« Puerto Rico Bankruptcy: Audio Recordings? | Main | Midland Got It Right (Sort Of) »

Kindred Nursing Centers--More on Arbitration and State Contract Law

posted by Mark Weidemaier

Today, the U.S. Supreme Court decided Kindred Nursing v Clark, an arbitration case in which the Kentucky Supreme Court declined to enforce arbitration agreements between a nursing home and two patients. The agreements had been executed by relatives holding powers of attorney granting broad authority to enter contracts, but the Kentucky Supreme Court held that a power of attorney must specifically grant the authority to agree to arbitration. It was clear--as it often is--that the U.S. Supreme Court would reverse. The Kentucky rule just can’t be squared with governing federal arbitration law. Put simply, state law can't say that a broadly-worded power of attorney grants authority to enter contracts generally, except for arbitration clauses. Not surprisingly, then, the U.S. Supreme Court reversed in a 7 to 1 opinion authored by Justice Kagan.* The dissent wasn’t on the merits, either; Justice Thomas does not believe the Federal Arbitration Act applies to proceedings in state court.

I teach contracts and arbitration law, among other classes, and I find it increasingly frustrating to teach arbitration cases. So many involve plausible applications of contract law (like Kindred) but get the arbitration law flatly wrong. Others involve questionable applications of contract law or related doctrines, seemingly to avoid the effect of arbitration law. Here’s a recent case by the Maryland Court of Appeals, Cain v Midland Funding, which falls into the latter camp.

Cain involved an arbitration clause in a consumer credit agreement. I will reprint the relevant parts of the arbitration clause below, but here’s what it says in substance:

  1. Either party may bring any claim in arbitration or in court.
  2. For any claim (or counterclaim) filed in court, the defendant may insist on arbitration instead, except for claims filed on an individual basis in small claims court.
  3. Any dispute sent to arbitration must be arbitrated on an individual basis (i.e., not as a class action).

Midland Funding, an unlicensed collection agency, filed a collections action in Maryland small claims court and won a default judgment against Cain. Subsequently, a Maryland court ruled that judgments obtained by unlicensed debt collectors are void and that judgment debtors can collaterally attack such a judgment. Cain thereupon filed a class action in Maryland state court seeking damages and other relief, and Midland moved to compel arbitration. Two lower courts ruled in favor of arbitration but the Maryland Court of Appeals reversed, holding that Midland had waived the right to demand arbitration by filing its collection action in small claims court in the first place. Midland, the court reasoned, had an option to bring that claim in arbitration or in court. By electing to file suit, it “waived” the right to demand arbitration of all “related” claims.

Wait, what? The contract gives each party the right to file individual cases in small claims court, while insisting on individualized arbitration of all other claims, including counterclaims (many of which will necessarily be related to the claim asserted by the counter-claimant's opponent). So how does one waive a contractual right by asserting it?

To be sure, one can “waive” the right to arbitrate. I put the term in quotes because the arbitration cases often use it loosely to refer both to the intentional relinquishment of the right and to cases in which a party forfeits the right unwillingly. As an example of the latter category, consider a defendant in a court action that first files a motion to dismiss (likely unavailable in arbitration) and moves to compel arbitration only after losing the motion to dismiss. Most courts would refuse to compel arbitration on those facts. But Cain has nothing to do with this scenario, because Midland contracted for precisely the right it asserted.

The problem in Cain has nothing to do with any waiver of contractual rights. The problem is with the rights Midland contracted for in the first place. The contract preserves meaningful legal remedies for the lender and its agents, while denying borrowers their most effective remedy, the class action. Even if class actions do not provide much compensation, the threat at least has the potential to deter lender misconduct. Unfortunately, federal arbitration law makes it difficult, though not impossible, to argue that a clause like this is unconscionable. That’s a shame. As I have said before, public officials should be the ones to decide whether businesses can use contracts to opt out of class action liability. Despite my skepticism about the individual and social benefits of the class action, I would prefer they answer this question in the negative. But until we get to that point, I would also prefer that courts apply the law as it is.

 

*In Kindred Nursing, the only remotely plausible counter-argument is that the rule announced by the Kentucky Supreme Court requires a clear statement of the intent to grant an agent the authority to waive any “fundamental” right and thus doesn’t single out arbitration. But there are two problems with this argument. First, even if this is what the Kentucky Supreme Court really meant, the rule might be preempted anyway. It isn’t clear that the FAA allows states to disfavor arbitration agreements, so long as they also disfavor a couple of other types of contract. Second, it takes a really, really charitable reading to come away with the impression that the Kentucky rule doesn't target arbitration for unfavorable treatment. As Justice Kagan’s opinion for the U.S. Supreme Court notes, the category of “fundamental” clauses identified by Kentucky law appears to consist only of arbitration agreements. It is as if the rule “were made applicable to arbitration agreements and black swans" (p. 7).

The arbitration clause in Cain (excerpt):

Either you or we may, without the other’s consent, elect mandatory, binding arbitration for any claim, dispute, or controversy between you and us (called “Claims”).

All Claims relating to your account … or our relationship are subject to arbitration … no matter what legal theory … or what remedy …. This includes … counterclaims … and Claims made independently or with other claims. A party who initiates a proceeding in court may elect arbitration with respect to any Claim advanced in that proceeding by any other party. Claims and remedies sought as part of a class action, private attorney general or other representative action are subject to arbitration on an individual (non-class, non-representative) basis, and the arbitrator may award relief only on an individual (non-class, non-representative) basis.

What about Claims filed in Small Claims Court? Claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual (non-class, non-representative) Claim.

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad