United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 06-1925
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Rhonda J. Lewallen, *
*
Appellee, *
*
v. * Appeal from the United States
* District Court for the Western
Green Tree Servicing, L.L.C.; U.S. * District of Missouri.
Bank Trust National Association, as *
Trustee for Conseco Finance Home *
Equity Loan Trust, *
*
Appellants. *
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Submitted: November 14, 2006
Filed: June 4, 2007
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Before BYE, JOHN R. GIBSON, and GRUENDER, Circuit Judges.
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JOHN R. GIBSON, Circuit Judge.
Rhonda J. Lewallen filed for Chapter 13 bankruptcy to avoid foreclosure on her
home. Green Tree Servicing, L.L.C., filed a proof of claim against the estate
representing the balance on her home equity loan, interest, and various fees. Lewallen
objected to Green Tree's claim and ultimately filed an adversary proceeding against
Green Tree and U.S. Bank in the bankruptcy court alleging that Green Tree, as
servicer of the loan, lacked standing to make a claim, that it overestimated her debt,
and that its handling of her account violated various consumer protection statutes.
Green Tree and U.S. Bank filed a motion to dismiss or, in the alternative, to compel
arbitration, which the bankruptcy court1 denied. The district court2 affirmed this
denial, holding that Lewallen's claims were core bankruptcy proceedings, the
bankruptcy court had discretion to refuse to enforce the arbitration provision in the
loan agreement, and Green Tree waived its right to arbitration in any event. Green
Tree and U.S. Bank appeal, and we affirm.
I.
Lewallen obtained a consumer loan for $50,300 from Conseco Finance
Servicing Corp. in May of 2000; the loan was secured by a deed of trust on her trailer
home. Conseco consolidated this loan, along with other consumer loans, and
transferred its interest in them to a securitization trust. Under a pooling and servicing
agreement entered into between Conseco and U.S. Bank, U.S. Bank obtained legal
title to the pooled loans, while Conseco retained the right to service the loans.
Lewallen’s loan agreement provided that the parties agreed to submit their disputes
to arbitration.3
1
The Honorable Jerry W. Venters, Chief Judge, United States Bankruptcy Court
for the Western District of Missouri.
2
The Honorable Fernando J. Gaitan, Jr., Chief Judge, United States District
Court for the Western District of Missouri.
3
The provision reads:
ARBITRATION. All disputes, claims, or controversies arising from or
relating to this Agreement or the relationships which result from this
Agreement, or the validity of this arbitration clause or the entire
Agreement, shall be resolved by binding arbitration by one arbitrator
selected by Lender with Borrower's consent. This arbitration agreement
is made pursuant to a transaction involving interstate commerce, and
shall be governed by the Federal Arbitration Act, Title 9 of the United
States Code. . . . Notwithstanding anything hereunto the contrary,
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Conseco filed for bankruptcy in 2002, and Green Tree purchased the right to
service Lewallen's loan from the bankruptcy estate. Lewallen’s loan was in default
at the time of the transfer. According to her, both Conseco and Green Tree improperly
increased her monthly payments, assessed excessive late charges against her, failed
to respond to her inquiries on her account, refused to accept payment from her, and
sent her erroneous overdue notices. In early 2004, Green Tree began preparations to
foreclose on Lewallen's home. Lewallen attempted to refinance the loan with a new
lender but her application was denied, which she attributes to Green Tree providing
an inflated payoff figure to the prospective lender. On February 23, 2004, the day of
the scheduled foreclosure sale, Lewallen filed her petition for bankruptcy under
Chapter 13 to stop the sale. Her bankruptcy schedules listed approximately $50,000
owed on the debt serviced by Green Tree and approximately $6,000 of unsecured debt
owed in taxes and credit card charges. Her home was the primary asset in the
bankruptcy estate.
In the bankruptcy proceeding, Green Tree filed a proof of claim alleging a
secured claim for over $54,000, plus over $4,000 in arrearages. Lewallen filed an
objection, arguing that Green Tree's claim included excessive charges and fees, that
Green Tree had failed to credit her for payments made and wrongfully had refused to
accept payment, that Green Tree had provided confusing and inaccurate bills and
Lender retains an option to use judicial or non-judicial relief to enforce
a security agreement relating to the collateral secured in a transaction
underlying this arbitration agreement, to enforce the monetary obligation
or to foreclose on the collateral. Such judicial relief would take the form
of a lawsuit. The institution and maintenance of an action for judicial
relief in a court to foreclose upon any collateral, to obtain a monetary
judgment or to enforce the security agreement shall not, constitute a
waiver of the right of any party to compel arbitration regarding any other
dispute or remedy subject to arbitration in this Agreement, including the
filing of a counterclaim in a suit brought by Lender pursuant to this
provision.
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failed to respond to her inquiries in violation of the Real Estate Settlement Procedures
Act, that Green Tree's claim included improperly assessed late charges, and that Green
Tree's attorney's costs and fees were not a proper claim because they were attributable
to Green Tree's own billing mistakes and failure to respond to Lewallen's inquiries.
Although a hearing on Lewallen's objection was scheduled in the bankruptcy
court for September 2004, the matter was continued several times. Lewallen served
discovery requests on Green Tree during this time. When the hearing on her objection
finally took place on March 22, 2005, Lewallen indicated that, in addition to objecting
to the proof of claim, she wished to raise affirmative claims against Green Tree
alleging violations of the Real Estate Settlement Procedures Act and other statutes.
Counsel for Green Tree stated that an adversary proceeding was “the only way to
resolve these issues” and asked the court to overrule Lewallen's objection. The
bankruptcy court dismissed Lewallen's objection without prejudice to enable her to
raise all her issues in the adversary proceeding.
Lewallen filed her adversary action, naming Green Tree and U.S. Bank as
defendants, in the bankruptcy court on May 24, 2005. Her complaint recited the same
facts as the objection she had filed to Green Tree's claim, and it alleged that Green
Tree's conduct violated the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601-
2617, 24 C.F.R. Pt. 3500, the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-
1692o, and the Missouri Merchandising Practices Act, Mo. Rev. Stat. § 407.020.
Lewallen later amended her complaint to add a count alleging that Green Tree violated
the Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681u. Green Tree apparently had
not responded to Lewallen’s first discovery requests, as Lewallen served a new round
of “first” requests which covered the same ground.
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On June 7, 2005, Green Tree and U.S. Bank4 sought and obtained an extension
of time to file their answer. Green Tree served discovery requests on Lewallen on
July 1, and, on July 15, sought an extension of time to respond to the discovery
requests Lewallen had served. A few days later, the parties participated in a joint
motion for continuance of the trial setting. On July 28, Green Tree filed a motion to
dismiss or, in the alternative, to compel arbitration, citing the arbitration provision in
the loan agreement. It also moved to extend the time for responding to discovery until
after the hearing on the motion to dismiss, in case the bankruptcy court decided to
send Lewallen's claims to arbitration. The record indicates that Lewallen had begun
preparing responses to Green Tree's discovery requests, but neither party served
responses on the other.
The bankruptcy court denied Green Tree's motion to dismiss or to compel
arbitration because it had waived any claim to arbitration through its active
participation in the adversary proceeding–a proceeding Green Tree had suggested.
The court also noted that bankruptcy courts are intended to resolve disputes like this
one. Green Tree informed the bankruptcy court that it planned to appeal, as the
Federal Arbitration Act, 9 U.S.C. §16, authorized it to do, and the bankruptcy court
stayed further proceedings pending the outcome of the appeal.
On appeal, the district court affirmed the bankruptcy court's order on two
independent grounds. First, it held that the bankruptcy court had discretion to refuse
to enforce the arbitration provision because allowing arbitration to proceed would
have seriously jeopardized core bankruptcy proceedings. In addition, it held that the
bankruptcy court’s finding that Green Tree waived its right to arbitrate was not clearly
erroneous. The court reasoned that Green Tree waited sixteen months after it filed its
proof of claim to seek arbitration, served extensive discovery requests, and
4
Although both are defendants, Lewallen’s claims focus on Green Tree’s
conduct and Green Tree has taken the lead in the joint defense of the suit, so we refer
to the defendants jointly as “Green Tree.”
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participated in six pretrial hearings. This appeal of the denial of the motion to compel
arbitration ensued.
II.
We address the waiver issue first because, if Green Tree waived its right to
arbitrate Lewallen's claims, we need not consider the bankruptcy court’s discretion to
deny arbitration.5 We review de novo the legal determination of waiver but examine
the factual findings underlying that ruling for clear error. Kelly v. Golden, 352 F.3d
344, 349 (8th Cir. 2003); Stifel, Nicolaus & Co. Inc. v. Freeman, 924 F.2d 157, 158
(8th Cir. 1991). “[I]n light of the strong federal policy in favor of arbitration, any
doubts concerning waiver of arbitrability should be resolved in favor of arbitration.”
