Cain v. Midland Funding , 452 Md. 141 ( 2017 )

Clifford Cain, Jr. v. Midland Funding, LLC, No. 45, September Term, 2016, Opinion by
Adkins, J.
CONTRACTS — ARBITRATION CLAUSE — WAIVER: A debt buyer waived its
right to arbitrate a debtor’s claims for unlawful debt collection practices when it brought a
collection action against the debtor in court. When the debt buyer obtained a judgment
against the debtor in district court, it acted inconsistently with an intent to enforce the
arbitration clause, and therefore waived the right to arbitrate any “related claims” under
Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443(1982). The debt buyer’s claims for declaratory and injunctive relief, pre- and post-
judgment costs, unjust enrichment, and violations of Maryland Consumer Debt Collection
Act and the Maryland Consumer Protection Act arose from the debt buyer’s collection
action, and thus constituted “related claims.” Therefore, the debt buyer waived its right to
arbitrate these claims.
Circuit Court for Baltimore City
Case No.: 24-C-13-004869
Argued: January 9, 2017
IN THE COURT OF APPEALS
OF MARYLAND
No. 45
September Term, 2016
CLIFFORD CAIN, JR.
v.
MIDLAND FUNDING, LLC
Barbera, C.J.
Greene
Adkins
McDonald
Watts
Getty
Harrell, Glenn T., Jr. (Senior Judge,
Specially Assigned),
JJ.
Opinion by Adkins, J.
Getty and Harrell, JJ., dissent.
Filed: March 24, 2017
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.1
Maryland Code (1957, 2015 Repl. Vol.), § 7-301 of the Business Regulation
Article (“BR”), provides:
§ 7-301. License required; exceptions.
(a) In general. — Except as otherwise provided in this title, a
person must have a license whenever the person does business
as a collection agency in the State.
(b) Exceptions. — This section does not apply to:
(1) a regular employee of a creditor while the employee
is acting under the general direction and control of the creditor
to collect a consumer claim that the creditor owns; or
(2) a regular employee of a licensed collection agency
while the employee is acting within the scope of employment.
2
The Maryland Collection Agency Licensing Act (“MCALA”) defines a “collection
agency,” in relevant part, as “a person who engages directly or indirectly in the business of
. . . collecting a consumer claim the person owns, if the claim was in default when the
person acquired it.” Md. Code (1957, 2015 Repl. Vol.), BR § 7-101(c)(1)(ii).
2
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
3
Maryland Code (1957, 2013 Repl. Vol.), § 14-202(8) of the Commercial Law
Article (“CL”) prohibits debt collectors from “[c]laim[ing], attempt[ing], or threaten[ing]
to enforce a right with knowledge that the right does not exist.”
4
Maryland Code (1957, 2013 Repl. Vol., 2016 Supp.), CL § 13-301(14)(iii) defines
a violation of the Maryland Consumer Debt Collection Act, including CL § 14-202(8), as
an “[u]nfair or deceptive trade practice.”
5
Midland moved to compel arbitration and stay the proceedings under Maryland
Code, (1957, 2013 Repl. Vol.), §§ 3-202, 3-207, and 3-209 of the Courts and Judicial
3
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
Proceedings Article (“CJP”), which provide procedures for judicial enforcement of
arbitration agreements.
6
Neither Midland nor Cain argued that the question of waiver was for the arbitrator
to decide, rather than the court.
7
The Court of Special Appeals also addressed the question of whether the
arbitration clause at issue merged into the 2009 collection judgment and, therefore, was no
longer effective. Cain v. Midland Funding, LLC, 2016 WL 1597179, at *8–11 (Apr. 21,
2016). The court held that the arbitration clause did not merge into the judgment. Id. at
*11. Neither party has appealed this aspect of the court’s decision.
We have consolidated and rephrased the two questions presented in Cain’s Petition
8
for a Writ of Certiorari. Cain’s Petition included the following questions:
4
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.
1. Did the Court of Special Appeals err in concluding that a
debt buyer’s pattern of filing thousands of collection
actions in Maryland courts, and obtaining judgments in
those actions, was unrelated to a later putative class action
seeking a judicial declaration that those earlier judgments
were void and disgorgement of the money obtained through
the judgments, thus finding the doctrine of waiver
inapplicable and permitting the debt buyer to compel
arbitration on an individual basis?
