An appeals court derailed a class action lawsuit aimed at keeping payday lenders from using the criminal justice system to file charges against debtors.

The Fourth Court of Appeals in San Antonio derailed a class action lawsuit aimed at keeping payday lenders from using the state’s criminal justice system as de facto collection agencies.

The suit filed by 1,400 plaintiffs argued that Cash Biz, a payday lender, illegally used district attorney offices to file criminal charges against debtors. Under the ruling, the plaintiffs will now have to settle their disputes with the firm through individual arbitration.

“This is a devastating opinion,” Daniel Dutko, attorney for the plaintiffs, said in an interview with the Observer. “[It] basically means that payday loan companies can do anything they want and send the cases to individual arbitration where nothing bad will happen except maybe a slap on the wrist.”

In 2013, the Observer was the first to report that Cash Biz and other payday lenders, in violation of state law, were using courts and prosecutors to extract payment from their customers by wrongfully filing criminal charges against them for writing “hot (illegal) checks.”

Under Texas state law, writing a post-dated check to a lender that bounces is not the same as writing an illegal check. When post-dated checks bounce, lenders are supposed to negotiate payment with customers. In fact, state laws forbid payday loan companies from even threatening to pursue criminal charges against their customers, except in unusual circumstances.

But the Observer investigation found at least 1,700 instances in which Texas payday loan companies filed criminal complaints against customers in San Antonio, Houston and Amarillo. In at least a few cases, people landed in jail because they owed money to a payday loan company.

In the case before the appeals court this week, the suit argued that Cash Biz engaged in malicious prosecution and fraud and violated both the Texas Deceptive Trade Practices Act and the state’s Finance Code. A previous decision in a Bexar County district court had cleared the way for trying the suit by rejecting Cash Biz’s motion to compel arbitration. But the appeals court reversed that decision on grounds that Cash Biz includes a provision in its lender contracts that protects the firm from such lawsuits. Under the provision, which is included in the contracts of most payday lenders, customers agree to waive their rights to a jury trial, a class action lawsuit and even to class (i.e. group) arbitration.

Dutko argued that Cash Biz, by starting criminal proceedings against its clients, had waived its right to enforce its arbitration provision. The company, he argued, nullified its own agreement by “substantially invoking the judicial process.”

While this argument persuaded the trial judge in the first decision, the three-judge appeals court panel rejected it. According to the panel’s majority opinion, Cash Biz did not “substantially invoke the judicial process” because it simply informed the district attorney of potential criminal behavior. The DA, they argued, had full autonomy to decide whether to act on the information. Further, they found that “Cash Biz’s actions, though presumably vindictive, do not evince a desire to achieve repayment of any loans through the criminal process.”

Justice Rebeca Martinez wrote the dissenting opinion. She rejected the idea that Cash Biz was disinterestedly reporting its customers to prosecutors. “Given the sheer number and geographic scope of the complaints,” she wrote, “it is disingenuous to assert, as Cash Biz does, that it was simply acting as a concerned citizen who was aware of potentially criminal conduct, without any desire for restitution from any of its borrowers.”

Frustrated by the ruling, Dutko said, “I finally get a case in which I believe the law is on my side. I have a trial judge who goes with me. Then just when I think I’ve got the law on my side, the Court of Appeals, two Republicans, come out and say ‘no’.”

He said that individual arbitration is both costly and lengthy. The customer often has to pay more than $1,000 to hire an arbitrator. He said that while attorneys can technically request punitive damages for their clients, they are not granted in practice. Ultimately, he said, the settlement could be less than the cost of arbitration.

The Consumer Financial Protection Bureau has proposed a ban on arbitration provisions like the one used by Cash Biz, but the change isn’t expected to take effect until next year.

The Observer tried to reach Cash Biz for comment, but the phone number listed on its corporate website reached an Indian restaurant, which said it gets about ten calls a day for the company. A second number appearing in Cash Biz’s Google results “snippet” reached a voice recording that attempts to sell callers a series of unrelated products. An email request through the company’s website received no reply.