Stratton v. Portfolio Recovery Associates, LLC
Filing
79
MEMORANDUM OPINION AND ORDER: (1) Dft's 41 Motion for Leave to File First Amended Answer is GRANTED. (2) Clerk is directed to file the First Amended Answer to Pla's Amended Complaint previously tendered by the Dft. Signed by Judge Danny C. Reeves on November 2, 2015. (AWD) cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
(at Lexington)
)
)
)
)
)
)
)
)
)
)
DEDE STRATTON,
Plaintiff,
V.
PORTFOLIO RECOVERY
ASSOCIATES, LLC,
Defendant.
***
***
Civil Action No. 5: 13-147-DCR
MEMORANDUM OPINION
AND ORDER
***
***
This matter is pending for consideration of Defendant Portfolio Recovery Associates
LLC’s (hereafter, “PRA”), Motion for Leave to File First Amended Answer to include the
additional affirmative defense of arbitration. [Record No. 41-1, pp. 1011] Plaintiff Dede
Stratton argues that the Court should not permit PRA to amend its Answer because she
would be unduly prejudiced and because the proposed amendment would be futile. [Record
No. 45, pp. 12] Specifically, she asserts that, through its litigation conduct, PRA has
effectively waived the arbitration defense. [Id., pp. 48] However, PRA disagrees with
these assertions. [Record No. 46] For the reasons outlined below, the Court will grant
PRA’s motion and allow its amended answer to be filed.
I.
PRA purchases debt from creditors and then collects the debt. [Record No. 27, ¶¶ 1,
27] In January 2010, the company purchased the plaintiff’s charged-off credit card account
from GE, F.S.B./Lowes. [Record No. 46, p. 2] On June 20, 2012, PRA filed a Complaint
-1
for collection of the debt alleged owed by Stratton in Kentucky’s Scott County District
Court. [Id.] Thereafter, on May 26, 2013, Stratton filed a Complaint seeking certification of
a class action, alleging that PRA violated the Fair Debt Collection Practices Act (“FDCPA”),
15 U.S.C. § 1692, et seq., by initiating the state court action. [Record No. 1]
On July 3, 2013, PRA moved to dismiss the Complaint for failure to state a claim
upon which relief may be granted, contending that Kentucky law permitted PRA to recover
prejudgment interest on Stratton’s debt. [Record No. 5] The Court denied that motion.
Subsequently, on July 30, 2013, Stratton filed an Amended Complaint [Record No. 10],
which further addressed the issue of prejudgment interest. Again, the defendant moved to
dismiss for primarily the same reasons as asserted previously.
[Record No. 12]
On
November 26, 2013, the Court granted PRA’s motion. [Record No. 17] However, that
determination was reversed and remanded by the United States Court of Appeals for the
Sixth Circuit. [Record No. 21]
On January 7, 2015, PRA filed its Answer to the Amended Complaint. [Record No.
27] The Court subsequently issued a Scheduling Order which permitted the parties to amend
the pleadings by July 31, 2015 (over a month before the scheduled end of discovery).
[Record No. 30] The only discovery activities to occur after entry of the Scheduling Order
and before the present motion to amend were: (i) the plaintiff’s service of her first requests
for admission on the defendant, for which the defendant requested and was granted a
protective order; (ii) the defendant’s service of its answers to those requests; and (iii) the
plaintiff’s service of her second requests for admission. [Record Nos. 34, 37, 38, 40]
-2
On June 26, 2015, PRA filed its Motion for Leave to File First Amended Answer,
seeking to include in its Answer the additional affirmative defense of arbitration. [Record
No. 41] PRA contends that the Court should grant it leave to amend because it was unaware
of the mandatory arbitration clause in the credit card agreement here in dispute because PRA
is not the original creditor. [Id., p. 2] It also asserts that Stratton will not be prejudiced by its
amended answer because little discovery has taken place and PRA’s motion was timely filed
according to the deadline contained in the Scheduling Order. [Id., p. 3] In response, Stratton
argues that she is unduly prejudiced because she has been required to respond to two motions
to dismiss and litigated at the appellate level, all of which spanned two years. [Record No.
45, p. 4] Further, she claims that, through its actions, PRA has impliedly waived its right to
arbitration. [Id.]
II.
“Generally, a failure to plead an affirmative defense . . . results in the waiver of that
defense.” Phelps v. McClellan, 30 F.3d 658, 663 (6th Cir. 1994). “However, as a practical
matter there are numerous exceptions to this broad rule, the most significant . . . being the
rule allowing amendments to the answer.” Id. Under Rule 15 of the Federal Rules of Civil
Procedure, leave to amend should be freely granted when justice so requires. Fed. R. Civ. P.
