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  • Michael D. Gorman

Is Two Years Into a Lawsuit Too Long of a Delay to File a Motion to Compel Arbitration?

Debtors filed an adversary proceeding in their Chapter 13 bankruptcy against their mortgage company. The suit was pending for two years before the mortgage company filed a motion to compel arbitration as was permitted in the Debtor’s loan documents. The Debtor’s objected to the mortgage company’s request to arbitrate claiming too much time had passed. The Bankruptcy Court disagreed and ordered that the suit be arbitrated. Trevino v. Select Portfolio Servicing, Inc. (In re Jose Sr. Trevino), Adv. Pro. No. 16-7024, 2018 Bankr. LEXIS 3605 (Bankr. S.D. Tex. Nov. 14, 2018).

The Bankruptcy Court looked at two factors in determining whether it was too late to compel arbitration. First, whether the mortgage company substantially invoke the judicial process during the two years the case was pending. If so, were the Debtors prejudiced by the mortgage company’s late action.

First, the court held that the mortgage company did not significantly invoke the judicial process while the adversary case was pending. Prior to requesting arbitration, the mortgage company had not filed a motion to dismiss with prejudice. Nor did it assert any affirmative defenses or counterclaims, conduct discovery or submit a motion for summary judgment. As a result, the mortgage company did not significantly invoke the judicial process.

Second, the court held that the Debtors were not prejudiced by the mortgage company’s delay in requesting arbitration. Prejudice occurs when there is delay, expense or damage to a party’s legal position. The Debtors’ adversary proceeding was abated. However, the mortgage company filed an answer within two months of the case being unabated, and they filed their motion to arbitrate two months after their answer. The Debtors only incurred “elementary costs” and those that would be reasonably expected prior to the mortgage company’s request to arbitrate. Finally, the two-year delay did not damage the Debtor’s legal position. By merely responding to the mortgage company’s various motions, the Debtor’s did not divulge any legal strategies.

In summary, it is always best to immediately review documentation to determine if there is a clause permitting arbitration. If so, a request to arbitrate should be promptly filed to avoid any possibility of the opposing side asserting waiver.


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