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Author Topic: Karnette v. Wolpoff & Abramson, L.L.P. (arbitration)  (Read 5324 times)
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« on: September 06, 2006, 12:15:55 PM »

2006 WL 2222673 (E.D.Va.)

United States District Court, E.D. Virginia,
Richmond Division.
Robin KARNETTE, and Diane McIntyre, Plaintiffs,
WOLPOFF & ABRAMSON, L.L.P., Defendant.
Civil Action No. 3:06cv44.
Aug. 2, 2006.

Background: Consumers sued credit card issuer's collection agency, alleging, inter alia, that agency had violated Fair Debt Collection Practices Act (FDCPA) by using sham arbitration proceeding. The District Court, Payne, J., denied agency's motion to dismiss. Agency moved to compel arbitration based on arbitration clause in credit card agreement.

Holdings: The District Court held that:
(1) agency was not entitled to enforce arbitration clause's general provision on theory that agency was “agent” of issuer;
(2) ambiguity was created by agency's interpretation of arbitration clause, requiring that clause be construed against agency;
(3) delay in filing motion to compel arbitration did not, alone, constitute waiver; but
(4) agency waived its right to move to compel arbitration by filing dispositive pretrial motions prior to moving to compel arbitration, given prejudice to consumers.

Motion denied.

Alternative Dispute Resolution
While ambiguities in scope of arbitration clause are resolved in favor of arbitration, question whether parties have submitted particular dispute to arbitration, i.e. question of arbitrability, is issue for judicial determination unless parties clearly and unmist

Alternative Dispute Resolution
Whether movant for stay of litigation pending arbitration is in default of its right to proceed with arbitration, so as to preclude right to stay, is issue for court. Federal Arbitration Act, 9 U.S.C.A. § 3.

Under Federal Arbitration Act (FAA), court applies ordinary state-law principles of contract construction respecting making of contracts. 9 U.S.C.A. § 1 et seq.

Alternative Dispute Resolution
Under Delaware law, credit card issuer's collection agency was not entitled to enforce arbitration clause of credit card agreement in consumers' Fair Debt Collection Practices Act (FDCPA) action against agency, on theory that agency was “agent” of issuer and therefore within clause's coverage for or] agents [of issuer]”; arbitration clause also contained specific language concerning debt collectors, which therefore controlled, stating that clause governed action against debt collector only if named as codefendant in action against issuer. Federal Arbitration Act, 9 U.S.C.A. § 1 et seq.; Consumer Credit Protection Act, 15 U.S.C.A. § 1692 et seq.

Under Delaware law, ambiguity was created by credit card issuer's collection agency's interpretation of credit card agreement's arbitration clause, under which agency claimed to be “agent” of issuer and therefore within clause's coverage, and thus clause had to be construed against agency; separate provision of arbitration clause excluded debt collectors unless issuer was also named as defendant. Federal Arbitration Act, 9 U.S.C.A. § 1 et seq.

Under Delaware law, ambiguity in contract is construed against drafter, especially in contracts of adhesion. Restatement (Second) of Contracts § 206.

Notwithstanding federal policy favoring arbitration, rule of contra proferentum applies to arbitration clauses. Federal Arbitration Act, 9 U.S.C.A. § 1 et seq.

Defendant's delay of six weeks after filing of amended complaint, and four months after filing of original complaint, to file its motion to compel arbitration did not, by itself, constitute waiver of its right to move to compel arbitration. Federal Arbitration Act, 9 U.S.C.A. § 3.

Debt collection agency defending consumers' Fair Debt Collection Practices Act (FDCPA) suit waived its right to move to compel arbitration by filing motion to dismiss and motion for summary judgment on consumer's amended complaint, prior to moving to compel arbitration; consumers were prejudiced by having to defend those potentially dispositive motions, especially since district court partially granted motion to dismiss, and agency obtained unfair litigation advantage by forcing consumers to respond to summary judgment motion, then taking different tack by moving to compel arbitration without bothering to reply to consumers' response. Federal Arbitration Act, 9 U.S.C.A. § 3; Consumer Credit Protection Act, 15 U.S.C.A. § 1692 et seq.

Dale Wood Pittman, The Law Office of Dale W. Pittman, Petersburg, VA, Craig Matthew Shapiro, O. Randolph Bragg, Horwitz Horwitz & Associates, Chicago, IL, Thomas Dean Domonoske, Law Office of Dale W. Pittman, Harrisonburg, VA, for Plaintiffs.

