When Unstoppable Allegations of Fraud Meet an Immovable Arbitration Clause, which will give first?

By Meaghan C. Murphy, Guest Contributor

In January, the Court of Special Appeals reported a case where an arbitration clause was held to be moot because of allegations of fraud and misrepresentation to the court in order to approve transfers of structured in exchange for a discounted lump sum cash payment. The class of people who transferred their structured settlements sued Access Funding LLC and its associated entities, asserting claims of negligence, misrepresentation, fraud, and conspiracy. See Chrystal Linton, et al. v. Access Funding LLC, et al., 253 Md. App. 507 (2022) (“Linton 2”). This was the second time these parties had appeared before the Court of Special Appeals. See Linton v. Consumer Protection Division, 467 Md. 502, 521-22 (2020) (“Linton 1”).

In Linton 1, the Plaintiffs allege that Access, and other Defendants, fraudulently conspired to convince the Plaintiffs to transfer their structured settlements. As part of the transfer process, Access referred the Plaintiffs to Defendant Charles Smith, Esq., to provide “independent professional advice” about the transfers—but Mr. Smith was affiliated with and paid by Access, in violation of the Structured Settlement Protection Act.  Maryland Code Ann., Courts and Judicial Proceedings Article (“CJ”) § 5-1102(d).

Under the Act, any sales or transfers of annuity benefits at a discount must be authorized by a court. Before authorizing such a transfer, the court must expressly find that the transferor received “independent professional advice” about the transfer. CJ § 5-1102(b)(3). The Act defines “independent professional advice” as “advice of an attorney, certified public accountant, actuary, or other licensed professional adviser” who “is not affiliated with or compensated by the transferee of the transfer.” CJ § 5-1101(d), (d)(2).

Plaintiffs alleged that after meeting with them, Mr. Smith signed form letters representing that he fully explained to the Plaintiffs the legal and financial implications of the transfer. Access then submitted the letters to the court to approve the transfers. The circuit court did approve the transfers of the structured settlements.

In Linton 1, the Plaintiffs alleged that Mr. Smith and Access prevented them from fully understanding the Purchase and Sale Agreements of their structured settlements with respect to a binding arbitration clause for any claim or dispute arising from their agreement after the court authorized the transfers. In August 2016, the Defendants filed motions to compel arbitration, but the parties settled out of court before the motions were ruled on. After the parties settled, the Consumer Protection Division of the Office of the Maryland Attorney General moved to intervene and appealed the class settlement. The Court of Special Appeals ultimately reversed the settlement and the Court of Appeals affirmed the Court of Special Appeals’ ruling, and remanded with instructions.

On remand, the Defendants filed renewed motions to compel arbitration. After a hearing on December 15, 2020, the Circuit Court, Baltimore City, No. 24-C-16-003894, Judge Videtta A. Brown granted the motions to compel and stayed the proceedings. In its memorandum opinion, the circuit court addressed three separate issues, although only the first issue was appealed. The class appealed the circuit court’s holding that the arbitration clause required that “arbitrability in this case must be determined by an arbitrator and not the court.” In Linton 2, the Court of Special Appeals reversed and remanded the circuit court’s order, and held that the arbitration clause was moot. The Court of Special Appeals reasoned that because the Purchase and Sale Agreements conditioned the obligation to arbitrate on the “closing” of the transaction, both the Agreement and the Structured Settlement Protection Act required valid court authorization for the “closing” of the transaction to take place, and the Plaintiffs alleged that the Defendants committed fraud while gaining the circuit court’s approval of the transfers, there may not have been a proper “closing” of the transaction to trigger the arbitration clause. Therefore the court, not the arbitrator, must determine whether the arbitration agreement exists.

On April 25, 2022, the Court of Appeals granted cert on Linton 2. The questions presented are: 1) Did the Court of Special Appeals err in ruling that the trial court must determine whether an arbitration agreement exists between the parties when Respondents did not challenge the validity or enforceability of the underlying agreements containing the arbitration clauses in their complaint, and; 2) Did the Court of Special Appeals err in ruling that the trial court must decide the existence of an arbitration agreement when well-established Federal and Maryland law mandates that the arbitrator and not the court decides the issue of arbitrability when Respondents executed agreements containing arbitration clauses that expressly stated the arbitrator shall decide the arbitrability of the parties’ dispute, and Respondents have only alleged fraud and misrepresentation as to the agreements as a whole and not with respect to the arbitration clause separately and specifically?

It is unsurprising that the Court of Appeals granted cert on this case. In general, Maryland public policy favors enforcement of arbitration agreements.  See, e.g., Allstate Insurance Co. v. Stinebaugh, 374 Md. 631, 641 (2003); see also CJP § 3-206; CJP § 3-207(c) (“If the Court determines that the agreement [to arbitrate] exists, it shall order arbitration.”); Gold Coast Mall v. Lamar Corp., 298 Md. 96, 104 (1983); Louis Fireison & Assoc, P.A. v. Alkire, 195 Md. App. 461, 471 (2010). As a result, arbitration clauses are often severable from an underlying contract and immune to other alleged contractual infirmities. See Baltimore County Fraternal Order of Police Lodge No. 4 v. Baltimore County, 429 Md. 533, 556 (2012)(severing an arbitration provision from a contract that had expired in the context of a health-insurance premium for retired police officers); Cheek v. United Healthcare of Mid-Atl, Inc., 378 Md. 139, 153 (2003)(agreeing that an arbitration provision was severable from an employment contract); Holmes v. Coverall N. Am., Inc., 336 Md. 534, 543 (1994) (considered an arbitration clause in a franchise agreement to be severable therefrom); Nowak v. Nahb Research Ctr., Inc., 157 Md. App. 24, 33–34 (2004) (holding an arbitration provision severable from an underlying employment contract). This case will test the limits for Maryland courts’ preference for enforcement of arbitration agreements, so parties to those agreements should pay close attention to see which will give first, the fraud allegations or the arbitration clause.

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