Donte Jackson v. Protas, Spivok & Collins LLC

Holding: A debt collection law firm that represents a creditor in litigation but does not service the loan by collecting payments is not a party to the borrower's arbitration agreement and cannot compel arbitration.
Standard: De novo review of contract formation under state law.
Vote: Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Judge Harris and Judge Benjamin joined.
Practical effect: Debt collection law firms cannot rely on arbitration clauses in consumer loan agreements to compel arbitration unless they actually perform the duties of a loan servicer, such as collecting payments and maintaining payment schedules.

The United States Court of Appeals for the Fourth Circuit affirmed the district court's denial of a motion to compel arbitration, holding that a debt collection law firm is not a party to a borrower's arbitration agreement merely because it represents the creditor in litigation.

Background

Donte Jackson took out a loan from WebBank, which was later sold to Velocity Investments, LLC. When Jackson defaulted, Velocity sued him in state court, represented by the law firm Protas, Spivok & Collins LLC. After Velocity dismissed the suit, Jackson sued both Velocity and the law firm, alleging they sued on time-barred debt. The law firm and Velocity moved to compel arbitration based on the original promissory note, which included an arbitration clause. The district court denied the motion, ruling that Velocity waived its right to arbitrate and that the law firm was not a party to the agreement. The law firm appealed.

The court’s reasoning

The court applied Maryland contract law to determine if the law firm was a party to the arbitration agreement. The agreement defined you to include any person servicing the note. The court rejected the law firm’s argument that servicing meant providing necessary services or making payments. Instead, the court adopted the definition of servicing as collecting payments and maintaining a payment schedule. The law firm did not perform these mechanical tasks; it only litigated the debt. Therefore, the law firm was not a party to the agreement and could not enforce it.

Because the firm is not a party to the agreement, it cannot enforce it.

Opinion at 2

What it means going forward

Debt collection law firms cannot rely on arbitration clauses in consumer loan agreements to compel arbitration unless they actually perform the duties of a loan servicer, such as collecting payments and maintaining payment schedules.