A recent decision by the Third Circuit examined the circumstances under which an arbitrator must decide gateway questions of arbitrability in cases involving challenged loan assignments. In Zirpoli v. Midland Funding, LLC, the plaintiff took a loan pursuant to a contract that contained an arbitration agreement with a delegation clause. The lender then assigned the contract to another company that purchased the plaintiff’s delinquent account from the lender. The assignee tried to collect on the loan, prompting the plaintiff to file a putative class action alleging unlawful collection practices.
The assignee moved to compel arbitration. The district court denied the motion based on a finding that the assignment between the original lender and the assignee was invalid. A panel of the Third Circuit disagreed, holding in a 2-1 decision that a challenge to the legality of the assignment was not a challenge to the formation of the arbitration agreement and did not permit a court to decide whether the arbitration agreement was enforceable.
In reaching this conclusion, the majority reasoned that a valid delegation clause existed because there was no question that the plaintiff had entered into an agreement to arbitrate disputes with the original lender and its assignees. The majority refused to consider the potential invalidity of the assignment in this analysis, citing Supreme Court precedent prohibiting courts from denying effect to arbitration provisions in potentially enforceable contracts. The majority also observed that deciding the validity of the assignment at this stage would render the threshold question of arbitrability meaningless insofar as it would necessarily decide the merits of the motion to compel arbitration and render any further decision by the arbitrator merely “performative”—a result that would be antithetical to the Federal Arbitration Act.