2. In concluding that no waiver of the right to arbitrate had
occurred, did the Court of Special Appeals err in
disregarding the tactical timing of the debt buyer’s motion
to compel arbitration, which it filed only after this Court
denied certiorari, and thus made final and binding, a Court
of Special Appeals opinion in a related case that was
adverse to the debt buyer’s litigation position?
5
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
6
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
9
Cain’s credit card agreement contains a choice of law provision which states that
federal law and South Dakota law govern the agreement. As we will establish, infra,
federal law does not apply in this case. And neither Cain nor Midland argued that South
Dakota law applies—they advanced arguments under Maryland law. When parties assume
that Maryland law applies, this Court has the discretion to accept that assumption. Felland
Ltd. P’ship v. Digi-Tel Commc’ns, LLC, 384 Md. 520, 530 n.1 (2004) (“[T]his Court could,
in its discretion, . . . accept for purposes of this case the parties’ assumption that Maryland
scope of employment law controls.” (citations omitted)); see also Beale v. Am. Nat.
Lawyers Ins. Reciprocal, 379 Md. 643, 651–52 n.5 (2004) (declining to apply another
state’s law because the case proceeded in the trial court on the assumption that Maryland
law applied and a petition for writ of certiorari was granted on that basis); Frericks v. Gen.
Motors Corp., 274 Md. 288, 296–97 (1975) (same). Here, both parties and the Circuit
Court proceeded on the assumption that Maryland law governs the issue of waiver of the
right to arbitrate. Because both parties advanced arguments under Maryland law as to the
waiver issue, we will exercise our discretion and apply the law of our State.
Cain’s credit card agreement also contains a “non-waiver” clause, which states, “We
can delay in enforcing or fail to enforce any of our rights under this Agreement without
losing them.” But Midland does not contend that this provision applies here. Moreover,
the Court of Appeals has held that a party can waive a contractual right even though the
contract contains an express non-waiver provision. Hovnanian Land Inv. Grp., LLC v.
Annapolis Towne Ctr. at Parole, LLC, 421 Md. 94, 125 (2011). “Waiver of a non-waiver
7
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
clause may be shown through the same actions that prove waiver of the contract clause at
issue.” Id. at 129. Therefore, if Midland waived its right to arbitrate Cain’s claims by
pursuing the 2009 collection action, it also waived the non-waiver provision.
10
We are aware that federal circuit courts, and at least one state court, address the
question of waiver under § 3 of the Federal Arbitration Act (“FAA”) rather than § 2. See,
e.g., Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 12–13 (1st Cir. 2005) (collecting
federal cases); Hudson v. Citibank (S. Dakota) NA, 387 P.3d 42 (Alaska 2016). Section 3
permits federal courts to stay a proceeding pending arbitration if “the applicant for the stay
is not in default in proceeding with such arbitration.” 9 U.S.C. § 3 (2012). But in state
courts, state court procedures govern petitions for a stay of proceedings. See Southland
Corp. v. Keating, 465 U.S. 1, 16 n.10 (1984) (“[W]e do not hold that §§ 3 or 4 of the [FAA]
apply to proceedings in state courts.”). Moreover, Midland filed its motion to compel
arbitration pursuant to the Maryland Uniform Arbitration Act, not the Federal Arbitration
Act. Supra, note 5. Thus, § 3 of the FAA does not apply in this case, and we will analyze
the question of waiver under § 2.
8
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
11
Similarly, the Maryland Uniform Arbitration Act, found in Maryland Code (1957,
2013 Repl. Vol.), CJP §§ 3-201 through 3-234, “expresses [state] legislative policy
favoring enforcement of agreements to arbitrate.” Cheek v. United Healthcare of the Mid-
Atl., Inc., 378 Md. 139, 146 (2003) (citation omitted).
9
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
12
But see Singer v. Jefferies & Co., 575 N.E.2d 98, 102–03 (N.Y. 1991) (applying
federal law to the question of waiver of an arbitration clause governed by the FAA).
10
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 and us (called “Claims”).
