in 

arguing the merits of its motion. Regardless, the Court must apply California’s choice of 

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law rules to determine whether to apply California or Arizona law. See Bridge Fund 

Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir. 2010). 

 “When an agreement contains a choice of law provision, California courts apply 

the parties’ choice of law unless the analytical approach articulated in § 187(2) of the 

Restatement (Second) of Conflict of Laws . . . dictates a different result.” Id. (quoting 

Hoffman v. Citibank (S.D.), N.A., 546 F.3d 1078, 1082 (9th Cir. 2008) (per curiam)). 

Under the Restatement approach, the court must first determine 

(1) whether the chosen state has a substantial relationship to the parties or 

their transaction, or (2) whether there is any other reasonable basis for the 

parties’ choice of law. If neither of these tests is met, that is the end of the 

inquiry, and the court need not enforce the parties’ choice of law. If, 

however, either test is met, the court must next determine whether the 

chosen state’s law is contrary to a fundamental policy of California. If there 

is no such conflict, the court shall enforce the parties’ choice of law. If, 

however, there is a fundamental conflict with California law, the court must 

then determine whether California has a “materially greater interest than the 

chosen state in the determination of the particular issue . . . .” If California 

has a materially greater interest than the chosen state, the choice of law shall 

not be enforced, for the obvious reason that in such circumstance we will 

decline to enforce a law contrary to this state’s fundamental policy. 

Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1152 (Cal. 1992) (footnotes 

omitted) (quoting Restatement (Second) of Conflict of Laws § 187(2) (Am. Law Inst. 

1971)). 

 Here, the ACH Agreement contains a choice of law provision: “Client further 

agrees that this Agreement, and any claims it may bring against SAS, shall be construed 

according to the laws of the State of Arizona.” Doc. No. 17-1 at 11. Given the choice of 

law provision, the Court applies Arizona law regarding claims brought under the ACH 

Agreement unless the Restatement approach requires a different result. See Bridge Fund 

Capital Corp., 622 F.3d at 1002 (quoting Nedlloyd Lines B.V., 834 P.2d at 1152). 

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 Under the Restatement approach, Arizona has a substantial relationship to the 

transaction because SAS, a signatory of the ACH Agreement, is based in Arizona. Thus, 

given that one of the preliminary tests is met, the Court must now determine whether 

Arizona law is “is contrary to a fundamental policy of California.” Nedlloyd Lines B.V., 

834 P.2d at 1152. Plaintiffs fail to adequately cite to an established, concrete policy that 

conflicts with Arizona law. Relatedly, Plaintiffs further fail to cite relevant Arizona law 

to contrast against California law even if it had cited to a fundamental California policy. 

Similarly, the Court finds Plaintiffs’ argument that “California has the greater material 

interest in protecting the rights of its citizens,” Doc. No. 22 at 24, is vague and 

conclusory, and it thus fails to persuade the Court that California law should apply 

instead of Arizona law. Because Plaintiffs fail to demonstrate a conflict between 

California and Arizona law, the Court must enforce the Arizona choice of law provision 

under the Restatement approach. 

 Because the Court finds that the choice of law provision and the Restatement 

approach reach the same result, the Court would apply Arizona law. However, because 

the arbitration clause falls outside the scope of the dispute at issue, see infra Section 

III.D, the Court does not apply the Arizona choice of law provision or the forum selection 

clause. Without an applicable choice of law provision, the Court applies California 

contract law to determine whether a valid arbitration agreement exists. See Republic 

Pictures Corp. v. Rogers, 213 F.2d 662, 664 (9th Cir. 1954) (“Being a diversity of 

citizenship case, the contracts will be interpreted so as to reach the same results as would 

be reached in a California court.”). 

C. Whether a Valid Arbitration Agreement Exists 

 Defendant argues that the parties entered into a valid arbitration agreement. Doc. 

