Johnson v. Cont'l Fin. Co.

690 F.Supp.3d 520

Tiffany JOHNSON, Plaintiff, v. CONTINENTAL FINANCE COMPANY, LLC, et al., Defendants.

Tracey Crider, Plaintiff, v. Continental Finance Company, LLC, et al., Defendants.

Civil Action No. 8:22-cv-02001-PX

Civil Action No. 8:23-cv-00854-PX

United States District Court, D. Maryland

Signed September 7, 2023

Benjamin Howard Carney, Richard S. Gordon, Gordon, Wolf & Carney, Chtd., Hunt Valley, MD, for Plaintiff in Nos. 8:22-cv-02001, 8:23-cv-00854.

Melissa O. Martinez, McGuireWoods LLP, Baltimore, MD, Brandi G. Howard, District of Columbia, Washington, DC, for Defendants Continental Finance Company, LLC, Continental Purchasing, LLC in No. 8:22-cv-02001.

John Alexander Nader, Hinshaw & Culbertson, LLP, Washington, DC, Philip John Collins, Protas Spivok and Collins

LLC, Bethesda, MD, for Defendant CKS Prime Investments, LLC in Nos. 8:22-cv-02001, 8:23-cv-00854.

Melissa O. Martinez, McGuireWoods LLP, Baltimore, MD, for Defendants Continental Finance Company, LLC, Continental Purchasing, LLC in No. 8:23-cv-00854.

MEMORANDUM OPINION

Paula Xinis, United States District Judge

Pending before the Court in this consolidated matter are the motions to compel arbitration filed by Defendants Continental Finance Company, LLC and Continental Purchasing, LLC (together "Continental"). No. 22-cv-2001 (hereinafter "Johnson"), ECF No. 13; No. 23-cv-854 (hereinafter "Crider"), ECF No. 9. Also pending is Continental's motion to strike class allegations, Crider, ECF No. 9, and Plaintiff Tiffany Johnson's unopposed motion to amend her Complaint, Johnson, ECF No. 16. The motions are fully briefed, and no hearing is necessary. D. Md. Loc. R. 105.6. For the following reasons, the Court DENIES Continental's motions and GRANTS Johnson's motion.

I. Background¹

Continental, a loan originator, marketer, and servicer, extended credit cards to Maryland residents, including Plaintiffs Tiffany Johnson and Tracey Crider. Johnson, ECF No. 4 ¶¶ 29, 33, 54-60; Crider, ECF No. 4 ¶¶ 17, 38-46. Continental engages a third-party financial institution to extend the short-term unsecured credit, then Continental buys back the loans and rights to collect payments. Johnson, ECF No. 4 ¶¶ 68-69; Crider, ECF No. 4 ¶¶ 54-55.

Plaintiffs initially filed suit in state court, challenging that this buyback arrangement was designed to circumvent the lender licensing requirements set forth in the Maryland Credit Services Business Act, Md. Code Ann., Com. Law §§ 14-1901, et seq., and the Maryland Consumer Loan Law, Md. Code Ann., Com. Law §§ 12-301, et seq. Johnson, ECF No. 4 ¶ 100-01; Crider, ECF No. 4 ¶ 101. Continental timely removed both matters to this Court and next moved to compel arbitration of the claims based on the arbitration provision within the cardholder agreements. Johnson, ECF No. 13-1 at 1-2; Crider, ECF No. 9 at 6-7.

Plaintiffs oppose arbitration on the grounds that they never formed a binding agreement to arbitrate such disputes. The argument depends on a proper reading of the Cardholder Agreement (the "Agreement") and its inclusive arbitration provision (the "Arbitration Provision"), and so the Court will describe the Agreement in some detail.²

The Cardholder Agreement is a single 13-page document that divides into several sections, each separated with prominent, underlined short titles. Johnson, ECF No. 13-5. The first, entitled, "Your Agreement With Us," sets out the basics of the contractual relationship. Id. at 4. It defines terms used throughout to identify Continental ("we" and "us") and the cardholder ("you" and "your"). Id. This section also plainly states that "[t]his Agreement covers the terms and conditions of the Card Account," all of which are accepted upon the cardholder's receipt and use of the credit card. Id.

This section next announces, under the bold heading, "Applicable Law," the Agreement's choice of law provision. It states:

Applicable Law: This Agreement and your Account, and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or related to your Account, this Agreement or any transferred balances, are governed by and construed in accordance with applicable federal law and, to the extent not preempted by federal law, by the laws of [Utah in Johnson and Missouri in Crider.].

Id. at 5; Crider, ECF No. 9-5 at 5.

