Thomas B. Smith, et al. v. Credit Acceptance Corporation, No. 2373, Sept. Term, 2017
Opinion by Shaw Geter, J.
Civil – Right to Arbitrate – Waiver – Participation in Prior Judicial Proceedings
Credit Acceptance Corporation’s (“Credit Acceptance”) participation in a
deficiency action brought in district court against appellants for monies owed under an
automobile contract did not waive its right to arbitrate appellants’ claims brought in circuit
court alleging Credit Acceptance violated the Credit Grantor Closed End Credit Provisions
(“CLEC”). Appellants’ CLEC claims were not “raised and/or decided” in the district court
action as required for a waiver of a party’s right to arbitrate under Charles J. Frank, Inc. v.
Associated Jewish Charities of Baltimore, Inc., 294 Md. 443 (1982). Appellants’ CLEC
claims were not sufficiently “raised” because, although Appellants arguably referenced
these claims as affirmative defenses in its answer to Credit Acceptance’s interrogatory in
the district court action, answers to interrogatories are not a part of the court record and
were not “decided” because Credit Acceptance dismissed the deficiency action before trial.
Moreover, Credit Acceptance did not waive its right to arbitrate Appellants’ CLEC
claims under the expanded standard set forth in Cain v. Midland Funding, LLC, 452 Md.
141 (2017) because the CLEC claims were not “related to” or “dependent on” the district
court deficiency action. Appellants’ claims that Credit Acceptance violated the CLEC by
charging impermissible fees and repossessing the automobile was wholly separate from
Credit Acceptance’s district court deficiency claim. Appellants’ CLEC claims would have
existed regardless of whether Appellants breached the contract or Credit Acceptance
instituted the deficiency action.
Circuit Court for Baltimore City
Case Nos. 24-C-17-003797
REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 2373
September Term, 2017
__________________________________________
THOMAS B. SMITH, ET AL.
v.
CREDIT ACCEPTANCE CORPORATION
_________________________________________
Fader, C.J.,
Wright,
Shaw Geter,
JJ.
___________________________________________
Opinion by Shaw Geter, J.
___________________________________________
Filed: May 3, 2019
Pursuant to Maryland Uniform Electronic Legal
Materials Act
(§§ 10-1601 et seq. of the State Government Article) this document is authentic.
2019-05-06 14:14-04:00
Suzanne C. Johnson, Clerk
This appeal arises from an order issued by the Circuit Court for Baltimore City to
compel arbitration in a contract action for the purchase of an automobile. Following
Appellee’s voluntary dismissal of its action against Appellants in the District Court of
Maryland for failure to make required payments under the same contract, Appellants filed
a class action complaint in the Circuit Court for Baltimore City. Appellants alleged
Appellee charged impermissible “convenience fees” and failed to sufficiently notify
Appellants regarding the repossession and sale of the vehicle in contravention of
Maryland’s Credit Grantor Closed End Credit Provisions. Appellee then petitioned the
circuit court to compel arbitration of Appellants’ claim. Appellants opposed the motion,
arguing Appellee waived its right to arbitration when it previously filed its claim in the
District Court. On January 12, 2018, the circuit court granted Appellee’s petition.
Appellants timely appealed and present the following question for our review:
1. Whether the Maryland Court of Appeals in Cain v. Midland Funding, LLC, 452 Md.
141, 156 A.3d 807 (Md. 2017) limited the waiver of the right to arbitrate “related”
claims as defined by Charles J. Frank, Inc. v. Associated Jewish Charities of
Baltimore, Inc., 294 Md. 443, 450 A.2d 1304 (Md. 1982) to include only those
claims that are “dependent” on the claims raised in a prior action?
BACKGROUND
On November 15, 2013, Appellants, Thomas Smith and Timothy Smith, entered
into a Retail Installment Contract (the “Contract”) to purchase a 2003 Cadillac Escalade
(the “Vehicle”) from Anderson Automotive Group, Inc. (the “Dealership”). The
Dealership assigned all of its rights, title, and interest, including its security interest, in and
to the Contract and the Vehicle to Appellee, Credit Acceptance Corporation (hereafter,
“Credit Acceptance”).
