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Khath v. Midland Funding, LLC

United States District Court, D. Massachusetts

September 26, 2018

JOHNSON KHATH, on behalf of himself and all other persons similarly situated, Plaintiff,
v.
MIDLAND FUNDING, LLC, Defendant. VIRGINIA NEWTON, on behalf of herself and all other persons similarly situated, Plaintiff,
v.
MIDLAND FUNDING, LLC, Defendant.

          MEMORANDUM AND ORDER

          WOLF, D.J.

         I. SUMMARY

         Plaintiffs Johnson Khath and Virginia Newton in these consolidated cases are Massachusetts residents with credit card debt who each initiated a putative class action suit against defendant Midland Funding, LLC ("Midland"), a debt collection company. Plaintiffs claim that Midland has harmed Massachusetts residents by wrongfully operating in the state without a debt collector license.[1] Khath and Newton filed their cases against Midland in the Massachusetts Superior Court. Midland removed the cases to federal court, where they were consolidated. The cases were referred to the Magistrate Judge for pretrial proceedings.

         Midland has twice moved to compel arbitration and stay the instant proceedings or, in the alternative, to dismiss plaintiffs' claims. On January 20, 2017, the Magistrate Judge issued an Order denying without prejudice Midland's first Motion to Compel Arbitration, finding that evidence then in the record did not demonstrate an unbroken chain of assignment to Midland of the plaintiffs' credit card accounts. See Docket No. 82 at 11-12 (the "January 20, 2017 Order"). The Magistrate Judge also found a triable issue existed concerning whether the credit card agreement produced by Midland, which contains an arbitration clause, governs Newton's account. Id. at 12 n.9.

         On August 14, 2017, the Magistrate Judge granted in part and denied in part Midland's Renewed Motion to Compel Arbitration. Docket No. 116 (the "August 14, 2017 Order"). The Magistrate Judge ordered Khath to arbitrate, finding that Midland had presented sufficient evidence to prove that Khath's credit account was assigned to it, and that an agreement to arbitrate exists between Khath and Midland. Id. at 6, 9. The Magistrate Judge also held that the validity of the Class Action Waiver provision found in Khath's credit card agreement was an issue that the agreement reserved for the court, as Midland conceded at oral argument. Id. at 9. However, she decided to stay litigation concerning the validity of the Class Action Waiver provision until after arbitration of Khath's individual claim. Id. The Magistrate Judge denied the Renewed Motion to Compel with respect to Newton, reaffirming her earlier ruling that a triable issue remains concerning whether an agreement to arbitrate exists between Newton and Midland. Id. at 7-8, 10.

         Now pending before the court are the plaintiffs' objections to the Magistrate Judge's January 20, 2017 Order, see Docket No. 83, and both parties' objections to the Magistrate Judge's August 14, 2017 Order, see Docket Nos. 117 & 118. For the reasons set forth below, the court is affirming the Magistrate Judge's January 20, 2017 Order. The court is modifying in part the August 14, 2017 Order because the Magistrate Judge must decide whether the Class Action Waiver in Khath's credit card agreement is valid before ordering Khath to arbitrate because the Class Action Waiver provides that if it is found to be invalid the agreement to arbitrate is void.

         II. FACTUAL BACKGROUND

         The following undisputed facts are taken from the Magistrate Judge's January and August 2017 Orders, and the record as cited in those Orders.

         Khath opened a credit card account with FIA Card Services, N.A. ("FIA") on or about October 11, 2007 (the "Khath Account"). See Docket No. 46-1 ("Burger-Khath Decl.") ¶11. The Khath Account number originally ended in 5191, but was changed to end in 2958 after it was closed. See id. Khath incurred charges on his account after opening it. See id., Ex. 1 (billing records for Khath Account dated between September 2008 and May 2009). The Khath Account was closed on April 30, 2009 with an outstanding balance of $1, 028.56. See Burger-Khath Decl. ¶14. Midland then allegedly purchased the rights to the Khath Account and sought to collect the debt by suing Khath in state court, which entered judgment in Khath's favor. Midland has submitted a credit card agreement that it argues governs the Khath Account and requires Khath to arbitrate his claims against Midland. See id, ., Ex. 2 (the "FIA Agreement") .[2]

