E-Alert Case Updates

Fourth Circuit Affirms Lower Court’s Dismissal of Complaint to Permit Arbitration on Grounds of Equitable Estoppel

Keanna Lomax v. Weinstock, Friedman & Friedman
Case No. 14-1130 (Sept. 4, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ca4.uscourts.gov/Opinions/Unpublished/141130.U.pdf

In Keanna Lomax v. Weinstock, Friedman & Friedman, the United States Court of Appeals for the Fourth Circuit was asked to determine whether the district court erred in dismissing, without prejudice, Plaintiff Keanna Lomax’s amended complaint to permit arbitration. Lomax’s complaint alleged violations of the Fair Debt Collection Practices Act (“FDCPA”), the Maryland Consumer Debt Collection Act (“MCDCA”), and the Maryland Consumer Protection Act (“MCPA”) by Defendant, Weinstock, Friedman & Friedman, P.A. (“Weinstock”). In a per curiam opinion, the Fourth Circuit affirmed the lower court’s decision.

Lomax financed the purchase of a car with a loan obtained through a retail installment contract (“the RISC”) with Credit Acceptance Corporation (“CAC”). The terms of the RISC are governed by Maryland’s Credit Grantor Closed End Credit Provisions (“the CLEC”), Md. Code Ann., Comm. Law § 12-1001 et seq. To secure the loan, Lomax gave CAC a security interest in the car, and when she fell behind on her payments, CAC repossessed the car in December 2010, and sold it at auction for $300 through the Manheim auction company. CAC then sought a deficiency judgment against Lomax for the remaining amount due on the loan, retaining Weinstock, a law firm, to file suit on its behalf. Weinstock filed suit against Lomax in the Maryland District Court for Baltimore City on October 13, 2011. Lomax claimed that Weinstock violated the FDCPA, the MCDCA, and the MCPA by maintaining suit against her for a deficiency judgment when CAC had not provided the requisite notice of the sale under the CLEC. Lomax purported to bring suit on behalf of herself and all persons similarly situated.

The RISC, between Lomax and CAC, included an agreement to arbitrate various disputes between the two (2) parties. Weinstock claimed the arbitration agreement covered the dispute, and on those grounds moved to dismiss for lack of subject matter jurisdiction, pursuant to Federal Rule of Civil Procedure 12(b)(1), and failure to state a claim, pursuant to Rule 12(b)(6),or, in the alternative, to stay the action and compel arbitration. The district court observed that under the Federal Arbitration Act (“FAA”), a court must, upon motion by a party, stay any proceeding that involves an issue subject to arbitration under a written arbitration agreement. If all issues are arbitrable, dismissal may be a proper remedy as well. See Aggarao v. MOL Ship Mgmt. Co., Ltd., 675 F.3d 355, 376 n.18 (4th Cir. 2012) (noting there is some disagreement over whether dismissal is a proper remedy where all claims are subject to arbitration, but not resolving the 2001) (noting that dismissal is a proper remedy when all issues are arbitrable); Davidson v. Becker, 256 F. Supp. 2d 377, 384 (D. Md. 2003) (same). Accordingly, the district court stated that a party may properly invoke the FAA through a motion to dismiss. See id. Although Lomax argued that the plain language of the arbitration agreement with Weinstock precluded arbitration of her claims, the district court declined to determine whether federal law or Maryland state law governed the arbitration agreement, and dismissed Lomax’s complaint without prejudice.

On appeal, the Fourth Circuit determined that, under both Maryland and federal law, Lomax’s argument failed. According to the appellate court, Maryland law provides that “a ‘broadly worded’ arbitration clause triggers the ‘significant relationship test.’” Griggs v. Evans, 43 A.3d 1081, 1088 (Md. Ct. Spec. App. 2012). Likewise, the Fourth Circuit has “consistently held that an arbitration clause encompassing all disputes ‘arising out of or relating to’ a contract embraces ‘every dispute between the parties having a significant relationship to the contract regardless of the label attached to a dispute.’” Wachovia Bank, Nat’l Ass’n v. Schmidt, 445 F.3d 762, 767 (4th Cir. 2006) (quoting Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 93 (4th Cir. 1996)). Based on its review of the record, the Fourth Circuit agreed with the district court that Lomax’s claims had a “significant relationship” to the retail installment contract at issue, because they involved the parties’ obligations under the contract.

Second, the appellate court agreed with the district court that the doctrine of equitable estoppel applied. Under federal law, “a nonsignatory to an arbitration clause may, in certain situations, compel a signatory to the clause to arbitrate the signatory’s claims against the nonsignatory despite the fact that the signatory and nonsignatory lack an agreement to arbitrate.” Am. Bankers Ins. Group, Inc. v. Long, 453 F.3d 623, 627 (4th Cir. 2006). “One such situation exists when the signatory is equitably estopped from arguing that a nonsignatory is not a party to the arbitration clause.” Id. “ Further, the Court opined that “estoppel is appropriate if in substance the signatory’s underlying complaint is based on the nonsignatory’s alleged breach of the obligations and duties assigned to it in the agreement.” Id. at 628. Likewise, under Maryland law, “[t]he doctrine of equitable estoppel permits non-signatories to enforce an arbitration provision . . . when a signatory must rely on the terms of the written agreement [containing the arbitration clause] in asserting [its] claims.” Griggs, 43 A.3d at 1092.

Because Lomax relied on the retail installment sales contract in an attempt to collect damages, the Fourth Circuit concluded that she was equitably estopped from disclaiming the contract’s arbitration provision. Accordingly, the Fourth Circuit affirmed the district court’s judgment.