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Collection agency’s extensive delay waives arbitration right

October 22, 2018

The 7th Circuit Court of Appeals affirmed the denial of a collection agency’s delayed motion to compel arbitration when it found the agency had inadequate explanations for its delay and had waived any right to arbitrate.

In 2014, Francina Smith applied for and received a Sam’s Club credit card from Synchrony Bank. The credit card contract included an agreement to arbitrate all disputes arising from the account as well as a waiver of the right to seek class action relief.

In March 2016, Synchrony Bank hired GC Services to collect an allegedly unpaid balance on the credit card. GC Services informed Smith that it would commence collection proceedings unless she disputed the debt in writing. Smith refused and brought a class action suit against GC Services, alleging that the company violated the Fair Debt Collections Practices Act when it required her to dispute the debt in writing.

One year later, GC Services sent Smith a letter notifying her of the arbitration agreement and demanding arbitration, which she refused. The correspondence was not filed on the docket, and the district court was not notified that GC Services had demanded arbitration.

Thirteen months after the suit began, GC Services moved to compel arbitration. The Southern District Court denied the motion, concluding that as a non-signatory, GC Services could not enforce the arbitration agreement and that it had also waived any right to arbitrate by not diligently asserting that right.

On appeal, GC Services argued whether it could bind Smith to the arbitration agreement as a non-signatory. The 7th Circuit found that GC Services acted inconsistently with the right to arbitrate when it took GC more than eight months to demand Smith arbitrate her claim after she had already sued. Following her refusal, the court added, GC waited another five months before moving to compel.

“GC Services’ explanation for these delays is entirely inadequate,” Circuit Judge Michael Kanne wrote. “The company contends that the initial eight‐month delay occurred because the arbitration agreement was in Synchrony Bank’s possession and so ‘GC Services was unaware of [its] existence.’”

As a “sophisticated debt collection agency” GC should have investigated whether Smith’s contract contained an arbitration agreement and could have found the agreement through a routine internet search, the 7th Circuit Court added.

The court noted that GC’s subsequent actions were “unjustified and manifestly inconsistent with an intention to arbitrate” when it additionally failed to notify the court of its intention to move to compel arbitration.

GC also asserted that Smith would suffer no prejudice from proceeding to arbitration, but the 7th Circuit Court found that argument “not only wrong but beside the point.”

In its motion to dismiss, GC focused on whether 15 U.S.C. § 1692g(a)(3) required that debts be disputed in writing. The 7th Circuit Court found that question to be inconsistent with a desire to arbitrate and suspect under St. Mary’s Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prod. Co., 969 F.2d 585, 590 (7th Cir. 1992), citing that “[a] party may not normally submit a claim for resolution in one forum and then, when it is disappointed with the result in that forum, seek another forum.”

 “The district court’s determination that Smith was prejudiced when GC Services sought arbitration after Smith had defeated a motion to dismiss, obtained class certification, and litigated several discovery issues was not erroneous,” Kanne concluded. “In essence, GC Services sought to erase Smith’s successes — including her victory on the pivotal legal issue of whether 1692g(a)(3) contains a writing requirement. This attempt to ‘play heads I win, tails you lose’ is ‘the worst possible reason for delay.’”

Ultimately, the 7th Circuit affirmed the district court’s denial of GC Services motion to compel arbitration in Francina Smith v. GC Services Limited Partnership, 18-1361.

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