Appeals Court Overturns Lower Court’s Denial of Arbitration Motion

It is not the job of a Court to determine whether a matter needs to be arbitrated or not — it is the job of an arbitrator to do that, according to the Court of Appeals for the Third Circuit, which overturned a lower court’s denial of a motion to compel arbitration in a Fair Debt Collection Practices Act case yesterday.

A copy of the ruling in the case of Zirpoli v. Midland Funding can be accessed by clicking here.

The plaintiff took out a personal loan that included an arbitration clause in the underlying agreement. The plaintiff stopped making payments on the loan and it was sold to the defendant. The defendant filed a collection lawsuit to recover the unpaid debt, and the plaintiff hired a lawyer and entered a defense, but the defendant dismissed the suit rather than litigating it. The defendant then began reporting the debt to credit reporting agencies. The plaintiff filed suit, alleging the collection activities constituted an unlawful attempt to collect on the loan, because the defendant did not have a license in Pennsylvania, meaning it was not lawfully permitted to purchase the loan from the original creditor.

The defendant responded to the complaint by filing a motion to compel arbitration. But a District Court judge denied the motion, focusing on the validity of the assignment from the creditor to the defendant.

In appealing the decision, the Third Circuit was left to answer the question — who decides whether the parties to an agreement must arbitrate: the arbitrator or the court, before the question of arbitrability can be decided. “In other words, courts must figure out whether the parties should arbitrate the question of whether the parties agreed to arbitrate the dispute,” the Third Circuit wrote.

Ultimately, the underlying agreement between the plaintiff and the original creditor guided the Third Circuit’s decision to overturn the lower court’s ruling. Because there is an underlying agreement — one that binds the plaintiff to arbitrate claims between him, the creditor, and any future assignees — everything else is moot. The arbitration claim of the agreement sets forth that “any claim … shall be resolved by binding arbitration.” That includes an agreement to arbitrate the issue of arbitrability, the Appeals Court ruled.

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