Dumont v. Saskatchewan Gov't Ins., 258 F.3d 880, 886 (8th Cir. 2001) (quoting Ritzel
Communications v. Mid-Am. Cellular Tel. Co., 989 F.2d 966, 968-69 (8th Cir.
1993)); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24-25 (1983).
A party may be found to have waived its right to arbitration if it: “(1) knew of
an existing right to arbitration; (2) acted inconsistently with that right; and (3)
prejudiced the other party by these inconsistent acts.” Ritzel, 989 F.2d at 969. Green
Tree concedes that it knew at all relevant times that the arbitration provision in
Lewallen's loan agreement gave it an existing right to arbitrate. It contends, however,
that it did not act inconsistently with its right to arbitrate and that Lewallen suffered
no prejudice.
5
Although the parties do not discuss the issue, the record leaves some question
about Green Tree’s ability to invoke the provisions of the arbitration clause as an
assignee or successor in interest of Conseco. We assume without deciding that the
clause is binding on the parties to this case.
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A party acts inconsistently with its right to arbitrate if the party “[s]ubstantially
invoke[s] the litigation machinery before asserting its arbitration right.” Ritzel, 989
F.2d at 969 (quoting E.C. Ernst, Inc. v. Manhattan Constr. Co. of Tex., 559 F.2d 268,
269 (5th Cir. 1977)). A party substantially invokes the litigation machinery when, for
example, it files a lawsuit on arbitrable claims, engages in extensive discovery, or fails
to move to compel arbitration and stay litigation in a timely manner. Stifel, 924 F.2d
at 158. In concluding that Green Tree acted inconsistently with its right to arbitrate,
the bankruptcy and district courts observed that Green Tree had served “extensive”
discovery requests on Lewallen, filed substantive motions in the case, and participated
in six hearings on its proof of claim before seeking arbitration. According to
Lewallen's and the district court's calculations, Green Tree delayed asserting its right
to arbitration for sixteen months, where it filed its initial proof of claim in March of
2004 and did not seek arbitration until July of 2005.
Green Tree contends that it invoked its right to arbitrate Lewallen's claims in
a timely manner by filing its motion to compel arbitration just two months after she
filed her adversary complaint. Green Tree raised the issue in its first responsive
pleading to that complaint. Lewallen, on the other hand, argues that we should
consider Green Tree’s conduct from the time it filed its proof of claim against her
bankruptcy estate. When a creditor files a proof of claim before the bankruptcy court,
this amounts to a civil action to collect the debt, Coxson v. Commonwealth Mortgage
Co. of Am., L.P. (In re Coxson), 43 F.3d 189, 193-94 (5th Cir. 1995), which arguably
invokes the litigation machinery. Nonetheless, a “creditor's act of filing a proof of
claim does not constitute waiver of the creditor's right to invoke an otherwise valid
arbitration clause.” In re Statewide Realty Co., 159 B.R. 719, 724 (Bankr. D.N.J.
1993). The arbitration agreement between Lewallen and Green Tree specifically
provided that
Lender retains an option to use judicial or non-judicial relief to enforce
a security agreement relating to the collateral secured in a transaction
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underlying this arbitration agreement, to enforce the monetary obligation
or to foreclose on the collateral. . . . [A lawsuit of this sort] shall not,
constitute a waiver of the right of any party to compel arbitration
regarding any other dispute or remedy subject to arbitration in this
Agreement, including the filing of a counterclaim in a suit brought by
Lender pursuant to this provision.
Thus, Green Tree had the right to collect Lewallen's debt by way of judicial
proceedings rather than arbitration, and its filing a proof of claim in her bankruptcy
case was not inconsistent with its right to arbitrate.