15(a)(2). But the Sixth Circuit has cautioned that the right to amend is not absolute or
automatic. Tucker v. Middleburg-Legacy Place, LLC, 539 F.3d 545, 551 (6th Cir. 2008).
Factors that affect the determination of whether amendment of an answer should be
permitted include undue delay, lack of notice to the opposing party, bad faith or dilatory
purposes on the part of the movant, repeated failure to cure deficiencies by previous
-3
amendment, undue prejudice to the opposing party, and futility of the amendment. Foman v.
Davis, 371 U.S. 178, 182 (1962); Seals v. Gen. Motors Corp., 546 F.3d 766, 770 (6th Cir.
2008).
III.
A.
Undue Prejudice
Delay that is neither intended to harass nor cause prejudice is not a sufficient reason
for a court to disallow an amendment of a pleading. Moore v. City of Paducah, 790 F.2d
557, 562 (6th Cir. 1986).
Notwithstanding, a showing of substantial delay and undue
prejudice may prohibit amendment of an answer. See id. The burden is on the non-movant
to demonstrate prejudice.1 Phelps v. McClellan, 30 F.3d 658, 662 (6th Cir. 1994).
In determining whether an opposing party will suffer undue prejudice, the Court
considers whether the assertion of a new defense: (i) requires the opponent to expend
significant additional resources in discovery or trial preparation; (ii) significantly delays
resolution of the dispute; (iii) prevents the plaintiff from bringing a timely action in another
jurisdiction; or (vi) abrogates the plaintiff’s cause of action. Id. at 66263; Duggins v. Steak
'N Shake, Inc., 195 F.3d 828, 834 (6th Cir. 1999) (finding that allowing the plaintiff to amend
would create prejudice to defendants in having to reopen discovery). Here, the plaintiff has
not addressed the third and fourth factors for finding prejudice. As a result, the Court’s
attention will focus of the first two factors for consideration.
1
“When amendment is sought at a late stage in the litigation, there is an increased burden to
show justification for failing to move earlier.” Wade v. Knoxville Utilities Bd., 259 F.3d 452,
459 (6th Cir. 2001).
-4
PRA did not file the present motion until over two years after Stratton filed her
Complaint. [See Record Nos. 1, 41.] As a result of this delay, Stratton asserts that she has
been prejudiced by having to defend against two motions to dismiss, whose merits would
likely be re-adjudicated if the case were submitted to arbitration. [Record No. 45, p. 4] She
further claims that she will suffer prejudice if the defendant is allowed to amend its Answer
because it can then appeal the denial of any order to compel arbitration. [Id.] Finally, she
argues that she has been prejudiced by the expense incurred and the time spent litigating.
[Id., p. 7] Because these arguments do not fully address the Sixth Circuit’s standard, Stratton
has not shown that she would be prejudiced.
First, Stratton has not demonstrated that she will have to spend significant additional
resources in discovery or trial preparation. Phelps, 30 F.3d at 662. As of the date of the
present motion, only PRA has responded to discovery requests. [Record No. 40] Further,
over a month remained until the closing of discovery. [Record No. 30] Moreover, the Court
has not yet scheduled this matter for trial.2 [Id.] These circumstances are dissimilar to those
in cases addressing the issue of prejudice. For instance, in Parry v. Mohawk Motors of
Mich., Inc., the Court found prejudice where sufficient discovery had taken place so that the
Court could issue an order regarding summary judgment. 236 F.3d 299, 307 (6th Cir. 2000);
Estes v. Kentucky Utilities Co., 636 F.2d 1131, 1134 (6th Cir. 1980) (“[P]rejudice is
demonstrated when a party has insufficient time to conduct discovery on a new issue raised
in an untimely manner.”) In addition, in United States v. Midwest Suspension and Brake, the
Court declined to permit an amendment to an answer because discovery had ended. 49 F.3d
2
Because the parties have engaged in little discovery, they are not in a “late stage” in the
litigation, meaning the increased burden on the movant does not apply. Wade, 259 F.3d at 459.
-5
1197, 1202 (6th Cir. 1995); see also Troxel Mfg. Co. v. Schwinn Bicycle Co., 489 F.2d 968,
971 (6th Cir. 1973) (finding prejudice where discovery had already taken place and the
plaintiff-movant had lost its case on one legal theory).
