Plaintiffs-Appellees brought suit against short-term lender PLS Financial Services, Inc., and PLS Loan Store of Texas, Inc. (collectively “PLS”), alleging the following scheme. First, as part of the application process, PLS would require customers to provide a blank or post-dated check for the amount borrowed plus fees. PLS assured its customers that the checks would only be used to verify checking accounts and would not be cashed. However, PLS did cash the checks of customers who defaulted, and, if the check bounced, PLS would submit worthless check affidavits to the local district attorney. As a consequence, those customers were notified that they would face criminal charges if they did not pay PLS for the outstanding balance.
Plaintiffs alleged that they fell victim to this scheme and asserted several causes of action against PLS, including malicious prosecution, fraud, and related violations of Texas’s Financial Code. PLS moved to dismiss the proceedings and compel Plaintiffs to arbitrate their claims pursuant to an arbitration clause in the loan agreement. The District Court for the Western District of Texas denied PLS’s motion to dismiss, finding that PLS had waived its right to compel arbitration of Plaintiffs’ claims when it submitted affidavits regarding their checks in the context of the litigation. PLS appealed and this decision followed.
Reviewing de novo, the Fifth Circuit affirmed. PLS first argued that the district court erred by deciding whether PLS waived its right to compel arbitration by participating in litigation conduct when it submitted the affidavits. On this issue, the Fifth Circuit reaffirmed its position that the court, not the arbitrator, is in the best position to decide whether certain conduct amounts to a waiver under applicable law. The panel rejected PLS’s argument that this position was inconsistent with the Supreme Court’s 2014 decision in BG Group, PLC v. Republic of Argentina, and further stressed that unlike other types of waiver, litigation-conduct waiver implicates courts’ authority to control judicial procedures or to resolve issues arising from judicial conduct.
The panel also rejected PLS’s second argument – that the district court erred by ignoring the parties’ express agreement to arbitrate all disputes, including any litigation-conduct waiver claims. Here, the panel found that PLS had waived this issue by raising it for the first time in its motion to reconsider, and in any event, the arbitration did not contain “clear and unmistakable evidence” of an intent to arbitrate the instant litigation-conduct waiver issue.
Last, regarding PLS’s argument that the district court erred in concluding that PLS waived its right to arbitrate by submitting the subject affidavits to the court, the panel found plausible Plaintiffs’ allegation that PLS waived arbitration through such conduct. In so finding, the panel determined that Plaintiffs had demonstrated prejudice from PLS’s submission of the worthless check affidavits, and that by submitting those affidavits, PLS “invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate.”