No. 17 at 15–16. Defendant points to the Debt Agreement signed by Plaintiffs and 

argues that the Debt Agreement incorporates the ACH Agreement, which Plaintiffs 

executed the same day as the Debt Agreement. Doc. No. 17 at 15; Doc. No. 17-1 at 9, 

12. Defendant further argues that it is a third-party beneficiary of the ACH Agreement 

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and thus can enforce the ACH Agreement. Plaintiffs respond that no valid agreement 

exists between the parties. Doc. No. 22 at 11. Specifically, Plaintiffs argue that there 

was no mutual assent between Plaintiffs and Defendant, incorporation of the AHC 

Agreement into the Debt Agreement does not allow Defendant to “step into the shoes of 

SAS” to enforce the arbitration clause, Defendant is not a third-party beneficiary of the 

ACH Agreement, and the arbitration clause is unenforceable because it is unconscionable 

and violates California public policy. Doc. No. 22 at 22, 19, 23. 

1. Whether the ACH Agreement is Incorporated into the Debt Agreement 

Under contract incorporation, “[a] secondary document becomes part of a contract 

as though recited verbatim when it is incorporated into the contract by reference provided 

that the terms of the incorporated document are readily available to the other party.” 

King v. Larsen Realty, Inc., 121 Cal. App. 3d 349, 357 (1981); see also Incorporation by 

Reference, Black’s Law Dictionary (11th ed. 2019). Incorporation of a secondary 

document into a contract by reference requires that “[1] the reference must be clear and 

unequivocal, [2] the reference must be called to the attention of the other party and he 

must consent thereto, and [3] the terms of the incorporated document must be known or 

easily available to the contracting parties.” Wolschlager v. Fid. Nat’l Title Ins. Co., 4 

Cal. Rptr. 3d 179, 184 (Ct. App. 2003) (quoting Shaw v. Regents of Univ. of California, 

58 Cal. App. 4th 44, 54 (1997)). Incorporation by reference applies in the arbitration 

context. E.g., Valley Casework, Inc. v. Comfort Constr., Inc., 76 Cal. App. 4th 1013, 

1022 (1999) (“Where a construction contract or subcontract incorporates the arbitration 

procedures found in the related contract, arbitration may be ordered.”). 

 Here, the Court finds that the Debt Agreement incorporated the ACH Agreement. 

First, the Debt Agreement clearly and unequivocally refers to the ACH Agreement in 

stating “[a]ll sums paid according to the terms shown on the ACH AGREEMENT, which 

is included as part of this AGREEMENT.” Doc. No. 17-1 at 8. Second, the 

incorporation clause is called to the attention of the party because not only does the 

clause include all-capitalized words and underlining but also the incorporation was done 

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as part of the signed and executed Debt Agreement. See id. at 8–9; see also King, 121 

Cal. App. 3d at 358 (“As a general rule, a party is bound by the provisions of an 

agreement which he signs, even though he does not read them and signs unaware of their 

existence.”). Third, the terms of the incorporated ACH Agreement were known and 

available to the contracting parties given that Plaintiffs signed and executed the ACH 

Agreement the same day as the Debt Agreement. See Doc. No. 17-1 at 9, 12. 

Therefore, the Court finds that the Debt Agreement incorporates the terms of the 

ACH Agreement. The Court must now assess (1) whether the terms of the arbitration 

clause apply to the contractual relationship between Plaintiffs and Defendant or only 

between Plaintiffs and SAS or, if the latter scenario be the case, (2) whether Defendant 

can enforce the arbitration clause as a third-party beneficiary. 

2. Whether the Arbitration Clause Applies to the Contractual Relationship 

Between Plaintiffs and Defendant 

The first step to determine whether to compel arbitration is not merely to uncover 

whether there is a contract between the parties but, rather, “whether a valid agreement to 

arbitrate exists.” Kilgore, 718 F.3d at 1058 (emphasis added) (quoting Chiron Corp., 

207 F.3d at 1130). Therefore, the Court must now determine whether the terms of the 

ACH Agreement’s arbitration clause cover the Plaintiffs-Defendant relationship and 

Plaintiffs-SAS relationship or only the Plaintiffs-SAS relationship. 