Stratton has shown that the proposed amendment could significantly delay resolution
of the dispute. Duggins, 195 F.3d at 834. For instance, the assertion of the arbitration
defense would likely lead to a motion to compel arbitration, and an order denying arbitration
could be appealed. Further, Stratton would probably have to again address in arbitration the
arguments presented in the motions to dismiss.3 However, this factor does not weigh so
heavily in Stratton’s favor to support a finding of prejudice. For example, the inclusion of
arbitration as a defense would not force the parties to engage in substantially more discovery.
See, e.g., Dubuc v. Green Oak Tp., 312 F.3d 736, 752 (6th Cir. 2002) (finding that “[s]uch an
amendment would also require the defendants to expend significant additional resources . . .
to conduct discovery related to the after-occurring events alleged in the amendment).
Moreover, PRA’s amendment complies with the Scheduling Order.4
[Record No. 30]
Therefore, the Court and the parties contemplated that amendments, generally, were
appropriate until July 31, 2015. Because Stratton has failed to demonstrate prejudice, the
Court will not deny the defendant’s motion for leave to amend for this reason.
3
Conversely, arbitration could effectively resolve the issues presented in a timely and efficient
manner.
4
The defendant correctly notes that, if it had included arbitration as an affirmative defense in its
original answer, Stratton would have “no grounds to strike” the defense, even though the defense
would have arisen after the motions to dismiss and the appeal. [Record No. 46, p. 1]
-6-
B.
Futility
The Court need not grant a motion for leave to amend under Rule 15 of the Federal
Rules of Civil Procedure if the amendment would be futile. Miller v. Calhoun Cnty., 408
F.3d 803, 817 (6th Cir. 2005). Futility exists if the proposed amendment could not withstand
a Rule 12(b)(6) motion to dismiss. Id. While Rule 12(b)(6) motions generally are made with
reference to complaints and not affirmative defenses, “the same basic standard applies.”
Gore v. El Paso Energy Corp. Long Term Disability Plan, No. 3:02–1008, 2008 WL 261258,
at *6 (M.D.Tenn. Feb. 8, 2008) (citation omitted). “In determining whether to grant a
motion to dismiss, all well-pleaded allegations must be taken as true and must be construed
most favorably toward the non-movant.” Am. Book Co. v. Consolidated Grp. of Co., Inc.,
No. 3:09-CV-112, 2011 WL 11969, *1 (E.D. Tenn. Jan. 4, 2011) (citing Trzebuckowski v.
City of Cleveland, 319 F.3d 853, 855 (6th Cir. 2003)). Stratton argues that amendment
would be futile because PRA has waived the right to compel arbitration by participating in
litigation on the merits. [Record No. 45, p. 3]
1.
Choice-of-Law
As an initial matter, the parties assert that Kentucky law determines whether PRA has
waived its right to arbitrate. [Record No. 45, p. 3; Record No. 46, p. 6] Specifically, Stratton
cites Morrison v. Circuit City Stores, Inc., which holds that the enforceability of an
arbitration agreement is determined according to the applicable state law of contract
formation. 317 F.3d 646, 666 (6th Cir. 2003) (not addressing waiver by litigation conduct
but rather state rules of unconscionability). However, “the inclusion in the contract of a
general choice-of-law clause does not require application of state law to arbitrability issues,
-7
unless it is clear that the parties intended state arbitration law to apply on a particular issue.”
George S. Hofmeister Family Trust v. FGH Industries, LLC, No. 06-CV-13984-DT, 2007
WL 2984188, *5 (E.D. Mich. Oct. 12, 2007) (emphasis added) (state law applied where
agreement specifically addressed waiver by conduct); cf. Francis v. Nami Res. Co., LLC, No.
04-510, 2007 WL 3046061, *4 (E.D. Ky. Oct. 16, 2007) (applying federal law to waiver
issue because arbitration agreement’s choice-of-law provision did not address arbitrability).
According to Stratton’s credit card agreement with the original creditor, “Utah law
shall apply to the extent state law is relevant under Section 2 of the FAA in determining the
validity of this provision.”5 [Record No. 58-3] The agreement makes no reference to
determinations of waiver or arbitrability. Therefore, this Court will apply federal law to the
issue of waiver. See Dantz v. Am. Apple Grp., LLC, 123 F. App’x 702, 70708 (6th Cir.
2005) (applying Ohio law to the contractual “enforceability” of the arbitration agreement but
federal law to the issue of waiver by litigation conduct).
2.
Waiver Under the FAA
Under the Federal Arbitration Act (“FAA”), a party may waive its right to arbitrate.
Am. Locomotive Co. v. Gyro Process Co., 185 F.2d 316, 318 (6th Cir. 1950). However,
“because of the strong presumption in favor of arbitration, waiver of the right to arbitration is
not to be lightly inferred.” Glazer v. Lehman Bros., Inc., 394 F.3d 444, 450 (6th Cir. 2005).
