Court Rules Debt Buyer’s Small Claims Court Judgment Waived Right to Arbitration in Class Action Suit

On March 24, 2017, the Maryland Court of Appeals held that a debt buyer waived its right to arbitrate a consumer’s class action lawsuit, alleging that an unlicensed debt buyer violated Maryland law when it obtained a small claims collection judgment against the consumer in 2009 (Cain v. Midland Funding, LLC, No. 45, Sept. Term 2016, Filed March 24, 2017). 

The consumer’s class action suit was premised on an earlier Maryland ruling holding that a 2007 Amendment to Maryland law required “passive” debt buyers to obtain a collection agency to file collection lawsuits and that a judgment debtor could maintain a separate action to void the judgment and collect damages as a result of the unlicensed activity. 

Earlier, the debt buyer (Midland) obtained a trial court order compelling arbitration based on the terms of the credit card agreement entered into between the original creditor (Citibank) and the consumer that allowed either party to submit its claims to binding arbitration.  However, Citibank’s contract included an exception permitting the parties to proceed directly to litigation in a small claims court.  Midland did just that, suing Mr. Cain in 2009 for his debt in the District Court of Maryland.  

The Court held that the question of waiver of the arbitration provision was one to be decided by state law. The Court examined the language of the small claims exception and held that Midland’s decision to file suit in the small claims court, as permitted by the agreement, operated as a waiver of their right to later arbitrate Mr. Cain’s subsequent suit.  The Court applied the waiver principle because the collection suit and the subsequent collateral attack on that judgment were deemed “related” actions. Therefore, when Midland elected to sue it gave up its right to arbitrate this related suit.  

This case now returns to the trial court to consider the class action claims seeking a declaratory judgment voiding the judgments and return of monies paid pursuant to the small claims judgment.