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Joseph A. Antkowiak, On v. Taxmasters

March 17, 2011


The opinion of the court was delivered by: Stengel, J.


Mr. Antkowiak filed a complaint against TaxMasters, TaxMasters, Inc., TMIRS Enterprises Ltd., TM GP Services, LLC, Patrick R. Cox and Jeffrey A. Steinberg alleging violations of the Truth in Lending Act, the Fair Debt Collection Practices Act, and various state laws.

Defendants filed a motion to compel arbitration and dismiss, or in the alternative to dismiss for failure to state a claim. For the reasons set forth below I will deny the motion to compel arbitration and grant in part and deny in part the motion to dismiss.

I. Background

The complaint alleges TaxMasters, Inc. is a Nevada Corporation.*fn1 TMIRS is a Texas limited partnership, whose affairs are controlled by TM GP Services, LLC, its general partner. Complaint at ¶ 4. TM GP Services, is a Texas limited liability company, which serves as the general partner for TMIRS. Id. at ¶ 5. TaxMasters, Inc., TMIRS, and TM GP Services are not registered, licensed, or otherwise authorized to do business in Pennsylvania. Id. at ¶ 6.

Patrick R. Cox is the sole member of TM GP Services, and is the president, board director, and chief executive officer of TaxMasters, Inc. See Complaint at ¶ 7. Mr. Cox, TM GP Services, TMIRS, and TaxMasters, Inc. operate as "TaxMasters," a fictitious Texas entity. Id. at ¶ 8. Jeffrey Aaron Steinberg is a licensed Texas attorney. Id. at ¶ 10. The complaint refers to Mr. Steinberg and other in-house attorneys of TaxMasters as "TaxMasters Collection Attorneys."*fn2 Id. at ¶ 11.

Mr. Antkowiak's complaint relies on a complaint filed in a Texas court by the Texas Attorney General. See Complaint at ¶ 21. The Texas AG complaint alleges TaxMasters offers to act as the consumer's agent in his dealings with the IRS. TaxMasters claims it "employ[s] and use[s] the expertise of . . . tax attorneys [and] tax CPAs" but states it "is not a law firm or a CPA firm."

Mr. Cox appears in the TaxMasters television commercials and on the TaxMasters website. He represents TaxMasters "will get between the IRS and the consumer, and will solve the consumer's tax problems." He states former IRS agents and other tax professionals are standing by to assist consumers. See Complaint at ¶ 21.

The Texas AG complaint suggests each inquiry by consumers follows a pattern or scheme. When consumers call the toll free number, the sales person, who is not required to be a tax professional, presents a solution to the consumer's tax problem, and quotes a fee, which is presented as a flat fee. Id. The sales person obtains a credit card number or bank account number from the consumer. If the consumer requests to receive a written description of the services prior to agreeing to purchase the services, the salesperson refuses, informing the consumer the documents cannot be generated without inputting the payment method into the computer. Id. If a consumer cannot afford the quoted fee in full, the sales person offers an installment plan. See Complaint at ¶ 21. After the consumer agrees to retain TaxMasters, the consumer is routed to another member of the sales team, the "verifier," who informs the consumer he has made a good decision and reviews the payment plan. See Complaint at ¶ 21.

After the call has ended, and "in most cases before TaxMasters sends the consumer any written materials," TaxMasters charges the consumer's credit card or debits the consumer's debit card. Id. It sends to the consumer a letter, the IRS forms appointing TaxMasters as the consumer's agent, an engagement agreement, and an engagement guide. The letter instructs the consumer to sign the engagement agreement and IRS forms and return the documents to TaxMasters.

The engagement agreement contains previously undisclosed terms and conditions. See Complaint at ¶ 21. Among these terms are the early termination provision, which suggests the consumer may be entitled to a refund if the agreement is terminated. If the consumer attempts to obtain a refund, he is told TaxMasters informed the consumer during the telephone call that all fees were non-refundable. Id. TaxMasters does not routinely disclose that the fees are non-refundable during the telephone calls. Id. Contrary to the engagement agreement, which states the quoted fee is the "minimum fee," id.,*fn3 the sales representative informs consumers the services will be provided for a flat fee, see Complaint at ¶ 21.

On its website and during the telephone conversations, TaxMasters informs consumers it will begin working on the consumer's tax problems as soon as the consumer purchases the services. The engagement agreement, however, states TaxMasters is not required to begin work until the consumer has paid in full. Id.

The Texas AG complaint also identifies Mr. Antkowiak's interactions with TaxMasters. See Complaint at ¶ 22. It states Mr. Antkowiak's engagement with TaxMasters to handle his problems with the IRS was "closed" by TaxMasters during the initial call. Id. Mr. Antkowiak was placed on an installment plan and charged an initial $500 payment. Id. TaxMasters charged his credit card before Mr. Antkowiak received disclosures from TaxMasters.*fn4 Id.