The section next includes a clause entitled "Changes in Agreement Terms," which sets forth Continental's power to change any term within the Agreement (the "Change Clause"). It reads:

Changes in Agreement Terms:We can change any term of this Agreement, including the rate at which or manner in which INTEREST CHARGES, Fees, and Other Charges are calculated, in our sole discretion, upon such notice to you as is required by law. At our option, any change will apply both to your new activity and to your outstanding balance when the change is effective as permitted by law.

Johnson, ECF No. 13-5 at 5 (bold emphasis in original) (italic emphasis added).

The final section of the Agreement, entitled "Arbitration Provision," sets out the terms under which the parties will arbitrate any dispute that "arises out of . . . the Agreement." Id. at 12. It begins: "PLEASE READ CAREFULLY: This Arbitration Provision ('the Provision') waives any right to file claims in court, other than a small claims court, or to participate in a class action or other consolidated proceeding." Id. at 12. The Arbitration Provision also allows for advance opt-out and directs that arbitration will be conducted by the American Arbitration Association; that either party may request a hearing; that the lender will advance the cardholder's portion of the filing and hearing fees; and that "[a]ll issues of arbitrability must be arbitrated," to include whether the Arbitration Provision "is enforceable or applicable." Id. at 12-13.

Because both actions concern the terms by which Continental extended consumer credit, Continental moves to compel arbitration pursuant to the Arbitration Provision. Johnson, ECF No. 13; Crider, ECF No. 9. In Crider, Continental separately moves to strike the class allegations, arguing that the Arbitration Provision prohibits the cardholder from pursuing class claims. Crider, ECF No. 9. The cases have been consolidated and the motions are now ripe for resolution. The Court turns first to the motions to compel arbitration.

II. Motions to Compel Arbitration

A. Standard of Review

Plaintiffs oppose the motion to compel arbitration, arguing that the provision is "illusory," or lacking in adequate consideration such that the parties never formed a binding agreement to arbitrate in the first instance. Johnson, ECF No. 14 at 25-26. Where, as here, the motion to compel arbitration implicates whether such an agreement was ever formed, the Court treats the motion as one for summary judgment. See Cherdak v. ACT, Inc., 437 F. Supp. 3d 442, 454 (D. Md. 2020) (quoting Caire v. Conifer Value Based Care, LLC, 982 F. Supp. 2d 582, 589 (D. Md. 2013)) (treating a motion to compel arbitration as a motion for summary judgment where "the formation or validity of the arbitration agreement is in dispute"). The Court may consider documents outside the pleadings "to effectively assess the merits of this motion." Shaffer v. ACS Gov't Servs., Inc., 321 F. Supp. 2d 682, 683-84 (D. Md. 2004).

Summary judgment is appropriate when the Court, construing all evidence and drawing all reasonable inferences in the light most favorable to the non-moving party, finds that no genuine dispute exists as to any material fact, thereby entitling the movant to judgment as a matter of law. Fed. R. Civ. P. 56(a); see In re Family Dollar FLSA Litig., 637 F.3d 508, 512 (4th Cir. 2011). Summary judgment must be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "A party opposing a properly supported motion for summary judgment 'may not rest upon the mere allegations or denials of [his] pleadings,' but rather must 'set forth specific facts showing that there is a genuine issue for trial.' " Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003) (quoting former Fed. R. Civ. P. 56(e)) (alteration in original).

The Federal Arbitration Act, 9 U.S.C. §§ 1-16 ("FAA"), governs the Court's review of a motion to compel arbitration. To prevail, the movant must show the existence of (1) a dispute between the parties; (2) a written arbitration provision that purports to cover the dispute; (3) a relationship between the transaction and interstate or foreign commerce; and (4) the failure of a party to arbitrate the dispute. See Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir. 1991).

B. Analysis

Plaintiffs argue that Continental cannot show the Arbitration Provision covers this dispute, as required under the FAA, because no binding agreement to arbitrate was ever formed. Johnson, ECF No. 14. Specifically, Plaintiffs contend that because the Change Clause permits Continental to modify any aspect of the Agreement, including the Arbitration Provision, at will and at any time, any pre-existing promises to arbitrate struck between the parties are illusory, or lack consideration, and thus do not constitute a validly binding contract. Id. at 26-30.

As a threshold matter, the parties dispute which substantive law governs this contract formation question. Continental urges that the Arbitration Provision incorporates the "Applicable Law," or choice-of-law, provision and so the Court must apply Utah and Missouri law respectively. Johnson, ECF No. 15 at 7; Crider, ECF No. 9 at 11-12. Although generally, the Court must honor the parties' agreement to apply selected substantive state law, this presupposes that the agreement is binding in the first instance. But until the Court determines whether the Arbitration...