Claims Covered:
What Claims are subject to arbitration? All Claims relating
to your account, a prior related account, or our relationship are
subject to arbitration, including Claims regarding the
11
application, enforceability, or interpretation of this Agreement
and this arbitration provision. All Claims are subject to
arbitration, no matter what legal theory they are based on or
what remedy (damages, or injunctive or declaratory relief) they
seek. This includes Claims based on contract, tort (including
intentional tort), fraud, agency, your or our negligence,
statutory or regulatory provisions, or any other sources of law;
Claims made as counterclaims, cross-claims, third-party
claims, interpleaders or otherwise; and Claims made
independently or with other claims. A party who initiates a
proceeding in court may elect arbitration with respect to any
Claim advanced in that proceeding by any other party. Claims
and remedies sought as part of a class action, private attorney
general or other representative action are subject to arbitration
on an individual (non-class, non-representative) basis, and the
arbitrator may award relief only on an individual (non-class,
non-representative) basis.
By its terms, the arbitration agreement permits either party to elect arbitration of
“any claim, dispute, or controversy.” But it provides a narrow exception from arbitration
for suits filed in small claims court:
What about Claims filed in Small Claims Court? 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 (non-class, non-representative) Claim.
Midland argues that this exception required it to litigate all claims falling under the
jurisdiction of a small claims court. Specifically, it argues that the phrase, “are not subject
to arbitration” prohibited it from arbitrating the 2009 collection action. But Midland’s
cramped reading overlooks the beginning of this provision—“claims filed.” When read
together—“[c]laims filed in small claims court are not subject to arbitration”—it is clear
that the collection action was subject to arbitration or litigation until Midland filed the
claim in small claims court. (Emphasis added.) At that point, the restriction on arbitration
12
was triggered. Thus, Midland could choose whether to litigate or arbitrate its collection
action against Cain—and it chose to litigate. And, in doing so, Midland waived its right to
arbitrate “related claims”—a term that is much disputed.
“Related Claims” Under Frank
Cain argues that his claims, though not identical, are “closely related” to Midland’s
2009 collection action, and thus Midland waived its right to arbitrate them by litigating an
arbitrable issue in that proceeding. Midland counters that it did not waive its right to
arbitrate Cain’s claims by litigating the collection action because, under Frank, “waiver is
limited to those issues raised and/or decided in the judicial proceeding,” and Midland’s
collection practices were not at issue in that proceeding. Frank, 294 Md. at 454. We do
not read Frank so narrowly.
Frank primarily involved two contract disputes that arose out of the construction of
a community center. Id. at 445–47. In the first dispute, a subcontractor sued a contractor
for additional compensation for the removal of rock from the construction site. Id. at 445.
The contractor answered and impleaded the owner. Id. Although the claim was arbitrable,
the owner did not pursue arbitration, and, eventually, the parties settled. Id. at 445–46.
Two months later, the contractor, in accordance with the construction contract, filed a
demand for arbitration against the owner for the outstanding balance on the contract. Id.
at 446. The owner attempted to force the contractor to litigate the claim, arguing that the
contractor had waived the arbitration provision by litigating the first lawsuit. Id. We held
that the contractor had not waived its right to arbitrate its dispute with the owner because
the issue in the second case was “unrelated” to the rock removal at issue in the first case.
13
Id. at 454–55. We explained that “waiver does not extend to any unrelated issues arising
under the contract” and suggested that it only extends to other disputes when “all of the
parts of the dispute [are] deemed to be interrelated.”13 Id. at 454, 453. We emphasized
that claims are related when “[t]he claim is in actuality part of one basic issue.” Id. at 453(emphasis in original) (citation omitted).
