Companies waive arbitration when they sue, says Md. high court

ANNAPOLIS – Companies with consumer contracts containing arbitration clauses might be best advised not to sue a customer in court, lest they waive their contractual right to an arbitrator.

In a 5-2 ruling, Maryland’s top court ruled Friday that companies which opt to take a customer to court cannot later insist on arbitration if and when the customer sues them on a “related” claim. In such cases, the contract’s arbitration provision is considered waived upon the filing of the companies’ suit, under Maryland law, the Court of Appeals held.

The high court rendered its decision in allowing Clifford Cain Jr. to pursue a class-action lawsuit against Midland Funding LLC, alleging the company illegally collected debts without a license. Midland had said Cain’s claim must go to arbitration based on a provision of the debt contract, even though the company had earlier sued him to collect an outstanding balance on his Citibank account.

Midland’s argument won in Baltimore City Circuit Court and the intermediate Court of Special Appeals, which held that the company’s debt-collection lawsuit did not waive the company’s right to enforce the arbitration provision regarding Cain’s unlawful practices claim.

But the Court of Appeals disagreed, noting the relatedness of the collection and unlawful practices claims.

“Put simply, if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist,” Judge Sally D. Adkins wrote in the court’s majority opinion. “Indeed, Cain’s claims would not exist if Midland had not obtained a final judgment against him while it was unlicensed. Thus, Midland waived its right to arbitrate Cain’s claims when it filed and pursued the 2009 collection action.”

The court added that Midland could have submitted its debt-collection claim to arbitration but chose to take Cain to court.

The high court’s decision drew praise from Annapolis solo practitioner Peter A. Holland, former director of the consumer protection clinic at the University of Maryland Francis King Carey School of Law.

“This case establishes that, in Maryland, large corporations can’t choose to sue the little guy in court and then hide behind forced arbitration clauses when the little guy has the audacity to sue them back for related claims,” Holland, whose law practice focuses on representing debtors, wrote in an email.

Cain’s attorney, Karla Gilbride, said “there is something ironic” when a company that prefers arbitration loses the right to arbitrate due to its own litigation.

“We hope that companies like Midland have gotten the message,” said Gilbride, of Washington-D.C.-based Public Justice. “They can’t have it both ways.”

Midland’s attorney, James P. Ulwick, declined to comment on the high court’s decision. Ulwick is with Kramon & Graham P.A. in Baltimore.

Contractual exception

In dissent, Judge Joseph M. Getty said Midland did not waive its right to arbitration. Rather, the company exercised a contractual exception to the arbitration provision that allowed Midland to file a debt-collection claim in district court.

The majority’s “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 out of the same contract will ever constitute ‘unrelated issues,’” Getty wrote.

He called it “unreasonable to hold that, by exercising this (district-court) option, Midland also waived its contractual right to arbitrate other, non-excepted claims arising under the contract in the future.”

Adkins was joined in the majority opinion by Chief Judge Mary Ellen Barbera and Judges Clayton Greene Jr., Robert N. McDonald and Shirley M. Watts.

Getty was joined in dissent by Judge Glenn T. Harrell Jr., a retired jurist sitting by special assignment for Judge Michele D. Hotten.

Hotten did not publicly disclose the reason for her recusal.

The high court rendered its decision in Clifford Cain Jr. v. Midland Funding LLC, No. 45 September Term 2016.

In the district court case, Midland was awarded a $4,520.54 default judgment against Cain.

But shortly after that court victory, Midland paid a $1 million out-of-court agreement with the Maryland Collection Agency Licensing Board to resolve claims the company was operating without a license. Cain subsequently brought the class-action lawsuit, alleging Midland had collected debts unlawfully.