Michael L. Rigsby, Shawn Alan Copeland, Carrell Rice & Rigsby PC, Richmond, VA, for Defendant.

ROBERT E. PAYNE, District Judge.
*1 This matter is before the Court on Defendant WOLPOFF & ABRAMSON, L.L.P.'S MOTION TO COMPEL ARBITRATION (Docket No. 21). For the foregoing reasons, the motion is DENIED.


Robin Karnette and Diane McIntyre were issued credit cards by MBNA America Bank, N.A. (“MBNA”) and used the credit cards for personal, household and family purposes. Karnette and McIntyre became indebted, and following their defaults, MBNA referred the accounts for collection to Wolpoff & Abramson, L.L.P. (“W & A”), a multi-state collections law firm. It is undisputed that the activities of W & A in its representation of MBNA in the collection of the debts from Karnette and McIntyre bring W & A within the purview of the Fair Debt Collections Practices Act, 15 U.S.C. § 1692 et seq..
On January 18, 2006, Karnette and McIntyre filed a class action against W & A, alleging that, the law firm engaged in false, deceptive and unfair debt collection practices in violation of the FDCPA and requesting damages and injunctive relief. On February 21, 2006, W & A filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6). Karnette and McIntyre did not respond to the motion to dismiss. Instead, on March 6, 2006, they filed their First Amended Class Action Complaint (Docket No. Cool (the “Amended Complaint”).
Count I of the Amended Complaint alleges that W & A violated the FDCPA by using a sham arbitration proceeding and by using arbitration to improperly increase the amount of attorney's fees (and thereby increased the amount of the debt) for which the plaintiffs were liable. In Count II, the plaintiffs seek injunctive relief under Virginia law. On March 13, 2006, W & A's motion to dismiss the original Complaint was denied as moot in view of the Amended Complaint.
On March 20, 2006, W & A filed its Answer to the Amended Complaint (Docket No. 11), a Motion to Dismiss the Amended Complaint under Rule 12(b)(6) ( Docket 12), and a Motion for Summary Judgment (Docket No. 14). None of those pleadings requested that the matter be referred to arbitration. On April 7, 2006, the plaintiffs filed their responses to the Motion for Summary Judgment and Motion to Dismiss (Docket Nos. 18, 19). Those responses outlined in detail the plaintiffs' case against W & A. On April 14, 2006, 25 days after filing the Motion to Dismiss the Amended Complaint and the Motion for Summary Judgment and seven days after learning the details, and the strength, of the plaintiffs' case, W & A filed the Motion to Compel Arbitration.
On May 23, 2006, the Court granted W & A's Motion to Dismiss Count II of the Amended Complaint. However, the motion was denied as to Count I.
The Motion to Compel Arbitration is based on a provision in the MBNA credit card agreements entitled “Arbitration and Litigation.” FN1 The first part of that section states:
Any claim or dispute (“Claim”) by either you or us against the other, or against the employees, agents, or assigns of the other, arising from or relating in any way to this Agreement or any prior Agreement or your account (whether under a statute, in contract, tort, or otherwise, and whether for money damages, penalties, or declaratory or equitable relief), including Claims regarding the applicability of this Arbitration and Litigation section of the validity of the entire Agreement or any prior Agreement, shall be resolved by binding arbitration.
*2 (Exh. A to PLAINTIFFS' BRIEF IN OPPOSITION TO MOTION TO COMPEL ARBITRATION (Docket No. 25) at 4) (emphasis added).) The definitions part of the Arbitration and Litigation section provides that:
For the purposes of this Arbitration and Litigation section, “we” and “us” means MBNA American Bank, N.A., its parent, subsidiaries, affiliates, licensees, predecessors, successors, assigns, and any purchaser of your account, and all of their officers, directors, employees, agents, and assigns or any and all of them. Additionally, “we” and “us” shall mean any third party providing benefits, services, or products in connection with the account (including but not limited to ··· debt collectors, and all other officers, directors, employees and agents) if, and only if, such a third party is named by you as a codefendant in any Claim you assert against us.
( Id. at 5.)
W & A argues that it was the agent of MBNA when it represented MBNA in the arbitration proceedings that led to judgment against the plaintiffs. Therefore, says W & A, the dispute presented in Count I of the Amended Complaint is subject to arbitration under the first paragraph of the Arbitration and Litigation section of the MBNA credit card agreement.
The plaintiffs oppose the motion for four reasons which can be summarized as follow:
(1) there is no agreement to arbitrate the claims against W & A because the MBNA credit card agreement does not require arbitration of claims against debt collectors;
(2) the arbitration clause is unconscionable and fraudulent because the consumer protections within it are illusory;
(3) W & A may not seek to enforce the arbitration clause because, by violating the FDCPA, W & A has materially breached the agreement, and cannot simultaneously seek to enforce it; and
(4) W & A has waived its right to arbitration.