Within the Contract was an arbitration clause, which provided:
AGREEMENT TO ARBITRATE
This Arbitration Clause describes how a Dispute (as defined below) may be
arbitrated . . .
A “Dispute” is any controversy or claim between [Appellants] and [Credit
Acceptance] arising out of or in any way related to this Contract, including,
but not limited to, any default under this Contract, the collection of amounts
due under this Contract, the purchase, sale, delivery, set-up, quality of the
Vehicle, advertising for the Vehicle or its financing, or any product or service
included in this Contract. “Dispute” shall have the broadest meaning
possible, and includes contract claims, and claims based on tort, violations
of laws, statute, ordinances or regulations or any other legal or equitable
theories . . .
***
Either [Appellants] or [Credit Acceptance] may require any Dispute to be
arbitrated and may do so before or after a lawsuit has been started over the
Dispute . . .
If [Appellants] or [Credit Acceptance] elect to arbitrate a Dispute, neither
[Appellants] nor [Credit Acceptance] will have the right to pursue that
Dispute in court or have a jury resolve that dispute . . .
***
It is expressly agreed that this Contract evidences a transaction in interstate
commerce. This Arbitration Clause is governed by the FAA and not by any
state arbitration law.
Beginning in 2015, Appellants failed to remit the required monthly installment
payments to Credit Acceptance as required. After Credit Acceptance attempted to obtain
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payment from Appellants unsuccessfully, Credit Acceptance repossessed and sold the
Vehicle, which resulted in a deficiency balance of $12,957.30.
On November 30, 2016, Credit Acceptance filed a lawsuit in the District Court of
Maryland, seeking to recover the unpaid deficiency balance (the “District Court Action”).
Credit Acceptance claimed Appellants were liable for failing to pay amounts owed under
the Contract. In response, Appellants filed a Notice of Intention to Defend, which stated,
“Plaintiff is not entitled to a judgment in its favor and Defendants deny the allegations of
the Complaint and demands [sic] strict proof thereof.” Credit Acceptance served limited
interrogatories, which Appellants answered. In response to one interrogatory, Appellants
stated, “Plaintiff did not provide Defendants with adequate notice related to the
repossession (i.e. redemption, sale and account). Plaintiff charged Defendants fees to make
payments by phone.” Prior to receiving the interrogatory answers, Credit Acceptance also
filed a notice of intent to rely upon business records. The parties did not engage in
additional discovery, file motions, or otherwise take any further action in the District Court
Action. On July 11, 2017, just prior to trial, Credit Acceptance voluntarily dismissed the
District Court Action.
On July 19, 2017, Appellants filed a Class Action Complaint in the Circuit Court
for Baltimore City (the “Circuit Court Action”), which was subsequently amended (the
“Amended Complaint”). The Amended Complaint alleged Credit Acceptance violated the
Credit Grantor Closed End Credit Provisions, Md. Code Ann., Com. Law §§ 12-1001, et
seq. (“CLEC”) by charging impermissible “convenience fees” when collecting payments
from Appellants by telephone or through the internet, and failing to provide adequate notice
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of the repossession and sale of the Vehicle. Appellants sought statutory damages for the
asserted CLEC violations.
Before filing its response to the Amended Complaint, Credit Acceptance invoked
the arbitration clause in the Contract and demanded Appellants submit their claims to
arbitration. Appellants refused this demand. Credit Acceptance then petitioned the circuit
court for an order to arbitrate Appellants’ claims. Appellants opposed the petition, arguing
that Credit Acceptance had waived its right to arbitrate by filing the District Court Action.
On January 12, 2018, the circuit court granted the petition and stated,
Now, I will find that the claims in the amended complaint are not dependent
on the claims in the [District Court Action] and therefore no waiver occurred.
Just because Credit Acceptance went ahead with the [District Court Action]
does not mean that they waived arbitration in this case . . . The fact that Credit
Acceptance could have arbitrated its [District Court Action] but did not
would not preclude them from arbitration in this case[.]
