Court: District Court, D. Maryland; September 21, 2017; Federal District Court
Charlene Novic filed a lawsuit against Credit One Bank, Midland Funding, and others, alleging violations of the Fair Credit Reporting Act. Credit One filed a Motion to Compel Arbitration and Stay Litigation, which was denied by the court. The background reveals that Novic opened a Credit One account in 2011, but in 2013, her mailing address was changed to an Oregon address without her knowledge. Subsequently, fraudulent charges appeared on her account. Ignoring a late notice from Credit One, which she believed was an error, her account was sold to multiple entities, culminating in Midland contacting her for debt collection. Initially believing the calls were scams, Novic eventually demanded proof of the debt and discovered the fraudulent activity. Despite reporting the fraud and disputing the charges with credit bureaus, both Credit One and Midland continued to report the fraudulent debt, leading to collection proceedings initiated by Midland in 2016. Documentation from Credit One supported Midland's claim as the successor-in-interest to Novic's account, including affidavits confirming the account's origination and ownership history.
Credit One’s Senior Vice President and Chief Financial Officer submitted an affidavit regarding the assignment of accounts and receivables. Ms. Novic filed a notice to defend, asserting identity theft and unauthorized charges on her account. The state district court ruled in her favor after a trial on October 3, 2016. Subsequently, Ms. Novic initiated a new action in the Circuit Court for Anne Arundel County on December 27, 2016, which was removed to federal court by Defendant Trans Union on the basis of federal question jurisdiction. On June 15, 2017, the court approved a Stipulation of Dismissal with Prejudice between Ms. Novic and Trans Union, and on September 11, 2017, Equifax and Experian were dismissed from the case by mutual consent. On March 24, 2017, Credit One moved to compel arbitration and stay the litigation, joined by Midland, which later withdrew its motion. The standard of review for such motions under the Federal Arbitration Act (FAA) is comparable to the summary judgment standard, requiring that the movant demonstrate no genuine dispute of material fact. To compel arbitration, the movant must establish: 1) a dispute exists; 2) a written arbitration agreement is in place; 3) the transaction relates to interstate or foreign commerce; and 4) the defendant has failed to arbitrate. While arbitration is favored, an underlying agreement to arbitrate must be present. Courts are instructed to apply state law for contract formation alongside federal law regarding arbitrability.
Ms. Novic argues against the enforceability of the arbitration agreement with Credit One on two grounds: (1) Credit One no longer has the right to compel arbitration due to its assignment of all rights related to Ms. Novic's account; (2) even if the arbitration agreement survived the assignment, Credit One waived its right to arbitrate as a result of ongoing state court litigation. The court addresses these arguments sequentially.
Regarding the first argument, the court emphasizes that arbitrability is fundamentally a matter of contract interpretation, and a party cannot be compelled to arbitrate unless bound by a contract. The court notes that while any ambiguities in arbitration agreements should generally favor arbitration, it must respect the clear intentions and language of the contract, as highlighted in relevant case law. Both parties agree that Maryland law governs the assignment issue, which states that contracts cannot be enforced by or against non-parties. An assignment transfers all interests from the assignor to the assignee, extinguishing the assignor's rights. This principle was reiterated by the Maryland Court of Appeals, confirming that an assignment eliminates privity between the original parties.
The arbitration agreement specifies that both parties agree to mandatory binding arbitration for disputes, defining "you" as the cardholder and "we" as Credit One and its successors or assigns. The documentation of assignments, as evidenced by bills of sale from Credit One to subsequent assignees, supports the view that Credit One's rights have been fully transferred, thereby impacting its ability to enforce the arbitration agreement.
Credit One acknowledged in the bill of sale that the accounts assigned, including Ms. Novic's, were originally originated by Credit One Bank and previously assigned to MHC under self-executing agreements. Credit One provided affidavits to support Midland's claim as the successor-in-interest to Ms. Novic's account, with statements from its Vice President and CFO confirming that the accounts purchased from MHC represent all rights previously owed to Credit One. Credit One argued it retained the right to arbitrate based on the Agreement's Severability and Survival provision, which states that the arbitration provision survives any transfer or assignment of the account. They cited a Georgia court case supporting this view, but the court found this reliance misplaced, as the case involved contract termination through novation.
