Third Circuit Forces Arbitration Despite Dispute Over Legality of Loan Assignment Containing Arbitration Clause | Carlton Fields
The Third Circuit Court of Appeals recently ruled that a district court should have granted a motion to compel arbitration even though there was a dispute over the legality of an assignment of a loan agreement containing the arbitration clause in question. The Third Circuit explained that there was a valid agreement to arbitrate, which was sufficient to send the case to arbitration.
OneMain Financial Group, a nonbank financial company that provides consumer loans, provided Benjamin Zirpoli with a loan pursuant to the Consumer Discount Company Act (CDCA), which creates exceptions to state usury laws. This loan contained an arbitration clause which stated that “you or we have the absolute right to require that any claim be submitted to an arbitrator in accordance with this agreement to arbitrate”. “We” has been defined to include “assignees” of OneMain. “Claim” has been defined to include “anything related to…the arbitrability of any Claim under this Agreement” and “anything related to…any alleged breach [of a state statute]including but not limited to…usury…laws.
OneMain sold Zirpoli’s account, which was then delinquent, to Midland Funding LLC, a company that buys consumer debt. The ‘CDCA prohibits CDCA licensees from ‘selling contracts to any…unlicensed company…without the prior written approval of the Banking Secretary'”, but Midland apparently ‘did not possess a license of the CDCA nor sought the approval of the Ministry of Banks”. to acquire Zirpoli’s account.
Midland sued Zirpoli to collect the debt, but later dismissed the suit and then allegedly reported Zirpoli’s outstanding debt to various consumer agencies, which allegedly negatively affected Zirpoli’s credit. Zirpoli then filed a putative class action lawsuit alleging that because Midland did not have a CDCA license and had not obtained Department of Banking approval, he was not legally permitted to purchase his loan or the other governed loans. by the CDCA that he had acquired.
Midland has requested arbitration. The District Court ultimately denied Midland’s motion based on the alleged illegality of OneMain’s transfer to Midland.
The Third Circuit (with a dissenting judge) reversed the district court’s decision and returned the case with instructions to grant Midland’s motion to compel arbitration.
After concluding that this “party” under Section 4 of the Federal Arbitration Act “refers to a disputing party” and therefore has jurisdiction to consider Midland’s petition on appeal, the Third Circuit held that arbitration was appropriate because Zirpoli had signed a valid agreement to arbitrate and that agreement applied to OneMain’s assigns, including Midland. The Third Circuit acknowledged that there was a dispute over the legality of OneMain’s assignment to Midland, but explained that its analysis was limited to the threshold question of whether there was a OK to arbitrate in light of the delegation clause delegating matters of arbitrability to the arbitrator and that he was therefore prohibited from analyzing the merits of the dispute as to whether this agreement should be invalidated because it violated the CDCA.
The Third Circuit also held that even if it considered the merits of Zirpoli’s claim, it would reject his claim that the surrender was invalid. OneMain had “written off” Zirpoli’s loan, which meant that “the assignment is outside the purview of the CDCA”.
Zirpoli v Midland Funding, LLCno. 21-2438 (3d Cir. Sept. 1, 2022).