The More the Merrier: Court Rejects Waiver Argument, Enforces Arbitration Clause in Consumer Contract

by Carlton Fields
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A federal district court in Oklahoma recently rejected a defaulting borrower’s attempt to argue that her lender’s pursuit of foreclosure litigation waived the lender’s right to insist on arbitration of the borrower’s counterclaims, and also compelled arbitration of the borrower’s third party claims against a lender-placed insurer, even though the insurer was not a signatory to the arbitration agreement.

After her mortgage lender initiated a foreclosure proceeding in an Oklahoma state court, the borrower in Beneficial Financial I Inc. v. Cravens removed the action to federal court and asserted a variety of counterclaims against the lender related to the servicing of the mortgage. She also filed a third party claim against the insurance company that had issued lender-placed insurance (“LPI”) to protect the mortgaged property after the borrower allowed her homeowner’s insurance policy to lapse, claiming that the insurance was unnecessary, excessively expensive, and accelerated her inability to bring the delinquent mortgage loan current, the borrower demanded substantial compensatory and extra-contractual damages as well as the total release of her loan obligation.

The lender and insurer jointly moved to compel arbitration pursuant to an arbitration clause in her loan agreement, which pre-dated the CFPB regulation banning arbitration provisions in home mortgage loans. The Court rejected the borrower’s argument that her lender waived the right to compel arbitration by initially refusing to arbitrate the foreclosure dispute, and by filing the state court foreclosure action, finding that first, the arbitration rider included a carve-out for foreclosure actions and, thus, the filing of a foreclosure action was not inconsistent with the agreement. Additionally, although the court agreed that the loan servicer’s initial refusal to arbitrate was inconsistent with its subsequent arbitration demand, it found that action insufficient to constitute a waiver. Given the strong federal policy in favor of arbitration, action inconsistent with the right to arbitrate is just one factor in making a waiver determination, and because other factors to establish a waiver were largely absent, the court found there was no waiver as a matter of law.

Although the LPI insurer was not a signatory to the loan agreement or arbitration clause, the court also granted the insurer’s motion to compel arbitration under an equitable estoppel theory. Equitable estoppel can be used by a non-signatory to compel arbitration where the contracting party’s claims against the non-signatory are related to the agreement that includes the arbitration clause, and where the claims allege interdependent or concerted conduct between the non-signatory and a signatory. Use of equitable estoppel to compel arbitration should be considered whenever a co-defendant’s contract includes an arbitration clause.

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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