Although, like Frank, this case involves two lawsuits arising under the same
contract, the similarities end there. The Frank cases involved two completely separate
issues—a contractor’s failure to pay a subcontractor for rock removal and an owner’s
failure to pay the contractor the balance due on the construction project. Neither suit was
dependent on the other. Cain’s current claims, however, depend on Midland’s 2009
collection action and money judgment. Cain seeks declaratory and injunctive relief to
recover the judgment against him and pre- and post-judgment interest and costs. He also
brings unjust enrichment, MCDCA, and Maryland Consumer Protection Act claims against
13
Federal courts that have addressed this question also analyze whether the claims
at issue are factually and legally distinct from those litigated previously. In MicroStrategy,
Inc. v. Lauricia, 268 F.3d 244 (4th Cir. 2001), the U.S. Court of Appeals for the Fourth
Circuit held that an employer did not waive its right to arbitrate its former employee’s
discrimination claims when it filed suit to keep the former employee from disclosing
confidential information. Id. at 250. The court explained, “Because these claims are
distinct, both factually and legally, from [the former employee’s] discrimination claims,
the litigation surrounding these claims cannot support a finding that [the employer] waived
its right to arbitrate the unrelated claims.” Id. (emphasis added). Similarly, in Doctor’s
Associates, Inc. v. Distajo, 107 F.3d 126 (2d Cir. 1997), the Second Circuit explained that
“only prior litigation of the same legal and factual issues as those the party now wants to
arbitrate results in waiver of the right to arbitrate.” Id. at 133. The Seventh Circuit has
explained that a party waives its right to arbitrate future disputes “growing out of the same
set of circumstances” when it chooses to bring its adversary to court. Midwest Window
Sys., Inc. v. Amcor Indus., Inc., 630 F.2d 535, 536 (7th Cir. 1980).
14
Midland. Put simply, 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. See Frank, 294
Md. at 453.
Other states considering the same question have concluded that debt collectors that
pursue collection actions against debtors waived the right to arbitrate claims challenging
the final judgments rendered in those actions. In a Nevada case, Principal Investments,
Inc. v. Harrison, 366 P.3d 688 (Nev. 2016), a payday loan company used process servers
who filed false affidavits attesting that summonses and complaints had been served when
they had not.14 It then obtained default judgments against borrowers when they failed to
appear in court. Id. at 690–91. Several borrowers brought a class action suit against the
payday loan company requesting declaratory and injunctive relief, including that the
judgments be declared void. Id. at 691. The Nevada Supreme Court held that the payday
loan company waived its right to arbitrate the class’s claims. Id. at 697–98. It reasoned
that because the payday loan company had initiated the collection actions, it would be
unfair to the borrowers to require arbitration of the claims seeking to set aside the
judgments due to the company’s alleged fraud or criminal conduct. Id. Distinguishing the
case from cases finding no waiver, it emphasized that the borrowers’ claims “arise out of,
and are integrally related to” the small claims actions. Id. at 697.
14
The process servers were also cited for serving process without a license.
Principal Investments v. Harrison, 366 P.3d 688, 691 (Nev. 2016).
15
In a similar case, Nelson v. Liberty Acquisitions Servicing LLC, 374 P.3d 27 (Utah
Ct. App. 2016), Utah’s intermediate appellate court found that a debt buyer had waived its
right to arbitrate claims challenging its debt collection practices by pursuing collection
actions in court.15 Id. at 30. It reasoned that the debtors’ state and federal consumer
protection act claims “did not just exist at the time of the [c]ollection [a]ctions but were in
fact created by the filing of the [c]ollection [a]ctions.” Id. We find this logic persuasive.
Here, Cain would not have claims against Midland if it had not pursued the 2009 collection
action in district court. Indeed, Cain’s claims would not exist if Midland had not obtained
a final judgment against him while it was unlicensed. See Finch, 212 Md. App. at 769
(holding that district court judgments obtained by unlicensed debt collectors are void and
may be collaterally attacked in another court). Thus, Midland waived its right to arbitrate
Cain’s claims when it filed and pursued the 2009 collection action.16
15
But see Hudson, 387 P.3d at 50–52 (holding debt collector did not waive its right
to arbitrate consumer protection claims by bringing collection action in court because the
“evidence and legal theories included in the two different claims would have little if any
overlap”).
16
Cain advances two additional arguments regarding the issue of waiver. First, he
argues that Midland waived its right to arbitrate by waiting to invoke the arbitration clause
until after this Court denied certiorari in Finch. Second, Cain argues that Midland’s course
of conduct in litigating the Vassalle v. Midland Funding LLC, 708 F.3d 747 (6th Cir. 2013),
class action suit for over five years and filing thousands of collection actions in Maryland
state court are acts “inconsistent with [the] intent[ ] to insist upon” arbitration, and therefore
Midland waived its right to arbitrate. See BarGale Indus., Inc. v. Robert Realty Co., 275
Md. 638, 643 (1975). We decline to reach these arguments because we have concluded
that Midland waived its right to arbitrate Cain’s current claims by pursuing the 2009
collection action.
