By Tim Faith, Esq.
The court held that the question of whether an arbitration agreement existed between Respondents and Petitioner factoring companies that purchased certain structured settlement agreements concerning lead paint poisoning was not a question to be decided by the arbitrator.
Opinion By: J. Watts
Structured settlement agreements are regulated by statute under Maryland law and generally require that such agreements are approved by a court after the payee receives independent advice as to the arrangement. Md. Courts & Jud. Proc. Code Ann. §§ 5-1101 – 5-1112. The Court noted that this statute had been amended several times since 2000, generally increasing the scrutiny to which such agreements are subjected by courts.
Respondents, Crystal Linton and Dimeca D. Johnson, were both lead paint tort plaintiffs who had each obtained structured settlements, and who signed agreements transferring the rights in these agreements to Petitioner Access Funding LLC and Assoc, LLC, in exchange for discounted lump sum cash payments. These agreements contained broad, mandatory arbitration clauses, including a provision that required that the validity of the arbitration agreement “shall be resolved by mandatory binding arbitration.”
After substantial litigation, including class certification and attempted settlement of the class action suit by the parties, the circuit court ordered the case to be arbitrated, over the objection of Respondents.
The Court’s analysis begins with the strong presumption that written arbitration agreements are generally enforceable under federal and state law, and that the Maryland Uniform Arbitration Act (“MUAA”) “’strictly confines the function of the court in suits to compel arbitration to the resolution of a single issue – is there an agreement to arbitrate the subject matter of a particular dispute.’” Md. Courts & Jud. Proc. Code Ann. §§ 3-201 to 3-234; Gold Coast Mall Inc. v. Larmar Corp., 298 Md. 96 (1983).
In the present case, however, the Court found that the circuit court erred when that court decided that the issue of whether the arbitration agreement was valid was itself subject to arbitration. Instead, the Court found that the Respondents’ complaint contained allegations that the arbitration agreement was obtained by fraud and deceit, and that the court reviewing the structured settlement agreement would not have approved of the agreement had it been aware of the relationship between Smith (the purportedly independent attorney hired to advise Respondents under the state law) and one of the Petitioner factoring companies.
The Court distinguishes two cases raised by Petitioners: Prima Paint and Holmes. In Prima Paint, the US Supreme Court held that absent an allegation that the arbitration provision within an agreement (rather than the agreement as a whole) was procured through fraud, an otherwise broad arbitration clause would require that an arbitrator rather than a federal court would decide the issue of fraud in the inducement to enter into the overall agreement. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). The Court’s gloss of Holmes v. Coverall N. Am. Inc., 336 Md. 534 (1994) is that where a trial court finds the arbitration clause itself to be valid, the remainder of the question of validity of the entire agreement is a matter for the arbitrator rather than the court.
The Court, however, distinguishes the present case by holding that the Respondent’s complaint specifically alleges that Petitioner’s use of Smith as counsel was intended to prevent Respondents from understanding the arbitration provision, thereby engaging in fraud in the inducement to that severable clause, and the enforceability of the arbitration clause was conditioned on the closing of the transaction, which itself was conditioned on entry of an order of approval by a court of competent jurisdiction as required by Maryland law. If such order was obtained by an “extrinsic” fraud, such as that the attorney purportedly representing Respondents was part of a scheme with Petitioners to prevent Respondents from understanding the arbitration agreement contained within the structured settlement contract, then such arbitration agreement is subject to collateral attack, which ultimately must be decided by a court rather than an arbitrator under MUAA.
As a result, the Court affirmed the reversal of the circuit court’s order compelling arbitration.
Tim Faith is a practicing business law and estates planning attorney, and also an associate professor at The Community College of Baltimore County, where he teaches business law, legal writing, and torts. Tim also serves as the chair of the Maryland Business Law Developments blog, a service of the Business Law Section of the Maryland State Bar Association.