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Cain v. Midland Funding, LLC

Court of Appeals of Maryland

March 24, 2017

CLIFFORD CAIN, JR.
v.
MIDLAND FUNDING, LLC

          Argued: January 9, 2017

         Circuit Court for Baltimore City Case No.: 24-C-13-004869

          Barbera, C.J. Greene Adkins McDonald Watts Getty Harrell, Glenn T., Jr. (Senior Judge, Specially Assigned), JJ.

          OPINION

          ADKINS, J.

         Contractual promises to arbitrate future disputes-in which parties forfeit their right to a trial in court and by a jury-have proven to be controversial. In this appeal we deal with an arbitration clause that seeks to preserve for a lender the right to sue a credit card debtor in small claims court, but insist on arbitration of all other claims relating to the debtor's account. Here, the lender's assignee, while operating as an unlicensed debt collector, obtained a $4, 520.54 judgment against the debtor in the District Court of Maryland, sitting in Baltimore City. The assignee now seeks to arbitrate the debtor's later-filed class action suit collaterally attacking the judgment based on violations of Maryland consumer protection laws. We address whether the assignee, in pursuing its earlier district court suit, waived its right to arbitrate the debtor's claims.

         FACTS AND LEGAL PROCEEDINGS

         In 2003, Clifford Cain, Jr., opened an AT&T Universal Savings and Rewards Card account with Citibank. Cain's contract with Citibank included an arbitration provision that allowed either party to "elect mandatory, binding arbitration for any claim, dispute, or controversy between [Cain] and [Citibank]." Additionally, it provided that the arbitration clause would survive "any transfer, sale or assignment of [Cain's] account, or any amounts owed to [his] account, to any other person or entity." In 2007, Cain stopped making payments on his Citibank account. In 2008, Citibank sold all of the rights, title, and interest in Cain's account to Midland Funding, LLC ("Midland").

         On March 30, 2009, Midland filed a small claims action against Cain in the District Court of Maryland, sitting in Baltimore City, for the outstanding balance on his Citibank account ("the collection action"). The court entered a default judgment against Cain for $4, 520.54. Under the Maryland Collection Agency Licensing Act ("MCALA"), with limited exceptions, companies doing business as a "collection agency" must be licensed by the State. Md. Code (1957, 2015 Repl. Vol.), § 7-301 of the Business Regulation Article ("BR").[1] Although the MCALA required Midland to be licensed when it brought suit against Cain, it did not become licensed until almost a year later.[2]

         On June 23, 2013, the Court of Special Appeals issued an opinion allowing debtors to collaterally attack judgments obtained by unlicensed collection agencies. In Finch v. LVNV Funding LLC, 212 Md.App. 748 (2013), the intermediate appellate court held that a "judgment entered in favor of an unlicensed debt collector constitutes a void judgment as a matter of law." Id. at 764. Thus, "appellants may collaterally attack these judgments in a circuit court action." Id.

         On July 30, 2013, Cain filed a class action complaint against Midland in the Circuit Court for Baltimore City for its unlawful debt collection practices. Cain argued that the judgments Midland obtained against him and the other class members were void under Finch. He brought claims for declaratory and injunctive relief related to the enforcement of the void judgments, unjust enrichment, and violations of the Maryland Consumer Debt Collection Act ("MCDCA"), Maryland Code (1957, 2013 Repl. Vol.), § 14-202(8) of the Commercial Law Article ("CL"), [3] and the Maryland Consumer Protection Act, Maryland Code (1957, 2013 Repl. Vol., 2016 Supp.), CL § 13-301(14)(iii).[4] Cain requested a money judgment "for violations of the MCDCA . . . and for purposes of a sum certain directly related to the judgment sums, pre- and post-judgment interest and costs (including attorney's fees)."