5
The agreement further provides that “[t]his agreement is entered into between you and us in
Utah.” [Id.] Thus, even if state law applied, the Court would have to resolve the question of
which state’s law applies. In any event, both states’ laws are consistent with federal law. See,
e.g., Am. Gen. Home Equity, Inc. v. Kestel, 253 S.W.3d 543, 556, n.39 (Ky. 2008) (evaluating
length of delay, actions inconsistent with arbitration, degree of pretrial litigation, proximity to
trial date, and resulting prejudice); Central Fla. Investments, Inc. v. Parkwest Assoc., 40 P.3d
599, 60708 (Utah 2002) (using same two-prong test as the Sixth Circuit).
-8-
The Sixth Circuit’s test for waiver of an agreement to arbitrate requires evaluation of whether
the party seeking arbitration: (i) took actions inconsistent with any reliance on an arbitration
agreement, and (ii) delayed its assertion to such an extent that the opposing party incurs
actual prejudice. Johnson Associates Corp. v. HL Operating Corp., 680 F.3d 713, 717 (6th
Cir. 2012).
Courts look to the filing of responsive pleadings, the parties’ actions during
discovery, litigation of issues on the merits, the length of delay, and the proximity of the trial
date in assessing whether the movant’s actions are consistent with an agreement to arbitrate.
Francis, No. 04-510, 2007 WL 3046061, *5. For instance, in Johnson Assoc. Corp., the
movant’s actions were inconsistent with arbitration where it filed an answer and a
counterclaim, engaged in extensive discovery, modified the scheduling order, and engaged in
judicial settlement discussions, which included the filing of related motions. 680 F.3d at
718. Similarly, in Am. Locomotive Co., the defendants had filed a counterclaim, engaged in
heavy discovery, filed motions to dismiss and consolidate, and set a trial date. 185 F.2d at
31819. See also Hurley v. Deutsche Bank Trust Co. Americas, 610 F.3d 334, 33839 (6th
Cir. 2010) (waiver where defendant sought to compel arbitration after motions to dismiss,
four summary judgment motions, and a motion for change of venue, all while extensive
discovery was taking place); Manasher v. NECC Telecom, 310 F. App’x 804, 806 (6th Cir.
2009) (waiver where litigation consisted of an answer, some discovery, negotiations, a
motion to certify a class, and a motion for summary judgment over a one-year period). Thus,
courts typically look for substantial discovery efforts in determining whether a party has
waived its arbitration rights.
-9
Additionally, parties act inconsistent with their rights to arbitrate when they appear to
“sit” on their rights through some intentional action. For example, in O.J. Distributing, Inc.
v. Hornell Brewing Co., Inc., the defendant waived its right to seek arbitration by engaging in
negotiations with the plaintiff before moving to compel arbitration. 340 F.3d 345, 358 (6th
Cir. 2003). In particular, the court focused on the fact that the defendant continuously denied
the existence of the arbitration agreement at issue, even though the plaintiff had provided the
defendant with it fifteen months earlier. Id. Likewise, in General Star Nat. Ins. Co. v.
Administratia Asigurarilor de Stat, the defendant waived it right to arbitrate by not asserting
the right until default judgment was entered against it. 289 F.3d 434, 438 (6th Cir. 2002).
Further, the defendant waited nearly a year after default judgment was entered before moving
to vacate the judgment, and it offered no explanation for the late motion. Id. at 438. Thus, a
showing of bad faith -- or at the very least of laxness -- weighs in favor of a finding of
waiver.
Stratton argues that amendment of the Answer would be futile because PRA has
waived its right to arbitrate by participating in litigation.
[Record No. 45, pp. 47]
However, the plaintiff has failed to show that PRA’s litigation activities are inconsistent with
its right to arbitrate. As outlined above, the cases addressing this prong of the test usually
involve extensive discovery. See, e.g., Johnson, 680 F.3d at 718; Hurley, 610 at 340;
Manasher, 310 F. App’x at 805. But here, very little discovery has taken place. The plaintiff
has made two requests for admission, and the defendant has responded to one of these
requests. [Record No. 40] While substantial time has passed between the filing of the
- 10
Complaint and the filing of the motion for leave to amend, the level of litigation activities
does not approach the level presented in the cases from this circuit finding waiver.6
As explained above, in cases where discovery is not the focus, courts look to some
showing of culpability on the part of the party seeking arbitration. Here, PRA alleges that it
was not aware of the subject arbitration clause until after it received the credit card
agreement from the original creditor while gathering documents in connection with
Stratton’s initial discovery requests. [Record No. 46, p. 3] Stratton made these requests in
March/April 2015, and PRA responded to the requests on June 1, 2015, indicating that PRA
discovered the agreement within that timeframe. [Record Nos. 34, 40]
Next, PRA asserts that soon after this discovery, it informed Stratton, and that two
days later, it filed the present motion. [Record No. 46, p. 3] Stratton does not dispute that
PRA was unaware of the agreement; rather, she claims that PRA should have sought credit
card agreement sooner. [Record No. 45, p. 6] Even if Stratton alleges that PRA discovered
the agreement at an earlier time in the litigation, the Court must construe PRA’s well-pleaded
factual allegations in its favor. Trzebuckowski, 319 F.3d at 855.