The Agreement explicitly granted "Credit One, its successors or assigns" the right to arbitrate, meaning that upon transferring its rights and interests, Credit One also transferred its arbitration rights to the assignee, Midland. The court referenced a previous decision allowing Midland, as an assignee, to enforce an arbitration provision but noted that Midland had waived its right to arbitrate by pursuing collection actions in state court, as established in a Maryland Court of Appeals ruling. Credit One, having assigned its rights to Midland, no longer had any relationship with Midland and thus could not compel arbitration. Consequently, the court denied Credit One's Motion to Compel Arbitration and Stay the Litigation.
Defendant's right to compel arbitration has been defaulted due to its actions in a state court suit, according to Ms. Novic. The applicability of the Federal Arbitration Act (FAA) versus Maryland state law regarding waiver is contested, but this distinction is deemed irrelevant in this context. The Fourth Circuit has established that engaging in litigation can prevent binding arbitration, as seen in Maxum Foundations, Inc. v. Salus Corp. Furthermore, Maryland law reinforces this position following the ruling in Cain v. Midland Funding, LLC.
The FAA applies to contracts involving interstate commerce, with a broad interpretation of commerce as per case law, including Iraq Middle Market Development Foundation v. Harmoosh. This definition encompasses transactions that collectively affect interstate commerce, regardless of the individual impact. The agreement between Credit One, a national bank, and Ms. Novic, a Maryland resident, qualifies as a transaction involving commerce, supported by explicit language in the arbitration provision.
The FAA dictates that if a party engages significantly in litigation, it may lose the right to arbitration. The Fourth Circuit emphasizes that substantial use of litigation machinery can prejudice the opposing party, as outlined in Forrester v. Penn Lyon Homes, Inc. Factors influencing this determination include the delay caused by the moving party and the extent of trial-oriented activities.
In Microstrategy, Inc. v. Lauricia, 268 F.3d 244 (4th Cir. 2001), the court ruled that Credit One waived its right to compel arbitration due to its actions in assigning Ms. Novic's account, which led to Midland litigating against her. The court established that Midland demonstrated it was the successor-in-interest to Ms. Novic’s account, thus barring any subsequent arbitration demand from Credit One. On April 22, 2014, Midland purchased the account and initiated state court proceedings regarding alleged defaults, supported by documentation from Credit One.
The court referenced Barbagallo v. Niagara Credit Solutions, Inc., indicating that Credit One's involvement in the state action created prejudice as it concerned the same underlying debt issues now contested. The Maryland Court of Appeals case, Cain v. Midland Funding, LLC, which held that Midland waived its arbitration rights by pursuing litigation, was also cited to bolster this position. Consequently, even if Credit One maintained an arbitration right, federal law dictated it had defaulted on that right. The motion to compel arbitration by Credit One was denied, with the court noting that the standard for such motions does not equate to summary judgment proceedings, and remedies are limited to a stay or dismissal of the action. The claims against other defendants, TransUnion, Equifax, and Experian, have been dismissed, leaving only Credit One and Midland as defendants.
Dismissal is appropriate when all issues in a lawsuit are subject to arbitration, as established in Alford v. Dean Witter Reynolds, Inc. The Plaintiff contended that any right the Defendant had to compel arbitration merged into a state court judgment against Midland, but the Court did not address this because it found the Defendant lacked any right to arbitrate. The Defendant's cited cases were deemed distinguishable. The Plaintiff asserted that the Agreement was canceled, negating any obligation to arbitrate. The Court had previously allowed Defendants Midland and Credit One to submit a supplemental memorandum regarding a Maryland Court of Appeals decision, after which Midland filed a Consent Motion to withdraw its motion to compel arbitration, which the Court approved. The Defendant referenced Rice v. Credit One Financial, where a motion to compel arbitration was successful; however, in that instance, Credit One had not assigned or sold the Plaintiff's account. Ultimately, Midland's Consent Motion to withdraw its motion to compel arbitration was granted by the Court.
