The Third Circuit Court of Appeals recently held that a district court should have granted a motion to compel arbitration even though there was a dispute about the legality of an assignment of a loan agreement that contained the arbitration clause at issue. The Third Circuit explained that there was a valid agreement to arbitrate, which was sufficient to send the case to arbitration.

OneMain Financial Group, a nonbank finance company that issues consumer loans, issued a loan to Benjamin Zirpoli pursuant to the Consumer Discount Company Act (CDCA), which creates exceptions to state usury laws. That loan contained an arbitration clause that provided that “You or We have an absolute right to demand that any Claim be submitted to an arbitrator in accordance with this Arbitration Agreement.” “We” was defined to include OneMain’s “assignees.” “Claim” was meanwhile defined to include “anything related to … the arbitrability of any Claim pursuant to this Agreement” and “anything related to … any alleged violation [of a state statute], including without limitation … usury … laws.”

OneMain sold Zirpoli’s account, which was then delinquent, to Midland Funding LLC, a company that purchases consumer debt. The “CDCA prohibits CDCA licensees from ‘selling contracts to a … corporation not holding a license … without the prior written approval of the Secretary of Banking,’” but Midland apparently “did not possess a CDCA license or request approval from the Department of Banking” to acquire Zirpoli’s account.

Midland sued Zirpoli to collect the debt but later dismissed the suit and then allegedly reported Zirpoli’s delinquent debt to various consumer agencies, which purportedly negatively affected Zirpoli’s credit. Zirpoli then filed a putative class action alleging that because Midland did not have a CDCA license and did not obtain approval from the Department of Banking, it was not lawfully permitted to purchase his loan or the other CDCA-governed loans it acquired.

Midland moved to compel arbitration. The district court ultimately denied Midland’s motion based on the purported illegality of the transfer from OneMain to Midland.

The Third Circuit (with one judge dissenting) vacated the district court’s decision and remanded the case with instructions to grant Midland’s motion to compel arbitration.

After holding that “party” under section 4 of the Federal Arbitration Act “refers to a party to a litigation” and that it therefore had jurisdiction to consider Midland’s motion on appeal, the Third Circuit held that arbitration was appropriate because Zirpoli had signed a valid arbitration agreement and that agreement applied to OneMain’s assigns, which included Midland. The Third Circuit acknowledged that there was a dispute about the legality of OneMain’s assignment to Midland but explained that its analysis was limited to the threshold question of whether there was a valid agreement to arbitrate in light of the delegation clause delegating issues of arbitrability to the arbitrator and that it was therefore prohibited from analyzing the merits of the dispute regarding whether that agreement should be invalidated because it violated the CDCA.

The Third Circuit alternatively held that even if it considered the merits of Zirpoli’s claim, it would reject his contention that the assignment was invalid. OneMain had “charged-off” Zirpoli’s loan, which meant that the “assignment falls outside of the CDCA’s purview.”

Zirpoli v. Midland Funding, LLC, No. 21-2438 (3d Cir. Sept. 1, 2022).