While the above provision reserved Green Tree’s right to file a court action
instead of arbitration to collect the debt, it is more problematic for Green Tree that it
failed to seek arbitration in the fall of 2004 when Lewallen filed an objection to its
proof of claim and accused it of violating the Real Estate Settlement Procedures Act,
raising affirmative claims that were subject to the arbitration provision. To safeguard
its right to arbitration, a party must “do all it could reasonably have been expected to
do to make the earliest feasible determination of whether to proceed judicially or by
arbitration.” Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391
(7th Cir. 1995). Green Tree had several opportunities to seek arbitration after
Lewallen's objection put it on notice of her claims, and it let each of those
opportunities pass. First, Lewallen filed her objection to the proof of claim on August
31, 2004, and Green Tree made no mention of arbitration in response. Next, at the
March 22, 2005, hearing on the objection, Green Tree's counsel not only failed to
mention arbitration of the claims but asked the bankruptcy court to overrule the
objection and affirmatively stated her position that “these issues can only be resolved
in an adversary proceeding.” Yet again, even after Lewallen filed her complaint in
May, Green Tree served discovery, sought an extension of time to respond to the
complaint, and participated in a joint motion to continue the trial date. It was not until
its July 28, 2005, motion to dismiss that Green Tree invoked its right to arbitration.
This amounts to an approximately eleven-month delay.
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Green Tree contends that it was powerless to seek arbitration until Lewallen
actually filed her complaint in the adversary proceeding on May 24, 2005. In other
cases, however, creditors have sought arbitration upon the debtor's objection to the
proof of claim rather than waiting for the debtor to file an adversary proceeding. See,
e.g., In re Farmland Indus., Inc., 309 B.R. 14, 17 (Bankr. W.D. Mo. 2004). Green
Tree fails to explain why it could not have asserted its right to arbitration earlier than
it did. It only argues that Lewallen is to blame for the delay because she improperly
raised her claims by way of an objection rather than an adversary proceeding. Green
Tree exaggerates the significance of Lewallen's selection of a procedural device.
Contrary to Green Tree's depiction, the bankruptcy court did not rule that Lewallen
acted improperly in raising her claims by way of an objection, but only observed that
the parties had the option to resolve those claims in an adversary proceeding, which
offered the evidentiary and procedural protections of Bankruptcy Rule 7001.
See Bankruptcy Rule 3007 (objections to claims take on the procedural form of an
adversary proceeding when they are coupled with certain additional demands for
relief). Procedural form has little practical significance in this case, where the
adversary complaint largely restates Lewallen’s objection to the proof of claim;
moreover, Lewallen specifically stated that she planned to raise Real Estate Settlement
Procedures Act claims both in her objection and again at the March 2005 hearing.
While Lewallen's and the district court's calculation of a 16-month delay is slightly
overstated because Green Tree could not have been expected to seek arbitration in
conjunction with filing its proof of claim, we conclude that Green Tree could have
requested arbitration approximately eleven months sooner than it did. This delay is
inconsistent with its right to arbitrate. See Stifel, 924 F.2d at 158 (six-month delay
in moving to compel arbitration, plus engaging in discovery on arbitrable claims, was
inconsistent with the right to arbitrate).
Green Tree also acted inconsistently with its right to arbitrate by urging the
bankruptcy court to dispose of Lewallen's claims on the merits, reserving arbitration
as an alternative avenue to resolve the dispute. Green Tree sought dismissal of the
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complaint on the grounds of judicial estoppel, failure to state a claim against
defendant U.S. Bank, failure to establish all the elements of her Missouri law claim,
statute of limitations, inapplicability of the Fair Debt Collection Practices Act, and
standing. Green Tree filed a supplemental memorandum of law in support of the
motion to dismiss, asserting these grounds as an alternative to arbitration. At the
hearing on the motion to dismiss, Green Tree encouraged the court to dismiss the case
on statute of limitations grounds or on a judicial estoppel theory “prior to even
reaching the arbitration.” Green Tree especially urged the court to dismiss the
complaint against U.S. Bank with prejudice, arguing that Lewallen had failed to allege
wrongdoing by U.S. Bank. An arbitration provision gives parties “the choice of an
alternative, nonjudicial forum” to resolve their disputes, but it does not go so far as to
“allow or encourage the parties to proceed, either simultaneously or sequentially, in
multiple forums.” Cabinetree, 50 F.3d at 390. Thus, Green Tree's request that the
bankruptcy court dispose of the case on the merits “prior to even reaching the
arbitration” is inconsistent with resolving the case through arbitration. See Kelly, 352
F.3d at 349-50 (party acted inconsistently with his right to arbitrate when he
“consistently encouraged the district court to resolve the entire dispute”).
