What Impact Do Arbitration Clauses Have on Wrongful Repossessions or Predatory Lending Lawsuits?

In the last several weeks, several consumers have contacted us about filing a wrongful or improper repossession or predatory lending lawsuit. Interestingly, those consumers also signed an agreement that contained an arbitration clause.

Arbitration clauses pose a “speedbump” for consumer protection lawyers when analyzing a consumer’s lawsuit for wrongful or improper repossession or a predatory lending.

Our lawyer answer is “we will need to distinguish and isolate” the arbitration clause from the wrongful acts by the financial institution.

Arbitration clauses, which are commonly included in vehicle purchase contracts, can significantly limit a consumer’s access to traditional litigation. We are now witnessing litigation being reported where the courts have ruled that the arbitration clauses contained within a vehicle finance agreement required the lawsuit to proceed to arbitration first.

In Illinois, provided the arbitration clause in the vehicle finance agreement is valid and enforceable, Illinois courts will generally uphold the arbitration clause. However, there are exceptions to the general rule in Illinois:

1. If the arbitration clause is procedurally or substantively unconscionable, courts will exclude the effectiveness of the arbitration clause.
2. If the subject matter of the lawsuit—predatory lending—which renders the vehicle finance agreement null or void then the arbitration clause will be declared a nullity.
3. Several vehicle finance agreements also contain provisions that explicitly exclude claims or lawsuits related to the possession, repossession, or the replevin of the vehicle—demonstrating that the enforceability of an arbitration clause depends on its specific terms and scope.
4. Illinois courts may also determine whether the dispute falls within the scope of the arbitration clause contained within the vehicle finance agreement, and issues of fraud or unconscionability specific to the arbitration clause itself can be grounds alone to challenge its enforceability.

Recently, an Arizona court released an opinion that might have been interpreted differently by an Illinois court. A recent ruling by the United States District Court for the District of Arizona held that when a finance agreement contained a valid arbitration clause with a clear delegation provision, the dispute had to first proceed through arbitration—even when the claim involved a third-party repossession company that did not sign the original vehicle finance agreement!

In Sedbrook v. Select Asset Recovery Group, LLC, the plaintiff alleged various statutory and tort-based violations stemming from two separate repossession events. Despite the serious nature of the allegations, the court concluded that the matter could not proceed in the United States District Court because the arbitration clause in the original finance agreement delegated questions of arbitrability to the arbitrator—not the judge. As a result, the court compelled arbitration and stayed the legal proceedings. [It does not appear that an appeal has been filed.]

An Illinois court may well have found an opposite result, but it is important to discuss Sedbrook and understand that financial institutions will advance the arbitration clause to forestall a consumer’s lawsuit.

Key Legal and Financial Terms

To fully understand the legal significance of the Sedbrook lawsuit, it’s important to define the key terms that shaped the court’s decision. These concepts are foundational in determining how and where a dispute can be resolved under a consumer finance agreement.

Arbitration Clause

A provision in a contract or finance agreement that requires the parties to resolve disputes through arbitration, an alternative dispute resolution (ADR) process outside of court, rather than litigation. This clause essentially “agrees” to bring disputes to a neutral third party, the arbitrator, for resolution.

Delegation Clause

A specific type of arbitration clause that assigns the authority to decide whether a dispute is subject to arbitration—known as “arbitrability”—to the arbitrator instead of the court. When properly drafted, delegation clauses are binding and limit judicial review.

Arbitrability

The legal question of whether a particular dispute falls within the scope of an arbitration agreement. If the parties have included a delegation clause, this determination may first be made by the arbitrator rather than the court.

Non-Signatory

A person or entity that is not a direct party to a contract but may still seek to enforce—or be bound by—certain contract provisions, including arbitration clauses. Courts may permit non-signatories to invoke arbitration in certain circumstances, especially when the claims arise from the relationship created by the agreement.

Wrongful Repossession

The act of reclaiming property, such as a vehicle, in a manner that violates state or federal law or breaches the peace. Common legal claims related to wrongful repossession include conversion, trespass, and violations of the Fair Debt Collection Practices Act (FDCPA) or state consumer protection statutes.

Unlike standard auto insurance, CPI typically protects only the lender, not the borrower. These policies often have much higher premiums and may not provide the same level of coverage as personal auto insurance. Borrowers may face substantial increases in their loan balances, leading to financial strain and, in some cases, auto repossession.

