Jallo v. Resurgent Capital Services, LP

Citations: 131 F. Supp. 3d 609; 2015 U.S. Dist. LEXIS 103513; 2015 WL 4722177Docket: CASE NO. 4:14-CV-449

Court: District Court, E.D. Texas; August 7, 2015; Federal District Court

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Defendants Resurgent Capital Services, LP and LVNV Funding, LLC filed a motion to compel arbitration and stay or dismiss the action, which was denied by the Court. The plaintiff, Bryan Jallo, alleged violations of the Fair Debt Collection Practices Act (FDCPA) and the Texas Debt Collection Act (TDCA) related to improper interest on a Best Buy branded credit card account opened in 2001. The account application indicated that by signing, the plaintiff agreed to the Cardholder Agreement and its arbitration provision, although the Cardholder Agreement is a separate document. LVNV claimed to have acquired the account in 2009, and Resurgent, as the account servicer, responded to a verification request in 2013 without referencing arbitration. The plaintiff filed a class action complaint in 2014, and the defendants did not mention arbitration in their joint answer, amended answer, or in any related motions or filings prior to 2015. The Court denied the defendants' motions to stay and dismiss the case in January 2015. Subsequently, a third party's counsel claimed to authenticate the Original Cardholder Agreement, and the defendants provided this document to the plaintiff's counsel.

Defendants did not produce the Original Cardholder Agreement early in the litigation, claiming it was not part of the records acquired when they purchased Plaintiffs' account. They noted that all parties faced challenges in obtaining this agreement despite multiple subpoenas. The Presented Agreement includes an arbitration clause mandating that any claims arising from the agreement be resolved through binding arbitration. On April 28, 2015, Defendants filed a Motion for Leave to Amend their Answer to include a defense that Plaintiffs' claims were subject to binding arbitration and subsequently moved to compel arbitration on May 20, 2015. Plaintiffs opposed this motion, arguing that Defendants had waived their right to arbitrate, the arbitration clause was not authenticated, and it was unilateral, thus unenforceable.

The Court considers two questions when evaluating a motion to compel arbitration: whether a valid agreement to arbitrate exists and whether the dispute falls within the arbitration agreement's scope. The Court applies state law principles for contract formation and federal substantive law for arbitration scope. Defendants asserted that Plaintiffs' claims fell under a mandatory arbitration clause, emphasizing that Plaintiff consented to the agreement when signing the account application and using the credit card. However, Plaintiffs contended that Defendants failed to authenticate the agreement and that a unilateral modification clause rendered the arbitration provision unenforceable. Ultimately, the Court concluded that Defendants waived their right to compel arbitration and found sufficient grounds to deny the motion without addressing Plaintiffs' additional arguments.

The right to arbitrate a dispute can be waived, particularly if a party significantly engages in the judicial process to the other party's detriment. Key considerations include whether the defendants substantially invoked the judicial process and whether the plaintiff experienced prejudice as a result. The defendants argue they could not have waived arbitration since they lacked the Original Cardholder Agreement until April 2015, while the plaintiff contends that the defendants were aware of their right to compel arbitration as early as August 2013, based on claims made in communications with the Better Business Bureau. The evidence indicates that the defendants had access to the Account Application, which referenced the arbitration provision, prior to the lawsuit. The court finds the defendants should have recognized their right to arbitrate and asserts that they acted without due consideration of this right by engaging in litigation activities rather than seeking to enforce arbitration. The defendants' claims of needing an authenticated copy of the agreement are insufficient to excuse their delay in asserting an intention to arbitrate. The court concludes that the defendants' actions reflected a preference for litigation over arbitration, thereby constituting a waiver of their right to arbitrate.

A party waives its right to arbitration if it seeks a judicial decision on the merits before initiating arbitration. The Fifth Circuit emphasizes that extensive litigation activity supports a finding of waiver. In this case, the Defendants did not invoke arbitration until almost ten months after the Complaint was filed, during which they engaged in multiple judicial filings, including a Joint Answer, several motions related to judgment and discovery, and requests to dismiss claims with prejudice. These actions demonstrate a clear intent to resolve the case through litigation rather than arbitration.

The Court compared this situation to Mirant, where a request for dismissal with prejudice indicated a desire for a merits decision. Unlike Lemus, where the defendants sought to compel arbitration while engaging in limited discovery, the Defendants here aimed to halt discovery and eliminate claims before considering arbitration. Consequently, the Court concluded that the Defendants substantially invoked the judicial process, leading to a waiver of their arbitration rights.

Additionally, the Plaintiff argued that the Defendants' inconsistent actions caused prejudice, such as incurring expenses and risking duplicative litigation of issues already addressed. The Court agreed, noting that the Defendants' failure to seek arbitration while actively litigating compromised the Plaintiff's position, thus causing prejudice. The Fifth Circuit precedent supports that engaging in pretrial activities inconsistent with an intent to arbitrate can substantiate claims of prejudice.

Defendants engaged substantially in litigation, exceeding a mere motion to dismiss and seeking to delay discovery pending a decision on the case's merits. Despite claiming they filed their motion promptly, the Court noted a considerable delay from when Defendants should have been aware of the arbitration clause to when they demanded arbitration. The Fifth Circuit emphasizes that arbitration aims to minimize litigation costs; thus, Plaintiff suffered prejudice due to Defendants' failure to invoke arbitration early in the proceedings. While Defendants contended that arbitration would not duplicate efforts, the Court found that Plaintiff incurred standard litigation expenses which would have been redundant had arbitration been pursued initially. Defendants argued there was no prejudice to Plaintiff's legal position, citing that no subpoena was issued to Capital One. However, Plaintiff asserted that Defendants' threats against Capital One were credible only because of the litigation context, as such threats would lack credibility in arbitration due to the discretionary nature of subpoena issuance by arbitrators. The Court recognized that Plaintiff's legal position was somewhat harmed by Defendants' actions. Weighing the delay, expenses, and impact on Plaintiff’s legal standing, the Court concluded that Defendants had prejudiced Plaintiff by not seeking arbitration at the outset, effectively waiving their right to compel arbitration. Consequently, Defendants' Motion to Compel Arbitration and Stay or Dismiss the Action was denied. The order also distinguishes between the Presented Agreement and the Original Cardholder Agreement, with Plaintiff questioning the authenticity of the Presented Agreement and citing Nevada and Ninth Circuit law. Notably, determining waiver of the right to arbitrate is a procedural issue rather than one based on contract interpretation. Plaintiff also noted attorney fees exceeding $46,000 as of May 12, 2015.