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Mass. SJC: Debt Collector Can’t Use Arbitration Provision to Thwart Class Action

debt collection arbitrationThe Massachusetts Supreme Judicial Court recently affirmed a lower court’s denial of a debt collector’s motion to compel arbitration, holding that the defendant had failed to provide “clear and definite” evidence of the parties’ intent that it benefit from the arbitration provision at issue.

A copy of the decision in Landry v. Transworld Systems Inc. is available at:  Link to Opinion.

In February 2018, the plaintiff rented a car from a car rental company, which the rental company claimed he returned damaged. The rental company charged the plaintiff for repairs, but the plaintiff failed to make any payment. The rental company engaged a debt collector to obtain payment.

In his class action complaint, the plaintiff claimed that the debt collector violated the Massachusetts consumer protection statute, Mass. Gen. Law ch. 93A, § 2, and debt collection regulations, 940 CMR §§ 7.00, by making too frequent telephone contact with the plaintiff and other debtors.

The defendant moved to compel arbitration pursuant to the Federal Arbitration Act (FAA), citing a binding arbitration provision contained in the plaintiff’s rental contract with the rental company, which stated, in relevant part, “Renter and Owner agree to arbitrate any and all claims, controversies or disputes of any kind (“claims”) against each other, including but not limited to claims arising out of or related to this Agreement, or owner’s…charges…”

In denying the debt collector’s motion to compel arbitration, the Superior Court held that the defendant, a nonsignatory, was required to present “clear and unmistakable” evidence that the plaintiff had agreed to arbitrate his claims against the defendant, but that the defendant had failed to do so.

The Supreme Judicial Court transferred the defendant’s appeal on its own motion. The Court noted that, “[i]n the present case, the question is not whether the subject matter of a particular claim falls within the scope of the arbitration provision, but, rather, whether there is an enforceable arbitration agreement between plaintiff and defendant.”

Because arbitration is a matter of contract, the interpretation of an arbitration provision itself “is generally a matter of [S]tate law.” Stolt-Nielson S.A. v. AnimalFeeds Corp., 559 U.S. 662, 681 (2010). The Court noted that, in Massachusetts, there are six theories under which a nonsignatory may enforce a contract, such as an arbitration agreement, against a signatory: “(1) incorporation by reference; (2) assumption; (3) agency; (4) veil piercing/alter ego; (5) equitable estoppel, and (6) third-party beneficiary.” Machado v. System4 LLC, 471 Mass. 204, 209-210 (2015).

The Court denied the defendant’s claims that it could enforce the arbitration provision in the rental company’s contract under the “agency” theory and/or as a third-party beneficiary. In regard to the “agency” theory, the Court noted that “[t]ypically, agents do not obtain rights…from contracts entered into by their principals…” Constantino v. Frecheet, 73 Mass. App. Ct. 352, 358 (2008).

The Court further explained that the agency theory could permit a nonsignatory agent to enforce an arbitration provision in a contract signed by a principal, but only in the limited circumstance where the claim against the agent arose “under the contract in question.”

The Court held that this limited exception did not apply because the plaintiff was not claiming that the rental company committed a breach of its rental contract with him, asserting any misconduct of any sort against the rental company, nor any breach of the rental contract by the defendant. Instead, his sole claim is that the defendant engaged in unlawful debt collection practices, which were not mentioned anywhere in the plaintiff’s rental contract with the company.

Moreover, if the defendant had engaged in the alleged unlawful debt collection practices, it would not have been acting within the scope of the work the rental company hired it to do since the service agreement between the defendant and the rental company prohibits debt collection by any means that violate applicable federal and state law.

In regard to the defendant’s third party beneficiary theory, the Court noted that, under Massachusetts law, a nonsignatory seeking to enforce an arbitration agreement as a third-party beneficiary must point to “clear[] and definite[]” evidence of the parties’ intent that it benefit from the provision. Constantino, 73 Mass. App. Ct. at 356.

The Court noted that the arbitration provision at issue contained competing language regarding the parties who may enforce it. The second sentence of the arbitration provision stated that “Renter and [rental company] agree to arbitrate any and all claims…against each other[,]” which, according to the Court, suggested that the only claims subject to arbitration are those brought by the plaintiff against the rental company or vice versa. The subsequent sentence, however, contradicts this position by stating that all claims against the rental company’s “employees, agents, affiliates or representatives” are also subject to arbitration.

Another section of the arbitration provision contains no mention of third parties, providing that arbitration may occur “if [the rental company] and [the] Renter” fail to resolve the dispute within 30 days, and provide an allocation of arbitration costs between the rental company and the plaintiff.

In light of the competing provisions, the Court held that reasonable minds could differ as to whether the arbitration provision is applicable to claims brought against the defendant. Thus, because the arbitration provision is susceptible to multiple interpretations, it is, at a minimum, ambiguous as to whether the defendant could enforce it. Therefore, the Court held that the defendant failed to put forth the “clear and definite” evidence necessary to show it was entitled to enforce the arbitration provision as a third-party beneficiary.

Accordingly, the order denying the defendant’s motion to compel arbitration was affirmed.

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Brady Hermann is based in Maurice Wutscher’s Boston office and supports the firm’s litigation matters in its New York office, practicing in the firm’s Commercial Litigation and Consumer Credit Litigation groups. Brady has substantial experience as a litigation attorney. He has represented individual and corporate clients in complex litigation matters, focusing on securities litigation and regulation, business and commercial litigation, multidistrict litigation and class actions and more. In addition, he has represented many of the nation’s largest securities broker-dealers in arbitration and regulatory proceedings before the Financial Industry Regulatory Authority and has represented and counseled clients in regulatory, enforcement and criminal investigations before the SEC, FINRA, state securities regulators, the Department of Justice, the FBI and various other governmental and self-regulatory organizations. For more information, see https://mauricewutscher.com/attorneys/brady-hermann/

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