Lawsuit Background: Sedbrook v. Select Asset Recovery Group, LLC

In August 2022, Lance Sedbrook entered into a Retail Installment Sale Contract with AutoNation Ford Scottsdale to purchase a used 2016 BMW X5. The agreement was later assigned to Wells Fargo Bank, N.A. The contract included a mandatory arbitration clause covering disputes related to the transaction. This clause also contained a delegation provision, assigning questions of arbitrability to the arbitrator.

First Repossession and Bankruptcy Filing

After Sedbrook defaulted on his payment obligations, Wells Fargo retained ALS Resolvion, LLC to initiate repossession. ALS subcontracted Knightrider Recovery Companies, LLC, which allegedly entered Sedbrook’s property without consent and used force in the repossession process. Following this incident, Sedbrook filed for Chapter 7 bankruptcy protection, and the vehicle was returned to him as part of the proceedings.

Second Repossession and Lawsuit

After receiving a discharge in bankruptcy, Sedbrook defaulted again. Wells Fargo then engaged United Nationwide Recovery, LLC, which subcontracted Select Asset Recovery Group, LLC to repossess the vehicle. Sedbrook alleged that the second repossession involved similar unlawful conduct, including trespass and breach of the peace.

Litigation and Motions to Compel Arbitration

Sedbrook filed lawsuits against multiple repossession companies, asserting claims under the Fair Debt Collection Practices Act (FDCPA), as well as common law claims for trespass, conversion, and breach of peace. The defendants, although not parties to the original finance agreement, moved to compel arbitration based on the arbitration clause contained in the contract between Sedbrook and AutoNation/Wells Fargo.

Lawsuit Analysis

The legal question in Sedbrook centered on whether the plaintiff’s wrongful repossession claims could be litigated in court despite the existence of an arbitration clause in the finance agreement. The court began its analysis with the language of the contract itself, which included a broad arbitration clause requiring that any disputes “arising from or related to” the vehicle purchase be resolved through binding arbitration. The clause also included a delegation provision, assigning to the arbitrator—not the court—the authority to determine whether specific disputes fall within the scope of arbitration.

For the court, the delegation provision was a decisive factor: the court determined that once the parties agree to such a clause, it is the arbitrator—not the judge—who must decide whether the claims fall under the arbitration agreement and whether non-signatories can enforce it. The court therefore found it lacked authority to rule on the arbitrability of the plaintiff’s claims or to determine whether the repossession companies—who were not parties to the finance agreement—could invoke the arbitration clause.

The court then went further, because the claims involved repossession actions that stemmed directly from the financing contract and its terms, the court then concluded that the proper course was to compel arbitration and allow the arbitrator to resolve any threshold questions. We believe Illinois courts would have taken an alternative path and kept the matter within the courthouse and would  not send it to an arbitrator.

Consumer Rights and Practical Advice

For consumers involved in vehicle financing, understanding the legal implications of an arbitration clause is essential. Contracts for vehicle purchases and financing often contain pre-drafted arbitration clauses that limit the consumer’s ability to bring a case before a court, even when serious allegations, such as wrongful repossession or statutory violations, are involved.

Our practical advice on the first review of any arbitration clause: strike that provision entirely.
Second, strike any “delegation” provision or sentence and by striking that delegation provision it should deny any court from deferring to the decision making by an arbitrator.
Finally, limit the arbitration provision to disputes regarding the financial terms of the loan or lease and no applicability to the possession, repossession, or the replevin of the vehicle.

Consumers should always consider the following precautions when entering into a vehicle financing agreement:

• Read the full agreement carefully, paying particular attention to the dispute resolution section.
• Identify whether the contract includes an arbitration clause, and whether it applies to third parties.
• Look for a delegation clause, which may transfer decisions about the scope of arbitration to an arbitrator, not a court.
• Understand that arbitration may limit your legal options, including discovery rights, appeal processes, and access to a public forum.
• Consult with counsel before signing, especially if the terms appear overly broad or unclear.

The Sedbrook opinion provides a cautionary tale consumer. It serves as a reminder that signing such agreements may restrict traditional legal remedies and shift important decisions—such as whether a claim can even be heard—into the hands of an arbitrator.

For consumers, this ruling serves as a clear reminder to carefully review the terms of any financing agreement—particularly clauses related to dispute resolution. Once signed, such provisions can limit access to traditional litigation, even in cases involving potential legal violations. While arbitration can offer a faster and more private forum, it may also restrict procedural rights commonly available in court. Understanding these implications before entering into a contract is critical to making informed decisions about how disputes may be handled in the future.

If you are dealing with wrongful repossession, predatory loans and the underlying financial agreement contained arbitration clauses, contact FS CORPS immediately. Our experienced legal team is committed to protecting consumer rights and ensuring that arbitration clauses are not used unfairly to shield lenders or their agents from accountability.