Maryland High Court Holds Defendant Waived Arbitration by Filing Collection Action, No Prejudice Required for Waiver

The Court of Appeals of Maryland, the state’s highest court, recently held that a debt collector waived its contractual right to arbitrate the claims against it when it chose to litigate the collection action outside of arbitration.

The Court also held that a finding of prejudice was not required under Maryland law to find waiver of the right to arbitrate.

A copy of the opinion in Cain v. Midland Funding, LLC is available at:  Link to Opinion.

A consumer opened a credit card account in 2003. The account agreement contained an arbitration provision that permitted either party to elect mandatory, binding arbitration for any claim.

In 2007, the consumer stopped making payments on the account and the creditor sold the account to a debt buyer. The debt buyer filed suit in small claims court to collect the outstanding balance.  The small claims court entered a default judgment against the consumer for $4,520.54.

At the time of the default judgment the debt buyer was not licensed to collect debts in Maryland. In 2013, the Maryland Court of Special Appeals issued an opinion allowing debtors to collaterally attack a judgment obtained by unlicensed collection agencies and holding that a judgment entered in favor of an unlicensed debt collector is void as a matter of law.

Shortly thereafter, the consumer here filed a putative class action complaint in Maryland state court asserting that the small claims court default judgment entered against him was void under the new opinion from the Court of Special Appeals.  The consumer asserted claims for declaratory and injunctive relief, pre- and post-judgment costs, unjust enrichment, and violations of the state consumer debt collection act and consumer protection act.

The debt buyer moved to compel arbitration pursuant to the arbitration provision in the account agreement and under Maryland’s state arbitration laws.  The trial court held an evidentiary hearing on the existence of an arbitration agreement between the parties.

The consumer argued that the debt buyer waived its right to arbitrate when it brought the collection lawsuit against the consumer in small claims court. Incidentally, neither party argued that the question of waiver of arbitration was for the arbitrator to decide instead of the court.

The trial court rejected the consumer’s argument and granted the motion to compel arbitration.  The consumer appealed to the Court of Special Appeals, which is an intermediate appellate court in Maryland, and it affirmed.

The Maryland Court of Appeals granted certiorari to answer the question of whether the debt buyer waived its contractual right to arbitrate, which depended on two questions of law: (i) whether the debt buyer had the option to arbitrate the collection action under the account agreement, and, if so, (2) whether, under Maryland law, the collection lawsuit was “related” to the class action lawsuit.

As you may recall, under Maryland state law, implied waiver occurs when a party takes an “action inconsistent with an intention to insist upon enforcing the arbitration clause.”

The Court of Appeals rejected the argument that the arbitration provision excluded claims filed in small claims court, reasoning that “claims filed in small claims court are not subject to arbitration” meant that the collection action was subject to arbitration up until it was filed as a lawsuit in small claims court. After the collection action was filed, the Court held, the account agreement restricted arbitration of that claim. Thus, the Court held that by choosing to litigate the collection claim, the debt buyer implicitly waived its right to arbitrate that claim and any other claim “related” to it.

Whether the collection claim was “related” to the class action claim depended on whether “all parts of the dispute [are] deemed to be interrelated” under Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443 (1982).

The Court of Appeals found that the existence of the consumer’s class action claims depended entirely on the debt buyer having filed the collection lawsuit.  Thus, the Court held, the claims were related because they were all part of “one basic issue.”  The Court noted similar rulings in Nevada and Utah state courts.

Thus, the Court held that the debt buyer implicitly waived its right to arbitrate the consumer class action that was based on the debt buyer’s collection lawsuit when it chose to litigate the collection claim instead of arbitrate.

On an issue of first impression, the Court of Appeals also analyzed whether a finding of prejudice was required to find waiver of the right to arbitrate, and held that Maryland law did not require it.

Accordingly, the Court of Appeals reversed the grant of the motion to compel arbitration.

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