TaxMasters refused to begin work on Mr. Antkowiak's IRS matter until it received full payment. Id.*fn5 The contract "belatedly" sent to Mr. Antkowiak denies the fee paid is a non-refundable "flat-fee" and authorizes TaxMasters to charge up to $850.00 per hour extra for its services. Id.

Mr. Antkowiak attempted to cancel the contract. TaxMasters stated Mr. Antkowiak still owed the "flat fee" even though no services were provided. See Complaint at ¶ 22. Mr. Antkowiak filed a complaint with the Better Business Bureau seeking a refund. TaxMasters maintained it was not required to perform any services until full payment was made and the "flat fee" was non-refundable. Id. On March 8, 2010, the TaxMasters Collection Attorneys contacted Mr. Antkowiak by mail demanding full payment of the outstanding balance under the installment plan. Id.

The engagement agreement contains an arbitration provision. Specifically, the arbitration provision provides:

[A]ny and all claims, demands, disputes, or controversies of any kind or nature that Client has concerning any of the negotiations leading to the purchase of services, terms, and provisions of the sale, engagement agreement, arrangements of payments, purchase of service contracts, performance of the engagement agreement or services, or any other aspect of the services from Firm shall be settled by binding arbitration conducted pursuant to the provisions of Title 9 of the United States Code Chapter 1 et seq. and according to the Rules of the American Arbitration Association.

Client agrees, covenants , and contracts that there shall be no class arbitration between the parties and the only parties to any disputes or controversies to be arbitrated as more particularly described herein shall be the Client and Firm. . . . . The Client agrees that the arbitration proceedings to resolve all such disputes shall be conducted in Houston, Harris County, Texas. Client agrees to bear all costs of arbitration. Client agrees to keep confidential the results, decisions, and controversies and all communications in connection with the arbitration proceedings and/or Arbitration Agreement. . . .

Client and Firm agree that all prior contracts and agreements between the parties of any kind and executed at any time prior to the date of this agreement shall, as part of this agreement, be deemed to be modified to include and adopt the arbitration terms of this agreement and to remove the litigation provisions as if all of the prior agreements of contracts originally contained these provisions.

Defendant's Memorandum at Exh. A at 8.

The March 8, 2010 letter Mr. Steinberg sent Mr. Antkowiak states: . . . If I do not hear from you, I will assume that you have no intention of voluntarily satisfying your obligation and will make my recommendations regarding further action on your case accordingly.

In addition to the amount of $2,500 due to TaxMasters, if you choose not to voluntarily resolve your account and litigation is filed, TaxMasters would also seek to collect late fees, reasonable attorneys' fees, and costs of court to the full extent provided for in the engagement agreement and/or is otherwise allowed by the law.

I urge you to satisfy your obligation to TaxMasters within 30 days of your receipt of this letter. Not only is this the right thing to do, but it could also be your last opportunity to settle this matter for only $2,500.00.

Compl. at Exh. G.

II. Discussion

A. Arbitration Provision

The Federal Arbitration Act ("FAA") provides that agreements to resolve disputes by arbitration "shall be 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. The United States Supreme Court has acknowledged that the arbitrability of a particular dispute is to be determined with a "healthy regard for the federal policy favoring arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr., 460 U.S. 1, 24 (1983). "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Id. at 24-25.

"[A]rbitration is a creature of contract law." E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 195 (3d Cir. 2001). As such, "it is a way to resolve those disputes--but only those disputes--that the parties have agreed to submit to arbitration." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). "[A] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648, 106 S. Ct. 1415, 89 L. Ed. 2d 648 (1986) (quoting Warrior & Gulf 363 U.S. 574, 582 (1960)). Accordingly, whether a party is bound to arbitrate "is a matter to be determined by the [c]court on the basis of the contract entered into by the parties." Id. at 649 (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 547, 84 S. Ct. 909, 11 L. Ed. 2d 898 (1964)). "[G]enerally applicable state-law contract defenses, such as fraud, duress, or unconscionability, . . . may be applied to invalidate arbitration agreements." Salley v. Option One Mort. Corp., 925 A.2d 115, 119 (Pa. 2007).

Under the FAA and Pennsylvania law, "a district court must compel arbitration if it finds (1) that a valid arbitration agreement exists between the parties, and (2) that the dispute before it falls within the scope of this agreement." Miron v. BDO Seidman, LLP, 342 F. Supp. 2d 324, 328 (E.D. Pa. 2004) (citing McAlister v. Sentry Ins. Co., 958 F.2d 550, 553 (3rd Cir.1992)). "A federal court must generally look to the relevant state law on the formation of contracts to determine whether there is a valid arbitration agreement under the FAA." Blair v. Scott Specialty Gases, 283 F.3d 595, 603 (3d Cir.2002).