Appellants timely appealed the circuit court’s ruling to this Court.
STANDARD OF REVIEW
The parties disagree on the appropriate standard of review. Appellants assert we
should review the circuit court’s determination without deference. They claim the question
of whether Credit Acceptance waived its right to arbitrate by filing the District Court
Action is a question of law, which we should review afresh. On the other hand, Credit
Acceptance argues that the question of whether it waived its right under the circumstances
is a factual inquiry that we should only reverse upon clear error.
In Cain v. Midland Funding, LLC, the Court of Appeals was presented with a
question of law similar to the one sub judice, namely “whether, under Charles J. Frank,
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Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443, [] (1982), the 2009
collection action [was] ‘related’ to [the appellant]’s current claims against [the appellee]
and thus constituted a waiver of the right to arbitrate.” 452 Md. 141, 151–52 (2017). The
Court noted that this was a question of law and “when a trial court order involves an
interpretation and application of Maryland . . . case law, our Court must determine whether
the lower court’s conclusions are legally correct under a de novo standard of review.” Id.
at 152 (internal quotations omitted). In this case, the circuit court’s decision entailed an
interpretation of applicable caselaw. Accordingly, our review of the circuit court’s
decision is de novo.
DISCUSSION
I. Whether the circuit court erred in granting Credit Acceptance’s petition
to compel arbitration.
Appellants contend Credit Acceptance waived its right to arbitrate Appellants’
claims filed in the Circuit Court Action because it instituted the District Court Action.
Conversely, Credit Acceptance argues it did not waive its right to arbitrate Appellants’
claims because the claims are not “related to” nor “dependent on” Credit Acceptance’s
deficiency claim in the District Court Action.
The arbitration agreement between Appellants and Credit Acceptance states that it
“is governed by the FAA,” or the Federal Arbitration Act. Section 2 of the Federal
Arbitration Act (the “FAA”) provides that arbitration clauses “shall be valid, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2 (2012). “The United States Supreme Court has described § 2 as
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the representation of ‘a liberal federal policy favoring arbitration agreements,
notwithstanding any state substantive or procedural policies to the contrary.’” Cain, 452
Md. at 153 (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24 (1983)). However, state courts are directed “to apply state contract law to arbitration
clauses when enforceability is at issue.” Id. (citing Perry v. Thomas, 482 U.S. 483, 492–
93 (1987)). “[U]nder the FAA, state law, whether of legislative or judicial origin, is
applicable if that law arose to govern issues concerning the validity, revocability, and
enforceability of contracts generally.” Id. at 153–54 (citing Perry, 482 U.S. at 493 n. 9)
(emphasis in original). This body of law includes “generally applicable contract defenses,”
including waiver. Id. at 154. “[W]e analyze whether the arbitration clause was waived,
and is therefore unenforceable, under state—not federal—law.” Id.
A party’s participation in a judicial proceeding can constitute a waiver of its right
“to arbitrate issues raised and/or decided in the proceeding.” Charles J. Frank, Inc. v.
Associated Jewish Charities of Baltimore, Inc., 294 Md. 443, 454 (1982). In Frank, a
subcontractor sued the contractor for additional compensation for the removal of rock from
a construction site. Id. at 445. The contractor answered and impleaded the owner. Id.
Although the claim against the contractor was arbitrable, the owner did not pursue
arbitration and the parties eventually settled. Id. at 445–46. Months later, the contractor,
in accordance with the construction contract, filed a demand for arbitration against the
owner for the outstanding balance of the contract. Id. at 446. The owner argued the
contractor waived its right to arbitration by litigating the first lawsuit, and attempted to
force the contractor to litigate its claim against the owner. Id. The Court of Appeals held
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the contractor had not waived its right to arbitrate the claim because the issue was
“unrelated” to the rock removal at issue in the first action. Id. at 454–55. The Court
explained that “waiver is limited to issues raised and/or decided in the judicial proceedings
and, absent additional evidence of intent, the waiver does not extend to any unrelated issues
arising under the contract.” Id. at 454.
