COA refuses to compel arbitration for debt buyer.

Byline: Correy Stephenson, BridgeTower Media Newswires

In a case with implications for the enforceability of arbitration agreements, the North Carolina Court of Appeals has affirmed the denial of a motion to compel arbitration after a debt buyer failed to demonstrate that it had also obtained the right to arbitrate disputes with consumers when it purchased their debts.

Portfolio Recovery Associates (PRA), a purchaser of delinquent consumer debt, bought the debts owed by four borrowers and then filed individual lawsuits against each, obtaining default judgments. The four borrowers responded by filing a class action complaint against PRA alleging that the default judgments violated the state's Consumer Economic Protection Act because PRA failed to comply with certain statutory requirements.

PRA moved to compel arbitration, arguing that each of the plaintiffs had entered into arbitration agreements with the original owner of their debts, and that the right to arbitrate had been assigned to PRA when it purchased the debt.

Durham County Superior Court Judge Michael O'Foghludha denied the motion, and PRA appealed. While the parties agreed that a valid arbitration agreement had existed between the plaintiffs and the original creditors, PRA contended that the trial court misapplied basic contract law and "singled out arbitration rights for special, discriminatory treatment and resolved its doubts against the transfer of arbitration rights," in violation of the Federal Arbitration Act (FAA).

But Judge Toby Hampson, writing for a unanimous panel in a Nov. 3 opinion, disagreed and affirmed the trial court.

"The language contained in plaintiffs' Bills of Sale does not identify the assignment of the right to arbitration nor does it demonstrate an intent of the parties to assign PRA 'all of the rights' of the original creditors," Hampson wrote. "Without more, the right to arbitrate against plaintiffs was not implicitly assigned along with plaintiffs' Accounts or Receivables."

No express assignment

Before referring a dispute to an arbitrator, a court needs to determine whether a valid arbitration agreement exists, and a litigant who wasn't a party to the relevant arbitration agreement may invoke the FAA only if the relevant state contract law allows him to enforce it, Hampson wrote.

"Therefore, as an initial matter and contrary to PRA's assertion, the trial court did not 'misapply basic contract law' when it examined the relevant state contract law to...