         Newton opened a credit card account with Chase Bank USA, N.A. ("Chase") on or about September 9, 2001 (the "Newton Account"). See Docket No. 46-2 ("Burger-Newton Decl.") ¶11. The Newton Account number ends in 0189. See id. Newton incurred charges on her account after opening it. See id., Ex. 1 (billing records for Newton Account dated between August 2007 and December 2008). On February 27, 2009, the Newton Account was closed with an outstanding balance of $21, 798.45. See Burger-Newton Decl. ¶14. Midland allegedly-purchased the rights to the Newton Account from Chase and sought to collect the debt by suing Newton in state court, where Midland obtained a default judgment against her. Midland has submitted a credit card agreement that it contends governs the Newton Account and requires Newton to arbitrate her claims against Midland as well. See id., Ex. 2 (the "Chase Agreement").

         III. DISCUSSION

         A. Standard of Review

         When a party timely objects to a non-dispositive ruling of a magistrate judge on a pretrial matter, the district judge must modify or set aside any part of the order that is "clearly erroneous or contrary to law." 28 U.S.C. 636(b)(1)(A); Fed.R.Civ.P. 72(a). An order compelling arbitration is a non-dispositive ruling. See PowerShare, Inc. v. Syntel, Inc., 597 F.3d 10, 14-15 (1st Cir. 2010) . In both of her Orders, the Magistrate Judge characterized the motions to compel arbitration as non-dispositive and held, therefore, that she could decide the motions subject to appeal. See Jan. 20, 2017 Order at 2 n.2; Aug. 14, 2017 Order at 2 n.2. No party objected to this conclusion, which is in any event correct. Therefore, the Magistrate Judge's rulings are reviewed under the foregoing standard.

         The "clearly erroneous" standard requires that the district judge accept the magistrate judge's findings of fact and the conclusions drawn from them "unless, after scrutinizing the entire record, [the court] form[s] a strong, unyielding belief that a mistake has been made." Phinney v. Wentworth Douglas Hosp., 199 F.3d 1, 4 (1st Cir. 1999) (quotations omitted); see Cumpiano v. Banco Santander P.R., 902 F.2d 148, 152 (1990). The district judge reviews pure questions of law de novo. See PowerShare, 597 F.3d at 15. Mixed questions of law and fact are subject to a sliding scale of review. See In re IDC Clambakes, Inc., 727 F.3d 58, 64 (1st Cir. 2013) . "The more fact intensive the question, the more deferential the level of review (though never more deferential than the clear error standard); the more law intensive the question, the less deferential the level of review." Id. (quotations omitted).

         B. The Magistrate Judge's Findings That Both Accounts Were Assigned to Midland Are Not Clearly Erroneous

         In her January 20, 2017 Order, the Magistrate Judge found that Midland failed to prove the threshold facts that it had been assigned both the Khath and Newton Accounts, which would allow Midland to enforce the agreements governing those accounts. See Jan. 2017 Order at 11. The Magistrate Judge, therefore, denied Midland's first Motion to Compel Arbitration without prejudice, inviting the submission of additional evidence.[3] Subsequently, in her August 14, 2017 Order, the Magistrate Judge found that Midland had submitted sufficient evidence in support of its Renewed Motion to prove that both the Khath and Newton Accounts were assigned to Midland. See Aug. 14, 2017 Order at 5. The parties made numerous objections to the Magistrate Judge's rulings. As explained earlier, the Magistrate Judge's factual findings are reviewed for clear error, see Phinney, 199 F.3d at 4, while legal issues are reviewed de novo, see PowerShare, 597 F.3d at 15.

         First, as a threshold matter, plaintiffs argue that the Magistrate Judge erred by not deciding in her January 2017 Order whether Midland is precluded from relitigating the issue of ownership of the Khath Account by a judgment Khath obtained from the Maiden District Court on September 3, 2014. See Docket No. 83 at 9-10.[4] Plaintiffs objection has two dimensions: that the Magistrate Judge should have addressed the issue, and that the Magistrate Judge should have ruled in Khath's favor. However, the Magistrate Judge did not act "contrary to law" in declining to rule on the issue preclusion argument at the time because she had discretion to deny the motion to compel without prejudice. See Oliveira v. New Prime, Inc., 857 F.3d 7, 12, 24 (1st Cir. 2017); 28 U.S.C. 636(b)(1)(A).

