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Financial Services Law Insights and Observations

3rd Circuit: Debt collector cannot enforce original creditor’s arbitration agreement

Courts Appellate Third Circuit FDCPA Arbitration Debt Collection


On July 12, the U.S. Court of Appeals for the 3rd Circuit affirmed the denial of a debt collector’s motion to compel arbitration, concluding the debt collector did not establish authority to enforce the arbitration agreement made between the consumer and the original creditor. According to the opinion, a consumer executed a credit card agreement with a creditor containing an arbitration clause. After the consumer fell behind on her payments, her account was referred to the debt collector for collection. The consumer filed suit against the debt collector, alleging that one of the collection letters violated the FDCPA by “failing to inform her whether interest would continue to accrue on her account.” The debt collector moved to compel arbitration based on the provision in the consumer’s credit card agreement with the original creditor, under a third-party beneficiary, agency, or equitable-estoppel theory. The district court rejected each theory and denied the motion, concluding that (i) the agreement did not “evince an intent to benefit” the debt collector; (ii) the FDCPA claim “did not bear a sufficient nexus to the credit-card agreement”; and (iii) the debt collector could not equitably estop the consumer from resisting arbitration under the 3rd Circuit’s previous interpretation of South Dakota law.

On appeal, the 3rd Circuit agreed with the district court. The appellate court noted that the debt collector failed the test to enforce an agreement as a third-party beneficiary under South Dakota law, because the debt collector failed to establish that the original creditor and its consumers “would not have entered the card agreement but for the intent to benefit debt collectors.” As for the debt collector’s agency theory, the appellate court stated that the debt collector did not cite, and the court did not find, “South Dakota authority adopting a freestanding ‘agency’ theory of third-party enforcement.” Further, the appellate court noted that the debt collector’s arguments would fail under the South Dakota test for equitable estoppel and, therefore, the appellate court had “no basis to conclude that South Dakota would allow [the debt collector], as a non-signatory, to enforce [the original creditor]’s arbitration agreement with its customers.”