In Pennsylvania, to be found unconscionable,*fn6 an arbitration provision must be found both procedurally and substantively unconscionable. "[U]nconscionability 'requires a two-fold determination: that the contractual terms are unreasonably favorable to the drafter and that there is no meaningful choice on the part of the other party regarding acceptance of the provisions.'" Gay v. CreditInform, 511 F.3d 369, 392 (3d Cir. 2007) (quoting Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181 (3d Cir. 1999)). Procedural unconscionability refers to "the process by which an agreement is reached and the form of an agreement." Zimmer v. CooperNeff Advisors, Inc., 523 F.3d 224, 228 (3d Cir. 2008) (quoting Harris, 183 F.3d at 181). Substantive unconscionability considers "whether the arbitration provision 'unreasonably favors the party asserting it.'" Id. (quoting Salley, 925 A.2d at 119). The party challenging the agreement bears the burden of proof. Salley, 925 A.2d at 120.

1. Procedural Unconscionability

"Procedural unconscionability pertains to the process by which an agreement is reached and the form of an agreement, including the use therein of fine print and convoluted or unclear language." Alexander v. Anthony Int'l, L.P., 341 F.3d 256, 265 (3d Cir. 2003) (quoting Harris, 183 F.3d at 181). The "element is generally satisfied if the agreement constitutes a contract of adhesion." Id. "A contract of adhesion 'is one which is prepared by the party with excessive bargaining power who presents it to the other party for signature on a take-it-or-leave-it basis.'" Id. (quoting Trailer Marine Transp. Corp. v. Charley's Trucking, Inc., 20 V.I. 282, 284 (1984)). "A contract, however, is 'not unconscionable merely because the parties to it are unequal in bargaining position.'" Id. (quoting Restatement (Second) of Contracts, § 208 cmt. d).

In McNulty v. H & R Block, Inc., 843 A.2d 1267 (Pa. Super. Ct. 2004), a client of H & R Block signed two contracts. The first was a contract for H & R Block to prepare and file the client's tax return. The second was an agreement for the client to receive a refund anticipation loan, using the promise of a tax refund as security for the loan. H & R Block was not a party to the loan agreement, but was a beneficiary of an arbitration provision in the loan agreement. In McNulty, the plaintiff brought a challenge to the fee H & R Block charged to electronically file tax returns. H & R Block argued, pursuant to the arbitration provision in the loan agreement, the court should compel arbitration. The Court found language of the arbitration provision was broad, but applied only to the loan transaction, not other services provided by H & R Block. In an alternate ground for refusing to compel arbitration, the McNulty Court found the contract was a "classic example of an adhesion contract, which is a 'form contract prepared by one party, to be signed by the other party in a weaker position, [usually] a consumer, who has little choice about the terms.'" McNulty, 843 A.2d at 1273.

The contract in this case is a contract of adhesion and is procedurally unconscionable. Mr. Antkowiak is a consumer who was presented with a contract by a company after a telephone discussion with the company's sales person. In practical terms he entered into an agreement with TaxMasters during the telephone conversation and paid for services before he received a written contract. The telephone conversation contained no mention of the arbitration provision. The complaint alleges TaxMasters sent the contract only after Mr. Antkowiak's credit card was charged the initial fee. Mr. Antkowiak was required to return only the signed pages of the contract. In addition, the complaint alleges TaxMasters believed it was owed the full amount of the fee after the telephone conversation, before Mr. Antkowiak signed the contract.

2. Substantive Unconscionability

Substantive unconscionability exists where terms unreasonably favor one party and "the disfavored party does not truly assent." Alexander, 341 F.3d at 265 (citing Harris, 183 F.3d at 181).

Mr. Antkowiak maintains the arbitration provision is unconscionable because it requires Mr. Antkowiak to pay all costs associated with the arbitration, allows TaxMasters access to the courts, but requires Mr. Antkowiak to arbitrate all claims, does not permit class action lawsuits or class arbitration, and requires the arbitration occur in Texas.

a. Arbitration Expenses

The engagement agreement provides: "Client agrees to bear all costs of arbitration."

Where "a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.." Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 90 (2000). In Green Tree Fin. Corp., 531 U.S. at 89, the question presented was whether the arbitration agreement was "unenforceable because it says nothing about the costs of arbitration, and thus fails to provide [the plaintiff] protection from potentially substantial costs of pursuing her federal statutory claims in the arbitral forum." The court noted "[i]t may well be that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the ...

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