16
Prejudice as an Element of Waiver
Lastly, Midland argues that to find waiver of its right to arbitrate, we must determine
that Cain would be prejudiced if this dispute moved to arbitration.17 We have never
addressed the question of whether prejudice is required to find waiver of the right to
arbitrate.18 Thus, we look to Maryland law establishing the elements of general contractual
waiver.
In Maryland, it is well-settled that waiver is “the intentional relinquishment of a
known right, or such conduct as warrants an inference of the relinquishment of such right,
17
Midland argues that, under the FAA, Cain must demonstrate prejudice for us to
find that Midland waived its right to arbitrate. It is true that most federal courts require a
showing of prejudice to find a “default” under § 3 of the FAA, supra, note 10. See, e.g.,
Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004) (“In
addition to the invocation of the judicial process, there must be prejudice to the party
opposing arbitration before we will find that the right to arbitrate has been waived.”); Am.
Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 95 (4th Cir. 1996)
(The “key inquiry” in determining waiver is “whether the party opposing the stay has
suffered any actual prejudice.” (citation omitted)). But as discussed previously, we apply
Maryland law to the question of whether a party has waived its right to arbitrate under the
FAA. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996); Perry v. Thomas,
482 U.S. 483, 492–93 n.9 (1987). Because prejudice (if relevant) is a part of the waiver
analysis, we also apply Maryland law to the question of whether prejudice is required to
find such a waiver.
18
This question has reached the Court of Special Appeals, and that court has never
treated prejudice as a prerequisite to waiver. See Freedman v. Comcast Corp., 190 Md.
App. 179, 206 (2010) (analyzing prejudice as part of overall analysis of whether a party
had waived the right to arbitrate); Abramson v. Wildman, 184 Md. App. 189, 200–02 (2009)
(same); Commonwealth Equity Servs., Inc. v. Messick, 152 Md. App. 381, 398 (2003) (“We
need not decide . . . whether delay, without a showing of prejudice to the opposing party,
may support a finding of waiver . . . because . . . the court found that appellees had been
prejudiced by appellants’ delay in seeking to compel arbitration.”); RTKL Assocs., Inc. v.
Four Villages Ltd. P’ship, 95 Md. App. 135, 144 (1993) (declining to reach the issue of
“whether prejudice must be occasioned before a waiver may be found” because the trial
court found that the opposing party was prejudiced by the delay).
17
and may result from an express agreement or be inferred from circumstances.” Hovnanian
Land Inv. Grp., LLC v. Annapolis Towne Ctr. at Parole, LLC, 421 Md. 94, 122–23 (2011)
(citation omitted). We have clarified the elements of waiver by distinguishing it from the
related doctrine of estoppel. This Court has explained that “waiver does not necessarily
imply that one has been misled to his prejudice or into an altered position,” whereas
“estoppel always involves this element.” Benson v. Borden, 174 Md. 202, 219 (1938); see
also Hovnanian, 421 Md. at 122 (describing how a party may waive a contractual right
with no mention of prejudice); Gould v. Transamerican Assocs., 224 Md. 285, 299 (1961)
(evaluating prejudice to the opposing party only as part of estoppel analysis, not waiver
inquiry). In Williston on Contracts, Professor Richard A. Lord explains the difference
between true contractual waiver and “waiver by estoppel”:
Unlike a waiver by estoppel, implied from conduct,
which depends not so much on the intention of the waiving
party as on the reliance of the nonwaiving party, a true waiver,
implied from a party’s conduct, is dependent solely on what
the party charged with waiver intends to do, and there is no
need to show reliance by the party asserting or claiming the
waiver.
13 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 39:28, at
683 (4th ed. 2013) (footnote omitted). Although “the same conduct may constitute both
an implied waiver and an estoppel,” waiver does not require a showing of prejudice. Gould,
224 Md. at 295. To determine whether a party has waived a contractual right, we look to
the words and conduct of that party—not what effect the conduct may have had on the
opposing party. Wright v. Wagner, 182 Md. 483, 491 (1943).