         In any event, this court cannot now find on the present record that issue preclusion applies and, therefore, that Khath was entitled to a ruling in his favor. The burden of proving issue preclusion "is always on the person raising the bar." Fireside Motors, inc. v. Nissan Motor Corp., 479 N.E.2d 1386, 1390 (Mass. 1985). Under Massachusetts law, issue preclusion applies when:

(1) there was a final judgment on the merits in the prior adjudication; (2) the party against whom preclusion is asserted was a party ... to the prior adjudication; and (3) the issue in the prior adjudication was identical to the issue in the current adjudication. Additionally, the issue decided in the prior adjudication must have been essential to the earlier judgment.

In re Sonus Networks, Inc., 499 F.3d 47, 57 (1st Cir. 2007) (quoting Kobrin v. Bd. of Reg, in Med., 832 N.E.2d 628, 634 (Mass. 2005)). "Massachusetts courts also require that appellate review must have been available in the earlier case before issue preclusion will arise." Id.

         Here, the court cannot now discern which issues were "actually adjudicated" by the Maiden District Court judgment, as would be required to determine that Midland is seeking to relitigate the same issue that was previously decided. Id. at 62. The Maiden District Court judgment is a single-page form and does not explain the court's reasons for entering judgment for Khath. On the present record, this court cannot find that the Maiden District Court decided that Midland did not own the Khath account, which is the issue Khath seeks to preclude litigation of now. Although Khath's attorney's affidavit asserts that the ownership issue was his sole defense at the Maiden District Court trial, Khath's answer filed in that case contains numerous defenses. Therefore, it is not clear to this court on what grounds Khath previously prevailed.

         Moreover, factors tending to support the conclusion that a decision is "final" are lacking. See Tausevich v. Bd. of App. of Stoughton, 521 N.E.2d 385, 387 (Mass. 1988) (citing Restatement (Second) of Judgments §13, cmt. g (1982)); see also Jarosz v. Palmer, 766 N.E.2d 482, 489-90 (Mass. 2002). The Maiden District Court judgment is not "supported by reasoned opinion" explaining why judgment entered for Khath; it states the judgment is not appealable, so it was not "subject to review"; and the court cannot discern that the parties "were fully heard" on the ownership issue. Jarosz, 766 N.E.2d at 489-90. Therefore, Khath has not now proven issue preclusion applies here. Khath may, however, request that the Magistrate Judge reconsider, or expressly address, the question of issue preclusion on a fuller evidentiary record, and the Magistrate Judge will have the discretion to decide whether to do so. See Fed.R.Civ.P. 54(b).

         In addition, plaintiffs object to both of the Magistrate Judge's Orders on the grounds that she should not have considered Midland's evidence submitted in support of its ownership claim because it lacked proper foundation and/or was not newly discovered; and therefore, she should have found that Midland was not assigned either account. See Docket No. 83 at 4-5; Docket No. 118 at 3-7. The Magistrate Judge's factual findings with respect to the Khath and Newton Accounts are discussed below. The court must accept the Magistrate Judge's factual findings "unless, after scrutinizing the entire record, [the court] form[s] a strong, unyielding belief that a mistake has been made." Phinney, 199 F.3d at 4 (quotations omitted).

         Midland initially submitted the following evidence to demonstrate it was assigned the Khath Account. According to the declaration of Michael Burger, the Director of Operations for Midland Credit Management, Inc., which maintains the business records of Midland, Khath owed $1, 028.56 on his FIA account when it was closed on April 30, 2009. See Burger-Khath Decl. ¶¶1-2, 14. A bill of sale dated May 18, 2009, states that FIA transferred ownership of a portfolio of unidentified accounts to Asset Acceptance LLC ("Asset") on that day. See id., Ex. 3 ("FIA Bill of Sale") . According to the affidavit of Tracy ...


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