Defendant argues that because the Debt Agreement’s incorporation clause 

“unequivocally places zero restriction on the parts of the ACH Agreement that are 

incorporated in the Debt Assumption Agreement, the Court must find that the Debt 

Assumption Agreement incorporated the entire document, Arbitration Agreement and 

all.” Doc. No. 17 at 15. Defendant appears to argue that the clause is not limited to the 

Plaintiffs-SAS relationship and, instead, extends broader to be include the PlaintiffsDefendant relationship through the Debt Agreement’s incorporation provision. See id. at 

16 (“The Arbitration Agreement covers ‘any dispute’ arising out of the ACH Agreement 

‘or otherwise’ that is ‘related’ to the services described in the ACH Agreement.”). It 

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argues that this broadness makes the arbitration clause applicable to the PlaintiffsDefendant relationship because the ACH Agreement was “designed to facilitate the 

exchange of consideration between the Plaintiffs and [Defendant].” Id. Plaintiffs counter 

that 

even if Defendant were to successfully incorporate the SAS ACH 

Agreement into its own separate contract, the arbitration provision in the 

SAS ACH Agreement is unambiguous in its narrowly tailored terms which 

clearly and repetitively state that the arbitration provision concerns disputes 

or claims “related to SAS’s services to [Plaintiffs]” and their claims against 

SAS. 

Doc. No. 22 at 19. 

 In another case involving the same Defendant and a similar—if not identical—

agreement to the one before this Court, the court ordered arbitration after finding that the 

debt agreement between defendant and plaintiff incorporated the “entire” SAS agreement 

between SAS and plaintiff, including the arbitration clause. Hunt v. Debt Assistance 

Network, LLC, No. 1:18CV644, 2019 WL 4647008, at *4 (M.D.N.C. Sept. 24, 2019) 

(applying North Carolina contract law). However, the court there failed to address 

whether the arbitration clause covered the specific relationship between defendant and 

plaintiff. See id. at 4–5. Instead, the court proceeded to determine whether the 

arbitration clause covered the dispute at issue after finding that incorporation satisfied the 

first inquiry of whether there was an agreement to arbitrate. See id. 

 Here, the Court finds that the plain language of the arbitration clause governs the 

relationship between SAS and Plaintiff, defined as “Client” in the ACH Agreement. The 

Court further finds that the arbitration clause does not govern the Plaintiffs-Defendant 

relationship. The arbitration clause begins by stating the following: “Client agrees that 

any dispute or claim arising out of this Agreement or otherwise, related to SAS’s services

to Client, shall be resolved through binding arbitration . . . .” Doc. No. 17-1 at 11 

(emphasis added). The Court finds that “this Agreement” refers to the ACH Agreement 

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and does not refer to the Debt Agreement despite incorporation. Even though the Debt 

Agreement incorporates the terms of the ACH Agreement, the terms within the 

arbitration clause do not govern the Plaintiffs-Defendant relationship because the terms 

themselves are narrow and apply to payment processing by SAS. This finding is 

underscored by the language “otherwise, related to SAS’s services.” Id. Given the 

construction of the clause, “SAS’s services” appears to be the broadening language of the 

clause. However, it is telling that the broadness is explicitly confined to the relationship 

with SAS. The remainder of the contract section further supports this limited 

interpretation of the arbitration clause given the similar language used in the choice of 

law and attorneys’ fees clauses. See id.

 The Court finds Defendant’s argument to the contrary unavailing. Defendant 

argues Plaintiffs’ contention that the arbitration clause only covers claims against SAS 

“contradicts the broad, unambiguous language that demonstrates the expansive scope of 

the Arbitration Agreement.” Doc. No. 23 at 4; see also Doc. No. 17 at 17. Defendant 

emphasizes that “Plaintiffs’ claims relate . . . to payments made to [Defendant]— 

payments that could not have been made possible without the ACH Agreement.” Doc. 