18
Despite this distinction between waiver and estoppel generally, when evaluating
whether a party has waived its right to arbitrate in particular, “many courts adopt reasoning
or language that is grounded more in estoppel than waiver or a loose combination of the
two.” 8 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction
Law § 21:178, at 88 (2014). For example, the Nevada Supreme Court has explained, “[A]
waiver may be shown when the party seeking to arbitrate (1) knew of his right to arbitrate,
(2) acted inconsistently with that right, and (3) prejudiced the other party by his inconsistent
acts.” Nev. Gold & Casinos, Inc. v. Am. Heritage, Inc., 110 P.3d 481, 485 (Nev. 2005);
see also LAS, Inc. v. Mini-Tankers, USA, Inc., 796 N.E.2d 633, 638 (Ill. App. 2003) (“A
waiver of the right to arbitrate may not be found in the absence of prejudice to the party
opposing arbitration.”).
But, as explained supra, in interpreting the FAA, the Supreme Court has instructed
state courts to apply the same principles of contract law to arbitration agreements as we do
to all other contracts. Perry, 482 U.S. at 492–93 n.9; see also Dean Witter, 470 U.S. at
219. The Supreme Court of West Virginia has explained that “the question of whether
there has been waiver in the arbitration agreement context should be analyzed in much the
same way as in any other contractual context.” Parsons, 785 S.E.2d at 853 (quoting Nat’l
Found. for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 774 (D.C. Cir.
1987)). Thus, the court reasoned, “[t]here is no requirement that the party asserting waiver
show prejudice.” Id. We agree.
We decline to adopt an approach that distinguishes waiver of the right to arbitrate
from other types of contractual waiver. Additionally, we see no reason to depart from our
19
precedent on contractual waivers generally. Therefore, we hold that to establish that
Midland waived its right to arbitrate, Cain does not have to demonstrate that he will suffer
prejudice if the arbitration clause is enforced.
CONCLUSION
Because Midland’s 2009 collection action is related to Cain’s claims, Midland
waived its right to arbitrate the current claims when 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. Accordingly, we reverse the judgment of the
Court of Special Appeals.
JUDGMENT OF THE COURT OF
SPECIAL APPEALS REVERSED. COSTS
TO BE PAID BY RESPONDENT.
20
Circuit Court for Baltimore City
Case No. 24-C-13-004869
Argued: January 9, 2017
IN THE COURT OF APPEALS
OF MARYLAND
No. 45
September Term, 2016
CLIFFORD CAIN, JR.
v.
MIDLAND FUNDING, LLC
Barbera, C.J.
Greene,
Adkins,
McDonald,
Watts,
Getty,
Harrell, Glenn T., Jr.
(Senior Judge, Specially Assigned),
JJ.
Dissenting Opinion by Getty, J.,
which Harrell, J., joins.
Filed: March 24, 2017
I respectfully dissent from the Majority’s conclusion that Midland waived its right
to arbitrate the current class action lawsuit by filing a collection action against Mr. Cain in
2009. Even if Midland had the option, under the contract, to arbitrate the 2009 collection
action, I disagree that its decision to litigate rather than arbitrate that claim suffices to waive
its contractual right to arbitrate virtually all other disputes between the parties arising under
the contract. The Majority’s overly broad definition of “related claims” under Frank
contradicts “Maryland’s legislative policy favoring enforcement of executory agreements
to arbitrate.” See Charles J. Frank, Inc. v. Associated Jewish Charities of Balt., Inc., 294
Md. 443, 454 (1982). Therefore, I would hold that the 2009 collection action and the
current class action lawsuit are not “related” claims under Frank, and thus Midland did not
waive its right to arbitrate the current action when it filed the collection action.
As this Court recognized in Frank, “The Maryland Uniform Arbitration Act . . .
embodies a legislative policy favoring enforcement of executory agreements to arbitrate.”
Id. at 448. As such, “[t]he intention to waive [a contractual right to arbitrate] must be
clearly established and will not be inferred from equivocal acts or language.” Id. at 449.
With this “policy favoring enforcement of executory agreements to arbitrate” in mind, the
Court in Frank considered whether a party’s participation in a judicial proceeding
constitutes a waiver that “extends to the right to arbitrate other unrelated issues arising
under the contract.” Id. at 450.
