Maryland’s Highest Court Finds Small Claims Court Action Waived Right To Arbitrate

by Stinson Leonard Street - Arbitration Nation
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It is not uncommon for lenders to exempt small claims actions from their arbitration provisions. The question confronted by the Court of Appeals of Maryland in a recent case was: when a lender opts for small claims court, does that waive any later right to enforce the arbitration clause?  The court’s answer was yes, if the claims are related.

In Cain v. Midland Funding, LLC, __ A.3d__, 2017 WL 1101804 (Md. Mar. 24, 2017), the lender pursued its collection action against the credit card holder in small claims court in 2009.  It obtained a default judgment for $4,520.  In 2013, that same credit card holder filed a class action complaint against the lender, arguing the lender had been an unlicensed collection agency. The lender moved to compel arbitration.  The trial court compelled arbitration, finding the lender had not waived its right to arbitrate by bringing the 2009 case, and the intermediate appellate court agreed.

A five-member majority of Maryland’s highest court applied a de novo standard of review and reversed on the issue of waiver (two judges dissented).  It applied Maryland case law that holds participating in a judicial proceeding only constitutes a waiver of the right to arbitrate issues raised in that proceeding, but not “unrelated issues.”  Therefore, the court looked at whether the lender could have arbitrated its collection action, and if so, whether that was related to the licensing issue raised in 2013.

The arbitration agreement at issue states 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. . . Claim.” The court found that language, along with the broad language that “all Claims . . . are subject to arbitration,” gave the lender the choice to litigate or arbitrate the collection issue.

The court also found the 2009 and 2013 claims were sufficiently related to apply the waiver doctrine. “Put simply, if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist.”  The majority noted that 2016 cases from both Nevada and Utah had reached similar conclusions.  Finally, the court refused to require a showing of prejudice: “Cain does not have to demonstrate that he will suffer prejudice if the arbitration clause is enforced.”

This issue is an important one for lending institutions. If the small claims court option is generally efficient, it may be worthwhile adding a clause to those arbitration provisions that pursuit of a claim in small claims court does not waive the right to raise arbitration as a defense in any later action.

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Maryland did not make my list of 5 states most hostile to arbitration last summer (and still wouldn’t). BUT, some of the states on that list have recently issued surprisingly pro arbitration decisions.  Check these out:

  • WEST VIRGINIA recently reversed a lower court’s refusal to enforce arbitration. It found the employee had failed to show the arbitration provision was unconscionable. It wasn’t all sunshine and arbitration butterflies, though.  One justice wrote a concurring opinion asking Congress to take action. “We can only hope that…Congress will implement better safeguards to the FAA to ensure that the legal rights of unsophisticated employees are protected.” Employee Resource Group, LLC v. Harless, 2017 WL 1371287 (W.Va. April 13, 2017).
  • WEST VIRGINIA also enforced an arbitration clause waiving class actions in Citizens Telecommunications Co. v. Sheridan, 2017 WL 1457006 (W.Va April 20, 2017). In that case, the class action waiver had been added via notice to all consumers pursuant to a modification clause in the original terms of the agreement. Because the new terms and conditions were distributed with a paper billing statement and “accepted” via continued use of the internet service, the court found they were a valid unilateral contract, just like an employee handbook. Therefore, the court enforced individual arbitration of the claims.
  • HAWAII confirmed an arbitration award in RT Import v. Torres, 2017 WL 1366999 (Ha. April 13, 2017), although reversed the trial court’s additional award of additional costs above the award. The court did get a jab in at arbitration in a footnote, though. It noted that the arbitrator awarded damages for emotional distress to a corporation. After commenting that there is no legal authority allowing such damages, the opinion states: “parties who submit their claims to binding arbitration assume all the hazards of the arbitration process, including the risk that the arbitrator may make mistakes in the application of law and in their findings of fact.”
  • ALABAMA found the arbitration agreement between a family and a funeral home was not unconscionable in Newell v. SCI Alabama Funeral Services, LLC, 2017 WL 1034469 (March 17, 2017).

I really should have titled this post “State Court Smorgasbord”...

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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