No. 17 at 17; Doc. No. 23 at 4. The Court agrees with Defendant that the language of the 

arbitration clause sweeps broadly. However, its scope is ultimately limited to Plaintiffs’ 

relationship with SAS, where SAS operated as a “third-party processor” that facilitated 

Plaintiffs’ relationship with Defendant. Doc. No. 17-1 at 11. 

 Therefore, the Court finds that there is no valid arbitration agreement between 

Plaintiffs and Defendant—unless the Court finds Defendant can enforce the agreement as 

a third-party beneficiary. See infra Section III.C.3. 

3. Whether Defendant Can Enforce the Arbitration Clause as a Third-Party 

Beneficiary

Alternatively, the Court may find that the arbitration clause’s terms can be 

enforced by Defendant if the Defendant is a third-party beneficiary of the ACH 

Agreement. Plaintiffs argue that “Defendant has not and cannot make any showing that 

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the arbitration provision in [SAS’s] contract was intended to confer any benefit upon 

Defendant.” Doc. No. 22 at 18. Defendant responds in its reply that the ACH Agreement 

was designed to facilitate the Debt Agreement and that a third-party beneficiary is not 

required to be expressly mentioned in the contract. Doc. No. 23 at 5–6. 

Third-party beneficiaries can enforce an arbitration provision. Cohen v. TNP 2008 

Participating Notes Program, LLC, 243 Cal. Rptr. 3d 340, 355 (Ct. App. 2019) (citing 

Smith v. Microskills San Diego L.P., 63 Cal. Rptr. 3d 608, 613 (Ct. App. 2007)). “To sue 

as a third-party beneficiary of a contract, the third party must show that the contract 

reflects the express or implied intention of the parties to the contract to benefit the third 

party.” Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d 1206, 1211 (9th 

Cir. 1999), opinion amended on denial of rehg, 203 F.3d 1175 (9th Cir. 2000). “[T]hird 

party beneficiary principles do not require that the person to be benefited be named in the 

contract, but rather allow the third party to qualify as a contract beneficiary if ‘the 

contracting parties must have intended to benefit that individual and such intent appears 

on the terms of the agreement.’” San Diego Hous. Comm’n v. Indus. Indem. Co., 95 Cal. 

App. 4th 669, 685 (2002) (quoting Harper v. Wausau Ins. Co., 56 Cal. App. 4th 1079, 

1086 (1997)). 

The ACH Agreement facilitates the underlying Debt Agreement where SAS 

operates as a “third-party processor” and provides “payment processing services” 

“pursuant to [Plaintiffs’] underlying agreement with the referring company.” Doc No. 

17-1 at 11. The ACH Agreement states that “[SAS] is not a party to the agreement 

between Client and [the Referring Company] and SAS does not participate in the 

underlying debt negotiations.” Id. The Court finds that the ACH Agreement arises out 

of, and indeed, bolsters the operation of the underlying Debt Agreement between 

Plaintiffs and Defendant, who appears to be defined as the “referring company.” But for 

the ACH Agreement, Plaintiffs would have been unable to fulfil its contractual 

obligations under the Debt Agreement. 

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Therefore, the Court finds that Defendant is a third-party beneficiary of the ACH 

Agreement even if the arbitration clause only pertains to actions between Plaintiffs and 

SAS. Thus, Defendant can enforce the terms of the ACH Agreement’s arbitration clause 

against Plaintiffs, but only with respect to disputes that involve the payment processing 

services as detailed in the ACH Agreement. 

