E-Alert Case Updates

Defendant Did Not Lose Right to Arbitrate Dispute by Delay Under the Federal Arbitration Act

Antonia Rota-McLarty v. Santander Consumer USA, Inc.
No. 11-1597, (U.S. Court of Appeals for the Fourth Circuit, November 28, 2012)
by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued opinion from the United States Court of Appeals for the Fourth Circuit, the Court held that Defendant Santander Consumer USA, Inc. did not waive its right to arbitration of the dispute, reversing the U.S. District Court’s decision which denied the Motion to Compel Arbitration.

In 2007, Plaintiff Antonia Rota-McLarty, a Maryland resident, purchased a used car from Easterns Automotive Group in Rockville, Maryland. At the time of the purchase, she executed two contracts with Easterns, a Buyer’s Order, which provided the terms of the sale and contained an agreement to arbitrate disputes, and a Retail Installment Sales Contract ("RISC"), which did not contain an arbitration provision. The RISC also contained an integration clause, which stated, “This contract contains the entire agreement between you and us relating to this contract. Any change to this contract must be in writing and we must sign it. No oral changes are binding."

Santander pre-approved the financing terms, and Easterns assigned the RISC to Santander immediately after the sale. The Plaintiff returned the vehicle claiming it was defective, and never made any payment on her loan. Santander repossessed the car and sold it at a loss, and then sought collection of the outstanding debt.

In March 2010, the Plaintiff filed a putative class action suit in Maryland state court alleging violations of various Maryland consumer protection laws for undisclosed finance charges and other unfair business practices. The matter was removed to federal court in April 2010 based on diversity of citizenship. Soon thereafter, the parties agreed to a bifurcated discovery plan that split discovery into two stages. The first stage was to focus on the issue of hidden finance charges, with class and other discovery to follow in a second stage.

Between April and September 2010, Santander took the Plaintiff’s deposition, and the Plaintiff took Easterns’ deposition along with issuing discovery requests. In September, Santander moved to compel arbitration of Plaintiff’s claims and stay the federal litigation. It argued it had waited to seek arbitration while awaiting the Supreme Court’s decision on the issue of potential class arbitration. The Supreme Court issued a decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ___, 130 S. Ct. 1758, 1775 (2010) ("[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.").

The U.S. District Court for the District of Maryland held that the Maryland Uniform Arbitration Act, MD. CODE ANN., CTS. & JUD. PROC. §§ 3-201 et seq., applied rather than the Federal Arbitration Act. The Court held that the arbitration provision applied as the two (2) contracts must be read together, but that Santander had waived its right to compel arbitration through unjustified delay and by having participated significantly in discovery.

The Fourth Circuit determined that the District Court was incorrect in its decision to apply the Maryland statute, as the transaction was one that involved interstate commerce, and that the FAA applied. The Fourth Circuit agreed that the two contracts should be read together and that an arbitration provision existed.

The Fourth Circuit then applied the FAA standards in order to determine whether the delay exhibited by Santander prevented it from seeking arbitration. Under the FAA a party cannot seek arbitration if it is in default in proceeding with such arbitration. Default occurs only when a party “‘so substantially utiliz[es] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.’" Forrester v. Penn Lyon Homes, Inc., 553 F.3d 340, 343 (4th Cir. 2009). The Court held that the six (6) month time frame and limited discovery did not prejudice the Plaintiff, and as such remanded the matter with instructions to compel arbitration.