Again, this case is dissimilar to Sixth Circuit cases finding waiver of the right to
arbitrate. In O.J. Distributing, Inc., the Court determined with specificity that the defendant
had the arbitration agreement in its possession fifteen months before asserting its rights. 340
F.3d at 358. In the present case, Stratton has made not even made an allegation that PRA
6
While Stratton does not argue that PRA’s filing of the state court action constitutes waiver of
the right to arbitrate, the Court has considered this filing along with the other litigation activities.
However, because the Court is not aware of any substantial discovery that took place at the state
level, this filing does not significantly alter its ultimate conclusion that PRA’s activities were not
inconsistent with the right to arbitrate.
- 11 -
discovered the agreement earlier.7 Further, in Gen. Star Nat. Ins. Co., the defendant was
aware of the arbitration provision for a year after default judgment was entered against it and
failed to do anything. 289 F.3d at 438. Without any reason to believe that PRA had
knowledge of the agreement and “sat” on its rights,8 the Court will not find that it is futile to
allow the defendant to amend its Answer to assert the affirmative defense of arbitration.
In summary, because the parties have engaged in little discovery, and because
Stratton has not demonstrated some culpable behavior on the part of the defendant, PRA’s
conduct is not inconsistent with its right to arbitrate. As a result, the Court need not evaluate
the second prong of the Sixth Circuit’s test, whether Stratton will be prejudiced.9 The Court
cannot conclude that PRA’s arbitration defense would not survive the motion to dismiss
7
Following an acknowledgement that PRA may have discovered the arbitration provision in
preparing its responses to Stratton’s requests for documents, Stratton confusingly states, “if PRA
just recently obtained the credit card agreement with an arbitration agreement, PRA has sat on
and completely ignored its alleged arbitration rights while it first moved to dismiss with
prejudice . . .” [Record No. 45, pp. 67] Because discovery occurred only after the motions to
dismiss, the Court interprets this as an implication that PRA did not seek the agreement as soon
as Stratton believes it should have sought it.
8
In addition, the Sixth Circuit recognizes that a waiver is an “intentional relinquishment of a
known right,” implying that one who waives his right to arbitrate must have knowledge of that
right. Am. Locomotive Co., 185 F.2d 316, 318 (6th Cir. 1950). Some circuits require knowledge
of the right to arbitrate before waiver can occur. Fisher v. A.G. Becker Paribas Inc., 791 F.2d
691, 694 (9th Cir. 1986); Dumont v. Saskatchewan Gov’t Ins., 258 F.3d 880, 886 (8th Cir. 2001).
While the Sixth Circuit has not expressly adopted this requirement, the cases appearing in this
Court’s opinion do not involve an instance where the party seeking arbitration was unaware of its
rights.
9
The Court notes, however, that Stratton may not be able to satisfy the prejudice prong because
the parties have engaged in little discovery. “[W]hen only a minimal amount of discovery has
been conducted, which may also be useful for the purpose of arbitration, the court should not
ordinarily infer waiver based upon prejudice to the [opposing party]." Johnson, 680 F.3d at 720
(distinguishing itself from and citing Tenneco Resins, Inc. v. Davy Intern., AG, 770 F.2d 416,
421 (5th Cir. 1985)).
- 12 -
standard; therefore, it is not futile to permit PRA to amend its Answer to include this
affirmative defense.
IV.
For the reasons discussed herein, it is hereby
ORDERED as follows:
1.
Defendant Portfolio Recovery Associates, LLC’s Motion for Leave to File
First Amended Answer [Record No. 41] is GRANTED.
2.
The Clerk of the Court is directed to file the First Amended Answer to
Plaintiff’s Amended Complaint [Record No. 41-1] previously tendered by the defendant.
This 2nd day of November, 2015.
- 13
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?