4. Whether the Arbitration Clause is Unconscionable 

 Plaintiffs argue in their opposition brief that the ACH Agreement is 

unconscionable. Doc. No. 22 at 19–23. Specifically, Plaintiffs assert that the ACH 

Agreement is an adhesion contract because of its take-it-or-leave-it nature that deprived 

Plaintiffs of their negotiating power. Id. at 20. Plaintiffs argue that the ACH Agreement 

is procedurally unconscionable because it was “drafted entirely by SAS and did not alert 

Plaintiffs or give them reason to know or expect that any claims that Plaintiffs sought to 

pursue against Defendant regarding Defendant’s conduct and services could be subject to 

binding arbitration or the SAS ACH Agreement’s arbitration provision.” Id. at 22. 

Plaintiffs make a similar argument as to the Debt Agreement. See id. As to substantive 

unconscionability, Plaintiffs state that applying the arbitration provision to Plaintiffs’ 

claims against Defendant “would be oppressive” and would fall outside Plaintiffs’ initial 

contracting expectations. Id. at 23. Moreover, Plaintiffs argue that the arbitration 

language contains “overly broad-sweeping application to Plaintiffs’ claims against 

Defendant” and provided no opportunity for Plaintiffs to opt-out. Id. 

 As to procedural unconscionability, Defendant counters that Plaintiffs cannot claim 

surprise over the arbitration clause within the ACH Agreement because it was not hidden 

in fine print. Doc. No. 23 at 7. Defendant argues that the Debt Agreement is not 

procedurally unconscionable even though it was drafted by Defendant because the Debt 

Agreement clearly incorporates the ACH Agreement. Id. Defendant adds that Plaintiffs 

were free to pursue other market alternatives, undercutting their oppression assertions. 

Id. at 8. Defendant argues that unsatisfied expectations do not satisfy substantive 

unconscionability. See id. at 9. Defendant states that the arbitration clause is not cost 

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prohibitive, applies equally to Plaintiffs and Defendant, does not restrict discovery 

procedures, and does not yield an imbalance of available remedies to either party. Id.

Agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such 

grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. 

Arbitration agreements are subject to standard general defenses. Ingle v. Circuit City 

Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003). “Because unconscionability is a 

generally applicable defense to contracts, California courts may refuse to enforce an 

unconscionable arbitration agreement.” Id.

A contract defense of “unconscionability . . . may operate to invalidate arbitration 

agreements.” Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). The 

party asserting that an arbitration agreement is unconscionable bears the burden of proof. 

Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741, 749 (Cal. 2015). Both procedural 

and substantive unconscionability must be present for a court to refuse to enforce a 

contract. See Armendariz v. Found Health Psychcare Servs., 6 P.3d 669, 690 (Cal. 

2000). California courts apply a sliding scale: “the more substantively oppressive the 

contract terms, the less evidence of procedural unconscionability is required to come to 

the conclusion that the term is unenforceable, and vice versa.” Id. However, courts 

cannot apply principles of unconscionability in a way that undermines the FAA’s 

objective “to ensure the enforcement of arbitration agreements according to their terms so 

as to facilitate streamlined proceedings.” Concepcion, 563 U.S. at 344. Instead, courts 

should give “due regard to the federal policy in favor of arbitration.” Wagner v. Stratton 

Oakmont, Inc., 83 F.3d 1046, 1049 (9th Cir. 1996). 

 i. Procedural Unconscionability

The procedural unconscionability analysis focuses on the circumstances 

surrounding the creation of a contract and the presence of “oppression or surprise.” 

Gatton v. T-Mobile USA, Inc., 61 Cal. Rptr. 3d 344, 352 (Ct. App. 2007) (citing 

Armendariz, 6 P.3d at 690.). In doing so, a court must uncover “the manner in which the 

contract was negotiated and the circumstances of the parties at that time.” Ingle, 328 

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F.3d at 1171 (quoting as Kinney v. United HealthCare Servs., Inc., 83 Cal. Rptr. 2d 348, 

352–53 (Ct. App.1999)). Oppression results from “an inequality in bargaining power that 

results in no real negotiation and an absence of meaningful choice.” Id. (citing Flores v. 