The Court again addressed the issue in Cain v. Midland Funding, LLC, further
expounding on when a party waives its right to arbitrate when participating in a judicial
proceeding. 452 Md. 141 (2017). There, Midland filed a small claims action against Cain
in district court for an outstanding balance on Cain’s credit account, and obtained a default
judgment against him. Id. at 147. Under Maryland law, Midland was required to have
been licensed by the State when it sued Cain, but it did not become licensed until almost a
year later. Id. Cain filed a class action complaint against Midland in circuit court to
collaterally attack the judgment, alleging the default judgment against him was void, unjust
enrichment, and violations of the Maryland Consumer Debt Collection Act and Maryland
Consumer Protect Act. Id. at 148. The Court held that Midland had indeed waived its right
to arbitrate Cain’s claims because his claims were “dependent” on Midland’s judgment
obtained in district court. Id. at 158. The Court explained, “if [Midland] had not pursued
its 2009 collection action, [Cain]’s current claims would not exist.” Id. at 158–59. The
Court distinguished Frank, explaining that that case “involved two completely separate
issues—a contractor’s failure to pay a subcontractor for rock removal and an owner’s
failure to pay the contractor the balance due on the construction project. Neither was
dependent on the other.” Id. at 158.
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Appellants argue here that the standard set forth in Frank—that a party waives its
rights to arbitrate any claim “related to an issue raised and/or decided in a judicial
proceeding”—determines whether Credit Acceptance waived its right to arbitrate claims
in the Circuit Court Action. They contend the alternative standard set out in Cain—that a
party waives its right to arbitrate any claim that is “related to” or “dependent on” the claim
raised in the previous litigation—should not apply. As we see it, by either standard, Credit
Acceptance did not waive its right to arbitrate the claims in the Circuit Court Action.
None of Appellants’ claims filed in the Circuit Court Action were “raised and/or
decided” in the District Court Action. The sole issue before the District Court was a breach
of contract action alleging Appellants were responsible for a contractual deficiency. In the
Circuit Court Action, Appellants allege Credit Acceptance violated the CLEC by charging
impermissible "convenience fees” when collecting their payments via telephone and
internet and its failure to provide adequate notices for the repossession and sale of the
Vehicle. These claims were not raised or decided in the District Court Action.
Appellants argue their answer to an interrogatory in the District Court Action
sufficiently “raised” the issues alleged in the Circuit Court Action as required by Frank.
We disagree. The answer to interrogatory stated, “Plaintiff did not provide Defendants
with adequate notice related to the repossession (i.e. redemption, sale and account).
Plaintiff charged Defendants fees to make payments by phone.” However, answers to
interrogatories are not a part of the court record. Also, the notice of intention to defend,
filed by Appellants, was general and did not specify any issues. Further, Credit Acceptance
dismissed the lawsuit prior to trial. Appellants also concede the issues alleged in the Circuit
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Court Action were not “decided” in the District Court Action. Thus, under Frank, Credit
Acceptance did not waive its right to arbitrate the claims in the Circuit Court Action as the
issues were neither “raised and/or decided in a judicial proceeding.”
Appellants’ claims in the Circuit Court Action are also not “related to” nor
“dependent” on Credit Acceptance’s claim in the District Court Action under Cain. Here,
unlike in Cain, where Cain’s claims would not have existed but for Midland’s district court
action against him, Appellants’ claims that Credit Acceptance violated the CLEC is wholly
independent of Credit Acceptance’s claim in the District Court. Appellants’ claims arise
from Credit Acceptance’s actions in collecting payment under the Contract, while Credit
Acceptance’s claim in the District Court Action was for a contractual deficiency.
Appellants’ claims would exist regardless of whether they breached the Contract or
whether Credit Acceptance instituted the District Court Action. Accordingly, we hold the
circuit court did not err in granting Credit Acceptance’s petition to compel arbitration.
JUDGMENT OF THE CIRCUIT
COURT FOR BALTIMORE CITY
AFFIRMED; COSTS TO BE PAID
BY APPELLANT.
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