• Arbitration Waived by Bringing Small Claims Collection Lawsuit
  • April 18, 2017 | Authors: Marjorie A. Corwin; Robert A. Gaumont; Bryan M. Mull
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • A recent ruling by the Court of Appeals of Maryland could impair the ability of creditors to enforce arbitration agreements. In its March 24, 2017 decision, Maryland's highest court held that a debt buyer waived its right to arbitrate a consumer's putative class action for unlawful collection practices because the consumer's claims were related to the debt buyer's earlier small claims collection lawsuit. The case involved a credit card account and the related credit card agreement which contained an arbitration provision. After the consumer defaulted, the original creditor sold the account to a debt buyer and the debt buyer filed a collection lawsuit against the consumer in the District Court of Maryland for Baltimore City (small claims court). In August 2009, the debt buyer obtained a default judgment against the consumer. The debt buyer was not licensed in Maryland as a collection agency at the time it obtained the judgment. Nearly four years later, on June 28, 2013, the Court of Special Appeals, Maryland's intermediate appellate court, issued an opinion allowing debtors to collaterally attack judgments by unlicensed collection agencies. The consumer immediately filed a putative class action complaint in the Circuit Court for Baltimore City against the debt buyer for allegedly unlawful collection practices. The debt buyer moved to compel arbitration and the consumer objected asserting, among other arguments, that the debt buyer waived its right to arbitration when it brought the small claims collection lawsuit. The credit card agreement arbitration provision included language providing that "Claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual (non-class, non-representative) Claim." The Circuit Court rejected the consumer's arguments and granted the debt buyer's motion to compel arbitration. In an unreported decision, the Court of Special Appeals affirmed. The Court of Appeals, however, reversed in a 5-2 decision. Under Maryland law, participation as a party in a judicial proceeding constitutes a waiver of the right to arbitrate issues raised or decided in that proceeding; however, such a waiver does not extend to other unrelated issues. The Court of Appeals emphasized that the consumer's claims in the putative class action were related to the judgment in the small claims collection lawsuit. The Court rejected the debt buyer's argument that language in the arbitration agreement (quoted above) required it to litigate claims falling under the jurisdiction of a small claims court and, therefore, could not constitute a waiver. In the Court's view, the arbitration provision makes a collection action subject to either arbitration or litigation until the claim is filed in a small claims court. Therefore, the debt buyer acted inconsistently with the arbitration provision by filing the collection lawsuit and, according to the Court, waived its right to arbitrate the related putative class action filed by the consumer. This decision should inform future recovery efforts in Maryland by creditors and debt buyers. It may prompt revising arbitration language to clarify that seeking relief in a small claims court does not waive arbitration rights for other claims or it may prompt changes in recovery efforts.