Can Debt Buyers Use Forced Arbitration Clauses After Suing Consumers In Court?

Midland Funding, a subsidiary of Encore Capital Group, is the world’s largest debt buyer and one of the most prolific users of Maryland’s District Court. It has filed tens of thousands of suits against Marylanders. But when one of those consumers, Mr. Cain, sued Midland Funding, Midland convinced the trial court and the intermediate appellate court to throw his case out of court and into forced arbitration on an individual basis, rather than as a class action.  In a March, 2017 watershed opinion, Maryland’s highest court overruled the lower court and held that when it originally sued Mr. Cain in a collection action, Midland waived its right to compel arbitration.   The Court of Appeals said:

Because Midland’s 2009 collection action is related to Cain’s claims, Midland waived its right to arbitrate the current claims hen it chose to litigate the collection action. In addition, Cain does not have to demonstrate that he suffered prejudice to establish that Midland waived the arbitration provision.

Mr. Cain was sued by Midland in 2009 over an old consumer debt Midland claimed it purchased. Midland got a judgment. At that time Midland was not licensed to as a debt collector in Maryland. Maryland law is clear that judgments obtained by an unlicensed debt collector are void. So, Mr. Cain for himself and in a class action on behalf of everyone else Midland sued without a license, sued Midland. Midland, relying on the arbitration clause used by Mr. Cain’s original creditor, tried to force Mr. Cain into arbitration. That move also stopped the class action.

Cain argued that Midland had waived its right to force him into arbitration, when it chose to sue him in the District Court. His suit against Midland was about Midland’s use of Maryland’s courts. The Court of Appeals agreed, finding that Midland had waived the right to arbitrate Cain’s claims, because his claims were related to Midland’s collection suit.

So how far does filing a collection suit waive arbitration? The Court of Appeals noted that “[c]laims are related when ‘[t]he claim is in actuality part of one basic issue.’” Cain v. Midland Funding, LLC, quoting Charles J. Frank Inc. v. Associated Jewish Charities of Baltimore, Inc. In Cain “if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist. Thus the claims are part of ‘one basic issue’ of whether Midland was entitled to a money judgment against Cain, and therefore are related.”

Claims that might be “related” to a collection action would include:

  • Allegations that the debt buyer sued for the wrong amount
  • Allegations that the debt buyer engaged in other illegal conduct during the suit (such as unlawful garnishment or deceptive statements).
  • Allegations that the debt buyer had not right to sue in the first place (this is effectively what the licensing claims underlying the Cain case are about)

Less likely to be related are:

  • Telephone Consumer Protection Act claims
  • Deceptive statements in pre- or post-litigation correspondence or calls, where the statements are deceptive for a reason unrelated to the suit – for example failing to include a required notice.

The Cain case is a huge victory for Maryland consumers, but forced arbitration will continue to limit the ability of many consumers to get their day in court.