Transamerica HomeFirst, Inc., 113 Cal. Rptr. 2d 376, 381 (Ct. App. 2001)). Surprise 

arises when the “agreed-upon terms of the bargain are hidden in the prolix printed form 

drafted by the party seeking to enforce the disputed terms.” Id. (citing Stirlen v. 

Supercuts, Inc., 60 Cal. Rptr. 2d 138, 145 (Cal. Ct. App. 1997). Procedural 

unconscionability typically takes the form of an adhesion contract, which is “a 

standardized contract, which, imposed and drafted by the party of superior bargaining 

strength, relegates to the subscribing party only the opportunity to adhere to the contract 

or reject it.” Gutierrez v. Autowest, Inc., 7 Cal. Rptr. 3d 267, 275 (Ct. App. 2003). 

However, an adhesive contract term not being read or understood “does not justify a 

refusal to enforce it”; rather, the imposed term can only be denied if it is also 

substantively unreasonable. Id.; see also Poublon v. C.H. Robinson Co., 846 F.3d 1251, 

1261 (9th Cir. 2017) (“[T]he California Supreme Court has not adopted a rule that an 

adhesion contract is per se unconscionable.”). 

Here, Defendant’s name is stylized across the top of the Debt Agreement. See

Doc. No. 17-1 at 6–9. Defendant’s name is ingrained within the text whereas Plaintiffs’ 

names are in a different inserted font. Id. at 6, 9. In a declaration signed by a principal 

member of Defendant, the member declares that “[Defendant] regularly requires that 

individuals offering to retain its services execute both the [Debt Agreement] and the 

ACH Agreement.” Id. at 3. Therefore, the Court finds that the Debt Agreement appears 

to be an adhesion contract imposed and drafted by Defendant. Similar factual 

underpinnings persuade the Court to similarly find the ACH contract as an adhesion 

contract. See Doc. No. 17-1 at 11–12. Plaintiffs lacked the power to negotiate both 

contracts and only had the option to take the contracts or leave them. However, finding 

an adhesion contract only begins the Court’s analysis. See Parada v. Superior Court, 98 

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Cal. Rptr. 3d 743, 757 (Ct. App. 2009) (“A procedural unconscionability analysis also 

includes consideration of the factors of surprise and oppression.”). 

A claim of oppression may be defeated “if the complaining party has a meaningful 

choice of reasonably available alternative sources of supply from which to obtain the 

desired goods and services free of the terms claimed to be unconscionable.” Parada, 98 

Cal. Rptr. 3d at 758. The Debt Agreement enrolled part of Plaintiffs’ debts into 

Defendant’s debt assumption program “to receive Defendant’s assistance with debt 

settlement and to improve Plaintiffs’ consumer credit, history, or rating with credit 

reporting agencies.” Compl. ¶ 23; Doc. No. 17 at 9. The Parada court determined that 

the petitioner had “reasonable and realistic market alternatives to opening [investment] 

accounts, including the option of not investing in precious metals at all.” Parada, 98 Cal. 

Rptr. 3d at 758. The court further reasoned that precious metal investments were not a 

necessity, such as admittance to a hospital or employment contexts where an adhesion 

contract may still be oppressive despite alternatives. Id. Here, the Court finds that 

Plaintiffs had other reasonable and realistic market alternatives to address their debt 

needs and entering into the Debt Agreement was not a necessity akin to hospital or 

employment contexts. However, Plaintiffs did not have other alternatives in executing 

the ACH Agreement with SAS given Defendant’s own declaration: “[Defendant] 

regularly requires that individuals offering to retain its services execute both the [Debt 

Agreement] and the ACH Agreement. The case of Plaintiffs is no exception. 

[Defendant] required that Plaintiffs execute both the [Debt Agreement] and the ACH 

Agreement.” Doc. No. 17-1 at 3. Despite having reasonably available alternatives as to 

finding a debt relief company, Plaintiffs were essentially given no alternative in selecting 

the third-party processor. Because of the lack of choice in selecting SAS as the thirdparty processor, the Court finds the arbitration clause within the SAS Agreement 

oppressive despite finding the terms of the Debt Agreement not oppressive. 