Examining cases from New York and Louisiana, this Court determined that those
jurisdictions hold “that although a party to a judicial proceeding involving issues arising
under a contract waives the right to arbitrate those issues, the waiver does not extend to
unrelated issues arbitrable under the contract.” Id. at 452–53. The Court also recognized
“that courts in some jurisdictions have decided that when some degree of participation in
a judicial proceeding constitutes a waiver of the right to arbitrate a part of a dispute arising
under a contract, the waiver extends to the entire dispute.” Id. at 453. “However, these
courts have reached this conclusion only under circumstances in which all parts of the
dispute were deemed to be interrelated.” Id. (emphasis added).
The Court in Frank described Maddy v. Castle as being illustrative of decisions
falling into the latter category. Id. (discussing Maddy v. Castle, 58 Cal. App. 3d 716(1976)). In Maddy, a contractor sued an owner for the unpaid balance of $350 for
completed work under a contract. Id. The owner countersued for $4500 in damages for
improper performance, and the contractor demanded arbitration of the owner’s
counterclaim. Id. The Court of Appeals of California, Second District, concluded that the
contractor’s action in filing suit constituted a waiver of its right to arbitrate the owner’s
$4500 counterclaim, and specifically rejected the contractor’s argument that the waiver
was limited to its $350 claim. Id. The California court explained,
In a dispute such as this it is impossible to separate the claim for money by
[the contractor] from the counterclaims which are the defense to this money
claim. The claim is in actuality part of one basic issue—whether the work
was properly completed—and cannot be separated from other claims of the
issue itself.
Id. (quoting Maddy, 58 Cal. App. 3d at 722). This Court in Frank then summarized this
holding as follows: “waiver of a part of the dispute constituted waiver of the entire dispute
because the dispute involved a single issue, not unrelated issues.” Id. at 453–54 (emphasis
added).
2
In concluding its examination of the pertinent cases from other jurisdictions, the
Court in Frank remarked,
No case has been cited, and we have found none, in which a court has held
that a waiver of the right to arbitrate issues arising under a contract by some
degree of participation in a judicial proceeding constitutes a waiver for all
purposes under the contract and, therefore, extends not only to issues raised
and/or decided in the judicial proceeding, but also to unrelated issues.
Id. at 454. This conclusion, expressly rejected by this Court in Frank, is effectively the
holding of the Majority today.
The Majority concludes that the 2009 collection action and the current class action
lawsuit are related because the latter is “dependent on” the former. Majority Slip Op. at
14. This is because “if Midland had not pursued its 2009 collection action, [Mr.] Cain’s
current claims would not exist.” Id. at 15. Therefore, in the Majority’s view, “the claims
are part of ‘one basic issue’ of whether Midland was entitled to a money judgment against
[Mr.] Cain.” Id. (quoting Frank, 294 Md. at 453). I disagree.
The “basic issue” in the collection action was whether Mr. Cain owed a debt to
Citibank under the contract; the “basic issue” in the current class action is whether
judgments obtained by Midland (against Mr. Cain and many others) while it was operating
as an unlicensed collection agency are void, based solely on the decision in Finch v. LVNV,
LLC, 212 Md. App. 748 (2013). Certainly, the collection action and the current class action
lawsuit are “related” in the sense that they involve the same contract and some of the same
parties. But this broad definition of relatedness, in determining which claims are
encompassed by a party’s waiver of the right to arbitrate, is precisely what this Court
rejected in Frank:
3
In our view, even when participation in a judicial proceeding
involving arbitrable issues arising under a contract constitutes a waiver of the
right to arbitrate those issues raised and/or decided in the judicial proceeding,
such conduct is not necessarily inconsistent with an intention to enforce
the right to arbitrate unrelated issues arising under the same contract.
Such conduct, in and of itself, is too equivocal to support an inference of an
intentional relinquishment of the right to arbitrate issues other than those
raised and/or decided in the judicial proceeding. We are persuaded that when
a party waives the right to arbitrate an issue by participation in a judicial
proceeding, the waiver is limited to those issues raised and/or decided in the
judicial proceeding and, absent additional evidence of intent, the waiver
does not extend to any unrelated issues arising under the contract. Our
conclusion that waiver of the right to arbitrate cannot be inferred in the
absence of a clear expression of intent is consonant with Maryland’s
legislative policy favoring enforcement of executory agreements to arbitrate.
Frank, 294 Md. at 454 (emphases added).
