Lewallen v. Green Tree Servicing, L.L.C.

• Decision Date: 04 June 2007
• Docket Number: No. 06-1925.,06-1925.
• Parties: Rhonda J. LEWALLEN, Appellee, v. GREEN TREE SERVICING, L.L.C.; U.S. Bank Trust National Association, as Trustee for Conseco Finance Home Equity Loan Trust, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

487 F.3d 1085

Rhonda J. LEWALLEN, Appellee, v. GREEN TREE SERVICING, L.L.C.; U.S. Bank Trust National Association, as Trustee for Conseco Finance Home Equity Loan Trust, Appellants.

No. 06-1925.

United States Court of Appeals, Eighth Circuit.

Submitted: November 14, 2006.

Filed: June 4, 2007.

David G. Wasinger, argued, St. Louis, MO (James S. Cole and Michael K. Daming, on the brief), for appellant.

F. Paul Bland, Jr., argued, St. Louis, MO (Debra K. Lumpkins, St. Louis, MO, on the brief), for appellee.

Before BYE, JOHN R. GIBSON, and GRUENDER, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

Rhonda J. Lewallen filed for Chapter 13 bankruptcy to avoid foreclosure on her home. Green Tree Servicing, L.L.C., filed a proof of claim against the estate representing the balance on her home equity loan, interest, and various fees. Lewallen objected to Green Tree's claim and ultimately filed an adversary proceeding against Green Tree and U.S. Bank in the bankruptcy court alleging that Green Tree, as servicer of the loan, lacked standing to make a claim, that it overestimated her debt, and that its handling of her account violated various consumer protection statutes. Green Tree and U.S. Bank filed a motion to dismiss or, in the alternative, to compel arbitration, which the bankruptcy court¹ denied. The district court² affirmed this denial, holding that Lewallen's claims were core bankruptcy proceedings, the bankruptcy court had discretion to refuse to enforce the arbitration provision in the loan agreement, and Green Tree waived its right to arbitration in any event. Green Tree and U.S. Bank appeal, and we affirm.

I.

Lewallen obtained a consumer loan for $50,300 from Conseco Finance Servicing Corp. in May of 2000; the loan was secured by a deed of trust on her trailer home. Conseco consolidated this loan, along with other consumer loans, and transferred its interest in them to a securitization trust. Under a pooling and servicing agreement entered into between Conseco and U.S. Bank, U.S. Bank obtained legal title to the pooled loans, while Conseco retained the right to service the loans. Lewallen's loan agreement provided that the parties agreed to submit their disputes to arbitration.³

Conseco filed for bankruptcy in 2002, and Green Tree purchased the right to service Lewallen's loan from the bankruptcy estate. Lewallen's loan was in default at the time of the transfer. According to her, both Conseco and Green Tree improperly increased her monthly payments, assessed excessive late charges against her, failed to respond to her inquiries on her account, refused to accept payment from her, and sent her erroneous overdue notices. In early 2004, Green Tree began preparations to foreclose on Lewallen's home. Lewallen attempted to refinance the loan with a new lender but her application was denied, which she attributes to Green Tree providing an inflated payoff figure to the prospective lender. On February 23, 2004, the day of the scheduled foreclosure sale, Lewallen filed her petition for bankruptcy under Chapter 13 to stop the sale. Her bankruptcy schedules listed approximately $50,000 owed on the debt serviced by Green Tree and approximately $6,000 of unsecured debt owed in taxes and credit card charges. Her home was the primary asset in the bankruptcy estate.

In the bankruptcy proceeding, Green Tree filed a proof of claim alleging a secured claim for over $54,000, plus over $4,000 in arrearages. Lewallen filed an objection, arguing that Green Tree's claim included excessive charges and fees, that Green Tree had failed to credit her for payments made and wrongfully had refused to accept payment, that Green Tree had provided confusing and inaccurate bills and failed to respond to her inquiries in violation of the Real Estate Settlement Procedures Act, that Green Tree's claim included improperly assessed late charges, and that Green Tree's attorney's costs and fees were not a proper claim because they were attributable to Green Tree's own billing mistakes and failure to respond to Lewallen's inquiries.

Although a hearing on Lewallen's objection was scheduled in the bankruptcy court for September 2004, the matter was continued several times. Lewallen served discovery requests on Green Tree during this time. When the hearing on her objection finally took place on March 22, 2005, Lewallen indicated that, in addition to objecting to the proof of claim, she wished to raise affirmative claims against Green Tree alleging violations of the Real Estate Settlement Procedures Act and other statutes. Counsel for Green Tree stated that an adversary proceeding was "the only way to resolve these issues" and asked the court to overrule Lewallen's objection. The bankruptcy court dismissed Lewallen's objection without prejudice to enable her to raise all her issues in the adversary proceeding.

