Summary:
In this unpublished but instructive decision, the Fourth Circuit affirmed a Maryland district court’s denial of a motion to compel arbitration brought by Oliphant Financial, LLC and its collection law firm, Stillman P.C. The defendants sought arbitration in a putative class action brought by Thelma Roper alleging violations of federal and Maryland consumer protection statutes for suing consumers in state court after the statute of limitations had expired.
The Fourth Circuit, applying Maryland contract law and following the U.S. Supreme Court’s decision in Morgan v. Sundance, Inc., 596 U.S. 411 (2022), concluded that the defendants had waived any right to compel arbitration by previously filing state court lawsuits to collect on the same debts that formed the basis of the arbitration agreement. Importantly, the court found the claims in Roper’s federal action—centered on the filing of stale lawsuits—to be “interrelated” with the same underlying claims the defendants sought to send to arbitration. The court rejected the argument that some of Roper’s claims arose before litigation and were therefore arbitrable, finding instead that the illegal conduct complained of stemming directly from the time-barred collection actions.
Commentary:
While Roper does not directly involve a bankruptcy proceeding, it carries significant implications for consumer bankruptcy practice—particularly regarding creditors who attempt to enforce arbitration clauses after having invoked the bankruptcy court’s jurisdiction.
The logic underpinning the waiver of arbitration in Roper—that a party who actively litigates waives the right to compel arbitration—applies neatly to bankruptcy contexts. Courts have long held that the filing of a proof of claim constitutes submission to the bankruptcy court’s equitable jurisdiction. As such, several bankruptcy courts (and courts of appeals) have found that a creditor who files a proof of claim and then attempts to enforce arbitration over related disputes has, by its actions, waived or forfeited that right.
The Eleventh Circuit in In re Henry, 944 F.3d 587 (11th Cir. 2019), for example, held that a creditor who files a proof of claim cannot enforce arbitration of a debtor’s objection to that claim, particularly when the objection involves defenses under consumer protection statutes. Similar reasoning appears in Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 382 (2d Cir. 2018), and In re Belton, 961 F.3d 612 (2d Cir. 2020).
In short, just as Oliphant’s initiation of collection litigation waived its right to compel arbitration in Roper, a creditor’s filing of a proof of claim in bankruptcy likely amounts to an election to participate in the judicial process and can constitute waiver of arbitration rights for disputes arising from or integrally related to that claim.
Creditors who choose to sue, file claims, or otherwise invoke judicial processes cannot then retreat into arbitration when the wind shifts. In the same way that “filing suit is inconsistent with intent to arbitrate,” so too is filing a proof of claim in bankruptcy court—especially when the debtor raises counterclaims or defenses that relate directly to that claim.
In addition to waiver through litigation conduct, an arbitration provision embedded in a prepetition contract may be unenforceable in bankruptcy if the underlying agreement is treated as an executory contract and not affirmatively assumed under 11 U.S.C. § 365. Executory contracts—those under which material obligations remain on both sides—are not automatically enforceable in bankruptcy; they are deemed rejected unless assumed. If a debtor or trustee does not assume such a contract, its terms, including any arbitration clause, are unenforceable. An obligation to arbitrate places duties on both the debtor and the creditor and should certainly be considered mutual (since both have to participate in the arbitration) and material (if the choice to arbitrate or not was immaterial, then how could it be enforceable?), therefore an executory contract.
Together with that, this doctrine offers another tool for consumer debtors and their counsel to resist forced arbitration in bankruptcy, particularly when a creditor's claim arises from what may have been an unassumed (and at least to some extent) executory agreement.
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