Green Tree's actions in serving discovery requests on Lewallen similarly were
inconsistent with its right to arbitrate. Green Tree asserts that the district court erred
in finding that it served discovery requests on Lewallen during the underlying
bankruptcy. Even if Green Tree did not initiate discovery during the proof of claim
phase of the bankruptcy proceedings, however, the record shows that Green Tree did
serve discovery requests (which it later moved to exclude from the record), including
lengthy interrogatories and requests for production of documents, after the adversary
proceeding commenced. Green Tree did not file its motion to compel arbitration until
a few days before Lewallen’s responses were originally due, and the record shows that
Lewallen had begun preparing responses to the requests. Green Tree also sought an
extension of time to respond to Lewallen's discovery requests, and the parties filed a
joint motion to continue the trial setting two weeks before Green Tree raised its right
to arbitration. To illustrate the minimal nature of the discovery that occurred, Green
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Tree emphasizes that it moved to stay discovery shortly after serving its requests and
that neither party served discovery responses on the other. This assertion is somewhat
disingenuous, as Green Tree moved for the stay after the bankruptcy court denied its
motion to dismiss or to compel arbitration. Although the parties never served their
discovery responses, we cannot say the bankruptcy and district courts clearly erred in
characterizing Green Tree's discovery requests as extensive. Green Tree's
participation in discovery was inconsistent with its right to arbitrate Lewallen's claims.
Green Tree's actions, however, are not the end of the inquiry. Even where a
party has acted inconsistently with its right to arbitrate, it has not waived that right
unless its actions prejudice the other party. A party is so prejudiced when the “parties
use discovery not available in arbitration, when they litigate substantial issues on the
merits, or when compelling arbitration would require a duplication of efforts.” Kelly,
352 F.3d at 349. In concluding that Green Tree's actions prejudiced Lewallen, the
bankruptcy court reasoned that it would be “inequitable” to require Lewallen to
arbitrate her claims “at this stage” after the parties had participated in discovery, that
arbitration would put Lewallen at a “great disadvantage,” and that arbitration would
impose duplicative expenses on her.
We conclude that Lewallen has been prejudiced by Green Tree's late assertion
of its right to arbitrate her claims and its participation in the litigation process. First,
Green Tree requested that the bankruptcy court rule in its favor on the merits of
Lewallen's claims; she likely would incur duplicative expenses if forced to arbitrate
issues that have already been presented to the courts. Lewallen also has incurred
expenses in the discovery process. Green Tree argues that there can be no discovery-
related prejudice where neither party has served discovery responses on the other,
because their investment in the discovery process is minimal, and neither party has
divulged information that would not be discoverable in arbitration. See Leadertex,
Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 26 (2d Cir. 1995). This
position overlooks the time and expense Lewallen has invested in preparing and
serving discovery requests, which she has been doing since September of 2004, and
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preparing responses to Green Tree's discovery requests (although they have not been
completed or delivered). Participation in discovery is not per se prejudicial, see Rush
v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir. 1985), but Lewallen has been
prejudiced here where Green Tree has sent her down the road of trial preparation at
a time when she can ill afford to waste resources. Moreover, Green Tree's delay has
hindered the administration of Lewallen's bankruptcy estate; it could have requested
arbitration anytime after Lewallen objected to the proof of claim but failed to do so,
instead inexplicably waiting almost eleven months to invoke its contractual right.
Green Tree points out that, at the March 2005 hearing, the bankruptcy court
admonished Lewallen for failing to make progress on her objection. Assuming she
was a willing participant in the multiple continuances granted between August 2004
and March 2005, we do not consider that period of delay to be prejudicial.
Nonetheless, Green Tree delayed invoking its right to arbitration when at the hearing
it insisted that Lewallen file an adversary proceeding and when, after receiving her
complaint, it served discovery before moving to compel arbitration. We conclude that
Lewallen has been prejudiced by Green Tree's attempt to litigate the merits of her
claims, participation in discovery, and delay. See Kelly, 352 F.3d at 350 (expense,
delay, and duplication of efforts show prejudice). Indeed, because they have had to
litigate the motion to compel arbitration in the middle of her Chapter 13 proceedings
instead of earlier, “the parties have been deprived of arbitration's main purpose:
efficient and low-cost resolution of disputes.” Reis v. Peabody Coal Co., 935 S.W.2d
625, 631 (Mo. Ct. App. 1996).
Having concluded that Green Tree waived its right to arbitrate Lewallen's
claims, we need not reach the parties' vigorous dispute about whether Lewallen's
claims were “core” bankruptcy matters and whether the bankruptcy court had
discretion to refuse to compel arbitration. We affirm the denial of Green Tree's
motion to dismiss or, in the alternative, compel arbitration.
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