Lewallen filed her adversary action, naming Green Tree and U.S. Bank as defendants, in the bankruptcy court on May 24, 2005. Her complaint recited the same facts as the objection she had filed to Green Tree's claim, and it alleged that Green Tree's conduct violated the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601-2617, 24 C.F.R. Pt. 3500, the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692o, and the Missouri Merchandising Practices Act, Mo.Rev.Stat. § 407.020. Lewallen later amended her complaint to add a count alleging that Green Tree violated the Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681u. Green Tree apparently had not responded to Lewallen's first discovery requests, as Lewallen served a new round of "first" requests which covered the same ground.

On June 7, 2005, Green Tree and U.S. Bank⁴ sought and obtained an extension of time to file their answer. Green Tree served discovery requests on Lewallen on July 1, and, on July 15, sought an extension of time to respond to the discovery requests Lewallen had served. A few days later, the parties participated in a joint motion for continuance of the trial setting. On July 28, Green Tree filed a motion to dismiss or, in the alternative, to compel arbitration, citing the arbitration provision in the loan agreement. It also moved to extend the time for responding to discovery until after the hearing on the motion to dismiss, in case the bankruptcy court decided to send Lewallen's claims to arbitration. The record indicates that Lewallen had begun preparing responses to Green Tree's discovery requests, but neither party served responses on the other.

The bankruptcy court denied Green Tree's motion to dismiss or to compel arbitration because it had waived any claim to arbitration through its active participation in the adversary proceeding—a proceeding Green Tree had suggested. The court also noted that bankruptcy courts are intended to resolve disputes like this one. Green Tree informed the bankruptcy court that it planned to appeal, as the Federal Arbitration Act, 9 U.S.C. § 16, authorized it to do, and the bankruptcy court stayed further proceedings pending the outcome of the appeal.

On appeal, the district court affirmed the bankruptcy court's order on two independent grounds. First, it held that the bankruptcy court had discretion to refuse to enforce the arbitration provision because allowing arbitration to proceed would have seriously jeopardized core bankruptcy proceedings. In addition, it held that the bankruptcy court's finding that Green Tree waived its right to arbitrate was not clearly erroneous. The court reasoned that Green Tree waited sixteen months after it filed its proof of claim to seek arbitration, served extensive discovery requests, and participated in six pretrial hearings. This appeal of the denial of the motion to compel arbitration ensued.

II.

We address the waiver issue first because, if Green Tree waived its right to arbitrate Lewallen's claims, we need not consider the bankruptcy court's discretion to deny arbitration.⁵ We review de novo the legal determination of waiver but examine the factual findings underlying that ruling for clear error. Kelly v. Golden, 352 F.3d 344, 349 (8th Cir.2003); Stifel, Nicolaus & Co. Inc. v. Freeman, 924 F.2d 157, 158 (8th Cir.1991). "[I]n light of the strong federal policy in favor of arbitration, any doubts concerning waiver of arbitrability should be resolved in favor of arbitration." Dumont v. Saskatchewan Gov't Ins., 258 F.3d 880, 886 (8th Cir.2001) (quoting Ritzel Communications v. Mid-Am. Cellular Tel. Co., 989 F.2d 966, 968-69 (8th Cir.1993)); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

A party may be found to have waived its right to arbitration if it: "(1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts." Ritzel, 989 F.2d at 969. Green Tree concedes that it knew at all relevant times that the arbitration provision in Lewallen's loan agreement gave it an existing right to arbitrate. It contends, however, that it did not act inconsistently with its right to arbitrate and that Lewallen suffered no prejudice.

A party acts inconsistently with its right to arbitrate if the party "[s]ubstantially invoke[s] the litigation machinery before asserting its arbitration right." Ritzel, 989 F.2d at 969 (quoting E.C. Ernst, Inc. v. Manhattan Constr. Co. of Tex., 559 F.2d 268, 269 (5th Cir.1977)). A party substantially invokes the litigation machinery when, for example, it files a lawsuit on arbitrable claims, engages in extensive discovery, or fails to move to compel arbitration and stay litigation in a timely manner. Stifel, 924 F.2d at 158. In concluding that Green Tree acted inconsistently with its right to arbitrate, the bankruptcy and district courts observed that Green Tree had served "extensive" discovery requests on Lewallen, filed substantive motions in the case, and participated in six hearings on its proof of claim before...