As to surprise, the arbitration clause was not hidden. The arbitration provision is 

on the first page of the two-page ACH Agreement and is in the same style and typeface 

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as the other contract terms. Moreover, the arbitration term rests within a clause that 

contains an all-capitalized, bolded, and underlined header: “6. BINDING 

ARBITRATION, GOVERNING LAW, AND ATTORNEY’S FEES.” Id. at 11. 

Given that the terms of the arbitration clause were not hidden or otherwise buried within 

the SAS Agreement, the Court finds that there is no surprise. 

Accordingly, the Court finds a moderate level of procedural unconscionability as 

to the arbitration clause. The Court proceeds by assessing substantive unconscionability 

while keeping in mind the sliding scale relationship between procedural and substantive 

unconscionability. See Armendariz, 6 P.3d at 690. 

 ii. Substantive Unconscionability 

 The substantive unconscionability analysis focuses on the “terms of the agreement 

and whether those terms are so one-sided as to shock the conscience.” Ingle, 328 F.3d at 

1172 (quoting Kinney, 83 Cal. Rptr. 2d at 353). Courts evaluate substantive 

unconscionability “as of the time the contract was made.” A & M Produce Co. v. FMC 

Corp., 186 Cal. Rptr. 114, 122 (Ct. App. 1982). The “shock the conscience” standard 

requires more than a contract term that “merely gives one side a greater benefit . . . .” 

Pinnacle Museum Tower Assn. v. Pinnacle Mkt. Dev. (US), LLC, 282 P.3d 1217, 1232 

(Cal. 2012). “Substantive unconscionability may be shown if the disputed contract 

provision falls outside the nondrafting party’s reasonable expectations.” Parada, 98 Cal. 

Rptr. 3d at 759 (emphasis added) (citing Gutierrez, 7 Cal. Rptr. 3d at 275). 

 As to the specific terms of the arbitration clause, the Court finds that the arbitration 

clause is not one-sided. The clause applies equally to “any dispute or claim” brought by 

any party that “aris[es] out of this Agreement or otherwise, related to SAS’s services to 

Client.” Doc. No. 17-1 at 11. Plaintiffs may view the clause as a bad bargain because it 

fell outside their expectations, Doc. No. 22 at 23, but a bad bargain is insufficient to 

trigger substantive unconscionability. Baltazar v. Forever 21, Inc., 367 P.3d 6, 11 (Cal. 

2016) (internal quotation marks and citations omitted). Substantive unconscionability 

requires “terms that are unreasonably favorable to the more powerful party.” Id. (internal 

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quotation marks and citations omitted). The terms here do not reach the high threshold of 

shocking the conscience. 

Accordingly, the court finds that the arbitration clause is not substantively 

unconscionable. Given the lack of substantive unconscionability, the Court finds that the 

clause is not unconscionable because both procedural and substantive unconscionability 

are necessary before a court can refuse to enforce a clause under the doctrine of 

unconscionability. Id. at 11. 

5. Conclusion 

 Accordingly, the Court finds that there is a valid arbitration clause that Defendant 

may enforce as a third-party beneficiary of the ACH Agreement—as to disputes that arise 

from payment processing services. 

D. Whether the Arbitration Agreement Encompasses the Dispute at Issue 

Defendant argues that the arbitration agreement covers the dispute at issue. Doc. 

No. 17 at 16–17. Defendant asserts that the expansive scope of the arbitration clause 

encompasses Plaintiffs’ claims and that any ambiguity as to the scope should be resolved 

in favor of arbitration. Id. at 17. Plaintiffs respond that its claims “are outside the scope 

of the arbitration provision.” Doc. No. 22 at 15. Specifically, Plaintiffs argue that its 

causes of action pertain to their relationship with Defendant and do not rely upon the 

terms of the ACH Agreement. See id. at 16. 

