A Maryland woman's claim that she returned a used car to a Rockville, Md. car dealership because the vehicle was defective is headed to arbitration. Antonia Rota-McLarty purchased an automobile from Eastern Automotive Group in the summer of 2007. She returned the car without having made a payment on the loan. Santander Consumer USA (Santander) sought collection of the outstanding debt after repossessing the vehicle and selling it at a loss.
Rota-McLarty filed a class action lawsuit against Santander in March 2010, alleging violations of various Maryland consumer protection laws for undisclosed finance charges and other unfair business practices. Santander is the successor by mergers to Drive Financial Services (Drive). Rota-McLarty originally sued Drive. While finding that an enforceable arbitration agreement existed, the United States District Court for the District of Maryland also concluded that Santander had waived its right to enforce arbitration by its delay in making the request. Santander waited about six months before seeking arbitration because of uncertainty over how the U.S. Supreme Court would rule in a case on class arbitration that was before that court.
Mandatory arbitration clauses are becoming more and more common. Consumer-oriented attorneys prefer the option to litigate a matter when something goes wrong. Corporate attorneys prefer to keep things in arbitration. Unfortunately, many consumers and job seekers are finding that, as a condition to purchasing a product or obtaining employment, they have waived their right to a jury of their peers if things go wrong.
Santander appealed the federal trial court's decision. The issue before the United States Court of Appeals for the Fourth Circuit was whether a valid arbitration agreement existed, and, if so, whether Santander was in default.
First, the appeals court said, it had to determine whether Santander -- an assignee to the Retail Installment Sale Contract (RISC), which contained a clause providing that it was the complete agreement between the parties, but was not an assignee to the Buyer's Order, which included the arbitration language -- could invoke arbitration. The facts in the case supported the district court's finding that the Buyer's Order and RISC were made as part of a single transaction and should be interpreted together under Maryland law, the appeals court said. The appeals court also rejected Rota-McLarty's argument that Santander should not be able to enforce the arbitration agreement because it contained a "carve out" for assignees of the RISC. There was nothing in the language of the arbitration provision that indicated that it was not intended to be enforceable by Santander as assignee of the RISC, the court said.
Then, the appeals court turned to the district court's finding that Santander waived its right to enforce the arbitration agreement. Applying Maryland arbitration law, the district court found that whether a party has waived its right to arbitrate depends on "the extent of its participation in judicial proceedings, including whether an answer has been filed; whether there was a legitimate reason for participation; and whether the delay in seeking arbitration prejudiced the other party." Additionally, the court proclaimed that a delayed insistence on arbitration that has all the markings of a simple strategic decision is improper. The district court said the delay in requesting arbitration, Santander's participation in discovery, Santander's strategic decision to await the U.S. Supreme Court's ruling, etc. combined meant that Santander had waived its right to arbitrate.
The appeals court noted that the district court had made a mistake when it rejected the use of the Federal Arbitration Act (FAA). Under the FAA, a party may lose its right to compel arbitration if it is in default in proceeding with arbitration. Generally, a litigant defaults on its right to invoke the FAA where it utilizes the machinery of litigation to the point where subsequent arbitration would prejudice the party opposing the stay. Here, the court said, the length of delay was relatively short. Santander waited six-and-a-half months to file its motion to compel arbitration and stay proceedings. The appeals court said it had ruled in the past that a delay of several months is insufficient to demonstrate that the opposing party suffered actual prejudice. The court also observed that that there was nothing in the record to support a finding that Rota-McLarty was prejudiced by the delay. "We conclude the district court erred to the extent it based its determination of default on the length of delay," the appeals court said.
The appeals court then examined the nature and extent of Santander's litigation activities. Here, the court remarked, Santander utilized the litigation machinery - removing the complaint to federal court, filing an answer, taking depositions, etc. - "in a few, mostly minimal ways." Rota-McLarty engaged in some discovery as well. Rota-McLarty said those activities supported a finding of prejudice because they limited her discovery rights. The court rejected the argument, finding that Rota-McLarty had failed to establish prejudice.
As a result, the trial court's decision was reversed and the claim was sent to arbitration.
The case is Antonia Rota-McLarty v. Santander Consumer USA Inc.
Baltimore, Maryland-based Belsky, Weinberg & Horowitz has represented consumers in mortgage, bankruptcy and debt collection cases for many years. Call us at 410-234-0100 or email us for a free consultation and let us help you.