         Shortly after Cain brought suit, Midland and Cain filed a consent motion to stay the class action pending the appeal of Finch to this Court. The Circuit Court granted the stay. On October 8, 2013, this Court denied certiorari in Finch, and two weeks later the Circuit Court lifted the stay in Cain's class action. Midland then moved to compel arbitration and stay the court proceedings, [5] or, alternatively, dismiss Cain's complaint. The Circuit Court stayed discovery and held a trial on the existence of an arbitration agreement between Cain and Midland. After finding that such an agreement did exist, the Circuit Court granted Midland's motion to compel arbitration. The Circuit Court rejected Cain's argument that Midland waived its right to arbitrate when it brought its 2009 collection action against Cain.[6]

         Cain appealed to the Court of Special Appeals, which affirmed. The intermediate appellate court held that Midland did not waive its right to arbitrate by pursuing a small claims action against Cain, seeking court approval of two class settlements in Vassalle v. Midland Funding LLC, 708 F.3d 747 (6th Cir. 2013), or filing a consent motion to stay Cain's class action pending the appeal of Finch. Cain v. Midland Funding, LLC, 2016 WL 1597179, at *13 (Apr. 21, 2016). It concluded that the Circuit Court properly granted Midland's motion to compel arbitration.[7] Id. at *14.

         We granted certiorari to answer the following question:[8]

Did Midland waive its contractual right to arbitrate Cain's claims by either (1) filing a collection action against him in 2009 for outstanding credit card debt, or (2) filing a consent motion to stay the current proceeding pending the appeal of Finch?

         Because we answer this question in the affirmative, we shall reverse the judgment of the Court of Special Appeals.

         STANDARD OF REVIEW

         The parties disagree on the appropriate standard of review for this case. Cain argues that we should review the Circuit Court's determination that Midland did not waive its contractual right to arbitrate without deference. He contends that the question of whether Midland's 2009 collection action was "sufficiently related" to the claims before us to constitute a waiver of the right to arbitrate is a question of law that we should review afresh. By contrast, Midland argues that the question of whether it waived its right to arbitrate is a factual inquiry that we should review only for clear error.

         When the determination of waiver turns on factual analysis, we inquire whether that finding was clearly erroneous. See Brendsel v. Winchester Constr. Co., 392 Md. 601, 618- 19 (2006) (applying clearly erroneous standard of review to question of whether a party waived the contractual right to arbitrate); BarGale Indus., Inc. v. Robert Realty Co., 275 Md. 638, 646 (1975) (applying clearly erroneous standard to question of whether a party waived contract provision requiring minimum mortgage loan). But when a circuit court decision is premised on a conclusion of law, we review that determination without deference. Wholey v. Sears Roebuck, 370 Md. 38, 48 (2002). Thus, when questions of waiver turn on law rather than fact, we ask whether the trial court's decision was legally correct. Holloman v. Circuit City Stores, Inc., 391 Md. 580, 588 (2006) (reviewing trial court's decision that a party waived her right to a jury trial by signing arbitration agreement without deference); Sears, Roebuck & Co. v. Gussin, 350 Md. 552, 559-67 (1998) (implicitly conducting de novo review of whether debtor waived the statutory accountant-client privilege).

         This approach mirrors that of federal courts, which review legal conclusions that a party waived its right to arbitration without deference to the trial court. See, e.g., Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 9 (1st Cir. 2005) ("Given the nature of the issues in this case, the primary of which is waiver, our review of the district court's denial of a motion to compel arbitration and stay judicial proceedings is de novo."); Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344 (5th Cir. 2004) ("We review whether a party's conduct amounts to a waiver of arbitration de novo, but we review any factual findings underlying the district court's waiver determination for clear error." (citation omitted)); MicroStrategy, Inc. v. Lauricia, 268 F.3d 244, 250 (4th Cir. 2001) (same); Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912, 925 (3d Cir. 1992) (conducting "plenary" review of trial court decision to deny motion to stay proceedings and compel arbitration).

         Here, the determination of whether Midland waived its right to arbitrate depends on two questions of law: (1) whether Midland had the option to arbitrate its 2009 collection action under its contract with Cain; and (2) whether, under Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443 (1982), the 2009 collection action is "related" to Cain's current claims against Midland and thus constituted a waiver of the right to arbitrate.[9] As to the first question, "[t]he interpretation of a written contract is ordinarily a question of law for the court and, therefore, is subject to de novo review by an appellate court." Wells v. Chevy Chase Bank, F.S.B., 363 Md. 232, 250 (2001) (citations omitted). As to the second, when a trial court "order involves an interpretation and application of Maryland . . . case law, our Court must determine whether the lower court's conclusions are 'legally correct' under a de novo standard of review." Walter v. Gunter, 367 Md. 386, 392 (2002). Thus, we will review the trial court's determination that Midland did not waive its right to arbitrate without deference.