Section 2 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et. seq., declares that “a contract ··· to settle by arbitration a controversy thereafter arising out of such contract ··· shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The Fourth Circuit has stated that
[t]he purpose behind Congress's passage of the FAA “was to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). The FAA therefore eliminates any bias in favor of judicial resolution of disputes, and establishes that where a contract includes an arbitration provision, “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone[Mem'l Hosp. v. Mercury Constr. Copr.], 460 U.S. [1] at 24-25 [1983].
Dockser v. Schwartzberg, 433 F.3d 421, 425 (4th Cir.2006) (internal citations edited for this opinion).
*3 [1] Link to KeyCite Notes An agreement to arbitrate is a contract and “the examination of the scope of an arbitration agreement is primarily a task of contract interpretation.” Cara's Notions v. Hallmark Cards, Inc., 140 F.3d 566, 569 (4th Cir.1998). While ambiguities in the scope of the arbitration clause are to be resolved in favor of arbitration, Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 475-76, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), both the Supreme Court and the Fourth Circuit have recognized that ecause the legal predicate of compulsory arbitration is contractual consent, courts can require arbitration only of those disputes which the parties have agreed to arbitrate.” Hendrick v. Brown & Root, Inc., 50 F.Supp.2d 527, 532 (E.D.Va.1999) (citing Gateway Coal Co. v. United Mine Workers of America, 414 U.S. 368, 374, 94 S.Ct. 629, 38 L.Ed.2d 583 (1974); Gen. Drivers, Warehousemen, and Helpers Local Union No. 509 v. Ethyl Corp., 68 F.3d, 80, 83 (4th Cir.1995)). Accordingly, it is necessary to decide whether the MBNA agreement provides for arbitration of the dispute over whether W & A's debt collection practices violated the FDCPA. To do so, the Court must examine the language of the arbitration provision in the MBNA credit card agreement.
[2] Link to KeyCite Notes If there is an agreement to arbitrate an issue, a party to the arbitration contract is entitled to a stay of litigation pending arbitration 4] Link to KeyCite Notes The arbitration agreement provides that:in the contract] must control the ··· general description····”); DCV Holding Inc., v. ConAgra, Inc., 889 A.2d 954, 961 (Del.2005) (“Specific language in a contract controls over general language, and where specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one.”); State v. Greger, 559 N.W.2d 854 (N.D.1997) ( “An age-old precept of contract interpretation requires that agreements be interpreted as a whole to give meaning to all terms, but when provisions conflict so that all cannot be given full weight, the more specific clauses are deemed to reflect the parties' intentions-a specific provision controls a general one.”). Accordingly, W & A is to be treated as a debt collector rather than as a general agent because W & A functioned only to serve MBNA for the purpose of collecting overdue credit card debts. By the terms of the arbitration agreement, there is no agreement to arbitrate the claim against W & A under the FDCPA because the plaintiffs' action does not name MBNA as a co-defendant.
Ordinarily, that would end the matter because it is preferable not to decide cases on alternative grounds. Karsten v. Kaiser Found. Health Plan of the Middle Atlantic States, Inc., 36 F.3d 8, 11 (4th Cir.1994). However, here alternative bases exist for denying the Motion to Compel Arbitration; and, in the interest of judicial economy, it is preferable to address those issues as well. See id. (“from the perspective of judicial economy, alternative holdings are a welcome blessing for courts at all levels”).

