May 01, 2019 Practice Points

Debt Collector Waived Right to Arbitrate

Parties who wish to enforce an arbitration agreement should not delay in seeking such relief.

By Mitchell L. Marinello

In Smith v. GC Services Limited Partnership, 907 F. 3d 495 (7th Cir. 2018), the Seventh Circuit held that a debt collector had waived its right to arbitrate due to its lack of diligence and its filing a motion to dismiss the plaintiff’s complaint.

Plaintiff Francina Smith obtained a credit card from a bank. The credit card contract contained an agreement to arbitrate and waived the right to file a class action. In March 2016, the bank hired GC Services, Ltd. (GC) to collect an unpaid balance on Smith’s credit card. GC informed Smith that it would commence a collection action unless she disputed the debt in writing.

In July 2016, Smith brought a class action against GC alleging that it violated the Fair Debt Collections Practices Act (FDCPA) when it required her to dispute the debt in writing. In August 2016, GC filed a motion to dismiss for, among other things, failure to state a claim and lack of personal jurisdiction. GC’s motion did not mention the parties’ arbitration agreement.

Smith filed an amended complaint that resolved the personal jurisdiction issues and a motion for class certification. GC responded with a motion to dismiss arguing that Smith failed to state a claim because the FDCPA required consumers to dispute debts in writing. GC again did not mention the arbitration agreement.

While these motions were pending, discovery disputes arose, and in February 2017, the magistrate judge made discovery rulings. On March 10, 2017, GC notified Smith of the arbitration agreement and demanded that Smith arbitrate. Smith refused. On April 19, 2017, GC filed an answer to the amended complaint with affirmative defenses but again did not mention the arbitration agreement. 

On June 19, 2017, the district court denied GC’s motion to dismiss and, about one month later, it granted Smith’s motion to certify the class. On August 7, 13 months after the suit began, GC filed a motion to compel arbitration. The district court denied GC’s motion holding that GC had waived any right to arbitrate due to its lack of diligence in asserting that right. 

The Seventh Circuit affirmed. GC attempted to excuse its delay in seeking to compel arbitration by saying that the arbitration agreement was in the bank’s possession and GC was unaware of its existence.  The court pointed out that credit card agreements routinely include arbitration clauses and that GC should have known to look for one. The court also noted that federal regulations require credit card companies to post their credit agreements online and GC could have found the credit agreement with a simple internet search. It also faulted GC for waiting until after the district court had decided the motions to dismiss and for class certification before it moved to compel arbitration. Ultimately, the court held that GC’s 13-month delay in asserting its right to arbitration, without valid excuse, was a sufficient basis for finding that GC had waived its right to arbitrate and, along with it, the right to prevent Smith from seeking relief through a class action. 

The court rejected GC’s argument that waiver can occur only if there is prejudice; it acknowledged that prejudice is a factor to be considered but ruled that it is not necessary to a finding of waiver. In any event, the court stated the district court’s conclusion that Smith was prejudiced by GC’s delays was not clearly erroneous, because GC sought arbitration only after it had put Smith to the trouble of defeating GC’s motion to dismiss, obtaining class certification and litigating several discovery issues. 

In another significant comment, the court stated that a party does not waive a right to arbitrate by filing a jurisdictional motion or one that raises procedural matters. Here, however, GC’s motion to dismiss sought a ruling that the FDCPA requires a debt to be disputed in writing and, if GC’s motion had been successful, GC would have prevailed on the merits of the case. The court indicated that a motion directed to the merits of an action is “evidence” that the moving party has waived its right to arbitrate. 

Practice Points: Parties who wish to enforce an arbitration agreement should not delay in seeking such relief, should not file motions to dismiss on the merits or answers that do not clearly raise the issue of arbitration, and should not normally engage in discovery. Instead, at the first opportunity, they should inform the court of the arbitration agreement and seek its enforcement. Further, if a delay has occurred, the party seeking to enforce the arbitration agreement should come forward with specific, detailed reasons that provide a legitimate excuse for the delay.

Mitchell L. Marinello is a partner at Novack and Macey LLP in Chicago, Illinois.

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