Although the Majority purports to be following Frank, its definition of “related
claims” is so broad that it essentially forecloses the possibility that distinct disputes
between the same parties (or similar parties, when a putative class is involved) arising
under the same contract will ever constitute “unrelated issues.” Unlike the holding in
Frank, today’s Majority decision is incongruous “with Maryland’s legislative policy
favoring enforcement of executory agreements to arbitrate.” See id.Furthermore, it is unreasonable to hold that Midland’s action of filing the 2009
collection action “support[s] an inference of an intentional relinquishment to arbitrate
issues other than those raised and/or decided in” that proceeding, see id., particularly where
the contract contains an express restriction on arbitration for claims filed in small claims
court.
“A waiver is the intentional relinquishment of a known right, or such conduct
as warrants an inference of the relinquishment of such right, and may result
from an express agreement or be inferred from circumstances. ‘[A]cts relied
4
upon as constituting a waiver of the provisions’ of a contract must be
inconsistent with an intention to insist upon enforcing such provisions.”
Id. at 449 (quoting BarGale Indus., Inc. v. Robert Realty Co., Inc, 275 Md. 638, 643
(1975)). Under the Majority’s interpretation of the contract, Midland had the option to
either arbitrate or litigate the collection action, and it chose to litigate. See Majority Slip
Op. at 12–13. This is because the collection action falls under an exception to the
arbitration clause, whereby “claims filed in small claims court are not subject to
arbitration.” Id. But Midland’s choice to litigate the collection action is not “inconsistent
with an intention to insist upon enforcing” the right to arbitrate claims not falling under the
small claims exception to arbitration contained in the contract. See Frank, 294 Md. at 449(quoting BarGale, 275 Md. at 643). Because the contract contains an express exception to
arbitration for claims falling under the jurisdiction of a small claims court, it is
unreasonable to hold that, by exercising this option, Midland also waived its contractual
right to arbitrate other, non-excepted claims arising under the contract in the future.
Although the Majority does not reach Mr. Cain’s other arguments supporting his
claim of waiver, see Majority Slip Op. at 16 n.16, I would hold that they are also
unpersuasive. As the Court of Special Appeals noted in its unreported opinion below, the
Vassalle class action “arose out of a challenge to Midland employees’ practice of robo-
signing ‘between 200 and 400 computer-generated affidavits per day for use in debt-
collection actions, without personal knowledge.’” Cain v. Midland Funding, LLC, No.
530, Sept. Term 2014, 2016 WL 1597179, at *13 (Md. Ct. Spec. App. Apr. 21, 2016)
(quoting Vassalle v. Midland Funding LLC, 708 F.3d 747, 752 (6th Cir. 2013)). Thus, the
5
issues raised in the Vassalle action are unrelated to the issues raised in Mr. Cain’s class
action, and Midland’s participation in the Vassalle proceedings does not constitute a waiver
of the right to arbitrate for purposes of the current class action.
In addition, Midland did not waive its right to arbitration by waiting to compel
arbitration in this case until after this Court denied certiorari in Finch. As the Court of
Special Appeals noted,
Midland did not file an answer to the complaint and seek the benefit of
discovery . . . . Rather, Midland’s first action was to seek a stay of the action
pending an appellate decision on a matter of law central to Mr. Cain’s claims,
with Mr. Cain’s consent. Once the stay was lifted, Midland promptly filed
its petition to compel arbitration. Midland’s consent motion for stay of the
proceedings was a “legitimate reason for participating in litigation,” and such
limited participation does not equate to waiver. See Abramson [v. Wildman,
184 Md. App. 189, 201 (2009)]. Moreover, we do not perceive the passage
of time during the consented-to stay pending a decision by the Court of
Appeals as a delay intentionally caused by Midland.
Id. (emphasis added).
Therefore, I would hold that Midland has not acted “inconsistent with an intention
to insist upon enforcing” the arbitration provisions in the contract with Mr. Cain, see Frank,
294 Md. at 449 (quoting BarGale, 275 Md. at 643), and thus has not waived its right to
arbitrate the current the class action. Having found no waiver, I would decline to reach the
issue of whether Mr. Cain must show that he will suffer prejudice if the arbitration clause
is enforced, instead reserving that decision for a case in which the issue is properly before
us. Accordingly, I would affirm the judgment of the Court of Special Appeals.
Judge Harrell has authorized me to state that he joins in this opinion.
6