Lomeli v. Midland Funding, LLC

Background

Jaime Prieto Lomeli brought a proposed class action against Midland Funding, LLC; Midland Credit Management, Inc.; Hunt & Henriques; Michael Scott Hunt; and Janalie Ann Henriques. He alleged that the defendants violated the federal Fair Debt Collection Practices Act in connection with efforts to collect a credit-card debt. The alleged violation concerned a declaration used in an earlier state-court debt-collection action, which Lomeli claimed was invalid because the declarant’s business address was more than 150 miles from the trial location and was therefore false, misleading, and unconscionable.

Lomeli opened a Shell credit-card account with Citibank in 2004. The card agreement submitted by the defendants included an arbitration provision stating that either side could require binding arbitration of claims relating to the account. It also stated that claims involving people or entities connected with, or claiming through, the cardholder or Citibank—including agents, affiliated companies, successors, and assignees—were subject to arbitration. The agreement contained an assignment clause and selected federal law and South Dakota law to govern its terms and enforcement.

Midland Funding purchased Lomeli’s debt from Citibank in 2016. Midland Credit Management serviced the debt, and Hunt & Henriques was retained to collect it. Midland Funding and Midland Credit Management filed one motion to compel arbitration, and Hunt & Henriques, Michael Scott Hunt, and Janalie Ann Henriques joined that motion and filed another. Lomeli opposed both motions.

Whether the Arbitration Agreement Applied

The court applied a standard similar to the summary-judgment standard to determine whether an arbitration agreement existed. The defendants had to show, by a preponderance of the evidence, that a valid arbitration agreement existed and that there was no genuine dispute of material fact about its formation.

Lomeli argued that the defendants had not authenticated the card agreement or connected it to his specific account. The court rejected those objections. It found that William Peck, a Citibank records custodian, and Sean Mulcahy, a Midland Credit Management employee responsible for account records, were qualified witnesses. Their declarations supported findings that Citibank regularly mailed card agreements when accounts were opened, that no record showed the agreement mailed to Lomeli was returned as undeliverable, and that Midland Credit Management received and maintained the agreement associated with Lomeli’s account.

The court also rejected Lomeli’s hearsay and best-evidence objections. It concluded that the submitted copies could be authenticated and that the witnesses’ testimony could be presented in admissible form. The court therefore found that the card agreement governed Lomeli’s account and that its arbitration provision was a valid agreement to arbitrate. Lomeli did not otherwise challenge the validity of the arbitration provision or argue that his underlying claims fell outside its scope.

Which Defendants Could Enforce Arbitration

The court applied South Dakota contract law because the agreement selected that law and the court found that South Dakota had a substantial relationship to the dispute.

The court held that Midland Funding could enforce the arbitration provision because it purchased all rights, title, and interest in the relevant accounts from Citibank and assumed Citibank’s related rights and obligations. The court also noted that the card agreement expressly permitted assignment and covered claims involving assignees.

The court held that the Hunt & Henriques defendants could enforce the provision even though they were not signatories or assignees. The agreement broadly covered entities connected with or claiming through the parties, including agents. The court found that Hunt & Henriques acted as Midland Funding’s agent and that Lomeli’s claims against those defendants were based solely on conduct by Midland Funding. The court concluded that the claims were sufficiently intertwined to support arbitration under equitable estoppel, a doctrine that can prevent a party from avoiding arbitration when its claims depend on the contract and related conduct.

The court also confirmed that Midland Credit Management could enforce the agreement. The court relied on the agreement’s reference to affiliated companies, Midland Credit Management’s relationship with Midland Funding, and Lomeli’s allegation that Midland Funding acted through Midland Credit Management’s agents and employees.

Waiver

Lomeli argued that the defendants waived arbitration by filing the earlier state-court action to collect the debt. The court decided that it—not the arbitrator—had to resolve that waiver question.

The court explained that waiver generally requires proof that the party knew of its arbitration right, acted inconsistently with that right, and prejudiced the opposing party. The court found that Lomeli did not meet that burden. The card agreement specifically stated that the creditor and an assignee would not initiate arbitration to collect a debt unless the debtor asserted a claim, while the debtor could seek arbitration of a claim made in a debt-collection proceeding. The court concluded that filing the earlier collection case did not conflict with the defendants’ right to arbitrate Lomeli’s later, different claims.

Class Allegations and Disposition

The court did not decide whether the arbitration agreement’s class-action waiver barred class arbitration or required striking Lomeli’s class allegations. It held that the agreement delegated questions concerning the application, enforceability, and interpretation of the arbitration provision to the arbitrator, including the class-waiver issue.

The court granted the defendants’ motions to compel arbitration. It also granted the defendants’ request to stay the case pending arbitration. The court denied as moot Lomeli’s motion to strike affirmative defenses and denied as moot the Midland defendants’ motion to stay proceedings pending the ruling on the arbitration motion. The clerk was directed to administratively close the case file, which the court stated was an internal procedure that did not affect the parties’ rights. The order also required the defendant to file quarterly reports about the arbitration proceedings beginning January 6, 2019.