II. If Construed As W & A Urges, The Arbitration Clause Is Ambiguous

[5] Link to KeyCite Notes If, as W & A says, the construction just articulated is faulty, then the Arbitration and Litigation section is, at best, ambiguous. That is, if debt collectors are a subset of agents, then a suit against a debt collector should be sent to arbitration pursuant to the first sentence of the arbitration provision. However, if debt collectors are a group separate and apart from agents, a suit against a debt collector will be sent to arbitration only if MBNA is named as a co-defendant. If W & A is correct in its assertion, and if, as here, a party sues only a debt collector, then the arbitration agreement requires the impossible result that the case both go to arbitration and that it does not. That, of course, would be an absurd construction and also it demonstrates the ambiguity of the arbitration provision if construed as W & A urges.
[6] Link to KeyCite Notes It is axiomatic that ambiguity in a contract is construed against the drafter. Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 398 (Del.Super.1996) (“It is a well-accepted principle that ambiguities in a contract should be construed against the drafter.” (citing Restatement (Second) of Contracts § 206 (1981); see also Arthur L. Corbin, et. al., Corbin on Contracts § 559, supp. at 337 (1960 & Supp.1996) (the cannon is “imposed as a matter of public policy as a penalty for bad draftsmanship”)); 11 Williston on Contracts 32:12 “ Contra proferentum: Ambiguities Interpreted Against Drafter ” (4th ed.). This is especially the case in so-called “contracts of adhesion,” such as this one, where one of the parties to the contract has no bargaining opportunity. Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 912 (Del.1989) (As applied to contracts of adhesion, “f there is an ambiguity in the terms of the contract, that ambiguity will be resolved against the party who drafted the contract. See E.I. du Pont de Nemours & Co. v. Shell Oil Co., Del.Super., 498 A.2d 1108, 1114 (1985).”); North Am. Phillips Corp. v. Aetna Ca. and Sur. Co., 1995 WL 628441 at *3 (Del.Super.1995) (“The well settled doctrine of contra proferentum, which literally means, “against the offeror,” requires that ambiguity in non-negotiated or adhesion contracts to be construed against the profferer. Carr v. Maryland Casualty Co., 88 Misc.2d 424, 388 N.Y.S.2d 196, 198 (1976).”).
*6 [7] Link to KeyCite Notes Notwithstanding the federal policy favoring arbitration, the rule of contra proferentum applies to arbitration clauses just as to other contractual terms. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 50, 64 (1995). In Mastrobuono, assessing two conflicting terms in an arbitration provision, the Supreme Court held that the “respondents cannot overcome the common-law rule of contract interpretation that a court should construe ambiguous language against the interests of the party that drafted it. [citations] Respondents drafted an ambiguous document, and they cannot now claim the benefit of the doubt.” Id. (citing relevant state law cases). As the Supreme Court explained, Inc. v. Lauricia], 268 F.3d [244] at 251 [ (4th Cir.2001) ] (internal quotations omitted); Am. Recovery Corp., 96 F.3d at 95.
Patten, 380 F.3d at 204 (internal citations truncated for use herein). Thus, it is necessary to determine whether W & A has “so substantially utiliz [ed] the litigation machinery that to subsequently permit arbitration would prejudice” the plaintiffs. See id.
*7 [8] Link to KeyCite Notes The plaintiffs argue that W & A's delay in filing its Motion to Compel Arbitration requires denying the motion. However, the Fourth Circuit repeatedly has held that a delay of three months between the filing of a complaint and the filing of a motion to compel arbitration does not alone constitute waiver. Maxum Founds., 779 F.2d at 982 (no prejudice in a delay of three months); In re Mercury Const. Corp., 665 F.2d 933, 939 (4th Cir.1981) (same); Carolina Throwing Co. v. S & E Novelty Corp., 442 F.2d 329, 330 (4th Cir.1971) (same); see Patten, 380 F.3d at 205 (delay of four months not alone prejudicial). Here, W & A only delayed six weeks between the filing of the Amended Complaint and the filing of the Motion to Compel Arbitration. Even if measured from the date the original Complaint was filed, the delay is four months. Such a delay-however measured-is not, standing alone, grounds to find a waiver.
“The movant's participation in litigation activity alone will not suffice [to constitute waiver], as the dispositive question is whether the plaintiffs have suffered any actual prejudice.” Patten, 380 F.3d at 206. Neither the filing of an answer, counterclaim, Carolina Throwing, 442 F.2d at 330, or a declaratory judgment action, Am. Recovery Corp., 96 F.3d at 96, nor responding to motions filed by the non-movant, Patten, 380 F.3d at 206, nor pursuing discovery that does not prejudice the non-movant, Maxum Founds., 779 F.2d at 982, nor decisions on non-dispositive motions such as unrelated state-law claims or discovery challenges, Microstrategy, 268 F.3d at 250, will, without a greater showing of prejudice, constitute a waiver.