 The arbitration clause states “[Plaintiffs] agree[] that any dispute or claim arising 

out of this Agreement or otherwise, related to SAS’s services to [Plaintiff], shall be 

resolved through binding arbitration.” Doc. No. 17-1 at 11. Although the Court finds 

that there is a valid arbitration clause that Defendant may enforce as a third-party 

beneficiary of the ACH Agreement, see supra Sections III.C.3, III.C.5, Defendant may 

do so only to the extent that there is a “claim arising out of this Agreement or otherwise, 

related to SAS’s services to [Plaintiff].” Doc. No. 17-1 at 11. Given the Court has found 

that the arbitration clause is narrow in applying to payment processing services, see supra

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Sections III.C.2–3, III.C.5, the Court accordingly finds that that the arbitration clause 

only encompasses disputes involving payment processing. 

 With the scope of the arbitration clause in mind, the Court must compare the 

clause’s scope to Plaintiffs’ allegations. Plaintiffs argue their claims address 

“Defendant’s services to Plaintiffs, business practices, failure to perform services as 

promised in Defendant’s agreement with Plaintiffs, breach of Defendant’s duties owed to 

Plaintiffs, misrepresentations to Plaintiffs and the damages that Plaintiffs have incurred as 

a result of Defendant’s violations of law.” Doc. No 22 at 16. Indeed, Plaintiffs’ 

allegations do not involve mere payment processing. See, e.g., Compl. ¶¶ 82 (CROA 

claim), 88–89 (CCSA claim), 92–93 (same), 100 (CLRA claim), 109 (UCL claim), 119–

20 (same), 133–38, (breach of contract claim), 142–43 (negligence claim), 148 (negligent 

misrepresentation claim), 164 (intentional misrepresentation claim). Plaintiffs’ claims 

address their relationship with Defendant outside of payment processing. Given 

Plaintiffs’ allegations and the clear language of the arbitration clause within the context 

of the ACH Agreement, the Court finds that there is no sufficient ambiguity in the 

contract that could otherwise result in finding in favor of arbitration. Cf. Volt Info. Scis., 

Inc., 489 U.S. at 475–76. Plaintiffs have carried their burden in proving that their claims 

are unsuitable for arbitration. See Green Tree Fin. Corp.-Alabama, 531 U.S. at 91. 

 Accordingly, the Court finds that the arbitration clause does not cover the dispute 

at issue. 

E. Whether Attorneys’ Fees Are Appropriate 

Defendant “requests leave of Court to file a motion for reasonable attorneys’ fees 

incurred in preparing the Petition because Plaintiffs’ actions constitute a frivolous refusal 

to arbitrate.” Doc. No. 17 at 22. Plaintiffs respond that attorneys’ fees are not 

appropriate because they filed this action in good faith. Doc. No. 22 at 25. 

The traditional American rule requires each party to pay its own attorneys’ fees. 

See Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 257, 263–64 (1975). 

However, a court has the inherent, discretionary power to award one party attorneys’ fees 

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when another party acts “in bad faith, vexatiously, wantonly, or for oppressive reasons.” 

Id. at 258–59; see also Marx v. Gen. Revenue Corp., 568 U.S. 371, 382 (2013). 

 Given that Plaintiffs are successful in defeating Defendant’s motion to compel 

arbitration, the Court finds that Plaintiffs have not acted in bad faith, vexatiously, 

wantonly, or for oppressive reasons. Accordingly, the Court DENIES Defendant’s 

request for attorneys’ fees. 

IV. CONCLUSION

 For the foregoing reasons, the Court DENIES Defendant’s motion to compel 

arbitration and DENIES Defendant’s request for attorneys’ fees. 

IT IS SO ORDERED. 

Dated: February 5, 2020

 _____________________________ 

 Hon. Michael M. Anello 

United States District Judge 

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