         DISCUSSION

         The arbitration agreement between Cain and Midland states that it is "governed by the Federal Arbitration Act." Section 2 of the Federal Arbitration Act ("FAA") provides that arbitration clauses "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."[10] 9 U.S.C. § 2 (2012). The United States Supreme Court has described § 2 as the representation of "a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary."[11] Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). But the Supreme Court has instructed state courts to apply state contract law to arbitration clauses when enforceability is at issue. Perry v. Thomas, 482 U.S. 483, 492-93 n.9 (1987). It has explained that in response to judicial non-enforcement of arbitration clauses, Congress passed the FAA to elevate arbitration agreements to "the same footing as other contracts, where [they] belong." Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219 (1985) (quoting H.R. Rep. No. 96, at 1 (1924)). Therefore, under the FAA, "state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally." Perry, 482 U.S. at 493 n.9 (emphasis in original). This body of law includes "generally applicable contract defenses, such as fraud, duress, or unconscionability." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).

         Because waiver is a "generally applicable contract defense, " we analyze whether the arbitration clause was waived, and is therefore unenforceable, under state-not federal-law. As the U.S. Court of Appeals for the Ninth Circuit has explained, under the FAA, "contract-based challenges" to the enforcement of an arbitration clause, such as waiver, "are governed by applicable state law." Cox v. Ocean View Hotel Corp., 533 F.3d 1114, 1121, 1124 (9th Cir. 2008) (holding that the federal district court erred in applying federal law to the question of waiver); see also Walther v. Sovereign Bank, 386 Md. 412, 423 (2005) (citing Southland Corp. v. Keating, 465 U.S. 1, 16 (1984)) (applying Maryland law to the question of whether arbitration agreement is unconscionable and therefore unenforceable); Sanderson Farms, Inc. v. Gatlin, 848 So.2d 828, 835, 837-38 (Miss. 2003) (applying state law to question of whether party waived a contractual right to arbitrate governed by the FAA because waiver is a "usual defense[ ] to a contract"); Parsons v. Halliburton Energy Servs., Inc., 785 S.E.2d 844, 853 ( W.Va. 2016) (applying state law to determine whether party waived right to arbitrate because, under the FAA, the "rights and liabilities of the parties are controlled by the state law of contracts" (citation omitted)).[12]

         Under Maryland law, the waiver of the contractual right to arbitrate "may result from an express agreement or be inferred from circumstances." BarGale, 275 Md. at 643. To waive the right to arbitrate without express agreement, a party must take action "inconsistent with an intention to insist upon enforcing" the arbitration clause. Id. In Frank, we addressed for the first time the question of "whether participation as a party in a judicial proceeding constitutes a waiver of the right to arbitrate issues raised and/or decided in that proceeding." 294 Md. at 449. We concluded that it did, but that such a waiver did not extend to "other unrelated issues arising under the contract." Id. at 450 (emphasis added). Here, we must first determine whether Midland could have arbitrated its 2009 collection action. If so, we then must address whether Midland's 2009 collection action is related to Cain's claims under the standard set forth in Frank, and thus constituted a waiver of the right to arbitrate the current dispute. If not, Midland's litigation of that claim was not "inconsistent with an intent[ ] to insist upon" its contractual right to arbitration, and it did not waive its right to arbitrate Cain's claims. See BarGale, 275 Md. at 643.

         Arbitration Clause

         Midland argues that under the terms of the arbitration agreement, claims that fall within the jurisdiction of a small claims court are not arbitrable. Therefore, it was required to litigate its collection action against Cain in district court, and the fact that it did so cannot constitute a waiver of its right to arbitrate. We disagree.

         Because arbitration is a matter of contract, we use contract principles to determine whether an agreement to arbitrate exists. Ford v. Antwerpen Motorcars Ltd., 443 Md. 470, 477 (2015) (citations omitted). When a contract's language is unambiguous, as it is here, we give effect to its plain meaning without considering what the parties intended. Rourke v. Amchem Prod., Inc., 384 Md. 329, 354 (2004) (citation omitted). Therefore, only "the intention of the parties as expressed in the language of the contract controls the analysis." Antwerpen, 443 Md. at 477 (citation omitted).

         The arbitration clause at issue provides:

Agreement to Arbitrate:
Either you or we may, without the other's consent, elect mandatory, binding arbitration for any claim, dispute, or controversy between you ...

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