[9] Link to KeyCite Notes However, “where a party fails to demand arbitration during pretrial proceedings, and, in the meantime, engages in pretrial activity inconsistent with an intent to arbitrate, the party later opposing a motion to compel arbitration may more easily show that its position has been compromised, i.e., prejudiced.” Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250, 252 (4th Cir.1987) (quoting Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1161 (5th Cir.1986)). By filing its motion for summary judgment, W & A forced the plaintiffs to present their case in the responsive pleading mandated under the Federal Rules of Civil Procedure. In doing so, plaintiffs argue, W & A got a full view of the plaintiffs' case, which enabled W & A to reassess its chances of winning the case and to revise its litigation strategy. Having obtained this strategic advantage, plaintiffs' argue, W & A then shifted strategies and moved to compel arbitration. It did not even file a reply to the plaintiffs' response to the summary judgment motion.
In Fraser, the Fourth Circuit found that Fraser, the nonmovant, was prejudiced where Fraser “had to respond to a number of potentially damaging motions, including a motion for partial summary judgment and three motions to dismiss.” Id. (emphasis added). The district court had granted in part Merrill Lynch' s partial motion for summary judgment and, due to delays in pre-trial proceedings, had reset trial dates twice before Merrill Lynch filed the motion to compel arbitration. Id. On those grounds, the Court of Appeals held that Fraser had been prejudiced and, therefore, Merril Lynch had waived its right to move to compel arbitration. Id.
*8 Here, W & A filed a motion to dismiss and a motion for summary judgment on the Amended Complaint. Both motions, if granted would be dispositive rulings on the merits of the Amended Complaint. Indeed, the Court ruled on the Motion to Dismiss, dismissing Count II of the Amended Complaint. Unquestionably, as a result of W & A's motion to dismiss, the plaintiffs have been prejudiced as to Count II. Although the Court denied the Motion to Dismiss the Amended Complaint as to Count I, the Court nevertheless made a ruling. See Order of May 23, 2006 (Docket No. 29). That is, through its dispositive motions, W & A has subjected the plaintiffs to a sort of “civil jeopardy.” The fact that W & A's motion to dismiss partially failed does not mean that W & A's actions did not cause prejudice to the plaintiffs on those motions.
Additionally, the plaintiffs responded (Docket No. 18) to W & A's Motion for Summary Judgment, requested discovery prior to a ruling on that motion (Docket 20), and the Court denied the motion for summary judgment without prejudice and granted the requested discovery (Docket no. 24). Although this ruling was in the plaintiffs' favor, W & A clearly availed itself of the machinery of litigation when it filed the motion to dismiss and the motion for summary judgment. The Court agrees with plaintiffs that W & A obtained an unfair litigation advantage by forcing the plaintiffs to respond to the motion for summary judgment and then taking a different tack. The fact that W & A did not file a reply to the plaintiffs' response to the motion for summary judgment evidences this strategy.
In addition, W & A's use of the litigation machinery is not excused merely because the Court did not decide the motion to dismiss or the motion for summary judgment entirely in the defendant's favor. At any point before the May 23, 2005 order, the Court could have ruled on the Motion for Summary Judgment, and that would have had a decidedly dispositive and prejudicial effect on the plaintiffs if they had lost on those motions.
For the foregoing reasons, the record establishes that W & A has waived any right it may have to arbitration of the plaintiffs' dispute against it for violations of the FDCPA. For that alternate reason, the Motion to Compel Arbitration will be denied.


For the forgoing reasons, the Motion to Compel Arbitration will be denied.
The Clerk of the Court is directed to send a copy of this Memorandum Opinion to all counsel of record.
It is so ORDERED.

    FN1. The plaintiffs do not contest the fact that, by their use of their MBNA credit card, they agreed to the terms of the credit card agreement.

    FN2. The FDCPA states that:

    The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

    15 U.S.C § 1692a(6) (2004). A search of the Delaware Annotated Code and the reported cases of the courts of Delaware did not find a state-law definition of “debt collector.”

    FN3. That section reads, in part:

    In general, where there are general and special provisions in a contract relating to the same thing, the special provisions control ···· Where the parties express themselves in reference to a particular matter, the attention is directed to that, and it must be assumed that it expresses their intent, whereas a reference to some general matter, within which the particular matter may be included, does not necessarily indicate that the parties had the particular matter in mind.

    Am.Jur. Contracts § 363.

    FN4. See Karsten, 36 F.3d at 11 (alternative holdings 4 acceptable).
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