A three-judge panel of the United States Court of Appeals for the Third Circuit recently ordered arbitration on the preliminary issue of arbitrability in a class action lawsuit alleging illegal debt collection practices, finding that a challenge of the legality of the assignment of a contract that is the subject of an arbitration agreement does not call into question the formation of the arbitration agreement itself.
The case arose when a debt collector purchased a consumer’s defaulted debt from a consumer discount company. The debt was owed on a loan made to the consumer under Pennsylvania’s Consumer Discount Company Act (CDCA), which creates an exception to the state’s usury law and requires subsequent purchasers of contracts entered into under law to obtain a license or obtain written approval from the State Banking Department. The loan was subject to an arbitration agreement which delegates arbitrability issues to arbitration and applies to the assignees of the contract. Because the consumer discount company that purchased the consumer’s debt allegedly did not have the proper license or written consent, the consumer challenged the validity of the assignment of his debt and argued that attempts to the debt collector to collect the debt were unlawful and that he was not bound by the arbitration agreement as it applies to the debt collector. The district court agreed that the assignment was invalid and denied the debt collector‘s motion to compel arbitration.
On appeal, the Third Circuit reversed the district court’s decision, finding that assessing the validity of the arbitration agreement’s delegation clause would erroneously require a determination of the merits of the case – whether the assignment of the debt was valid – rendering the delegation clause meaningless. The panel held that because the validity of the arbitration agreement itself, which applies to debt assignees, was not in question, and because the debt collector is an assignee, the The “clear and unequivocal” agreement to delegate the issue of arbitrability had to be enforced, even if the debt assignment could later be invalidated.