SDNY Finds That Car Dealer Can Sue in Court but Then Demand Arbitration in Separate Suit

Sean Michael Murray (Murray) attempted to buy a car from DCH Toyota City (DCH) in January 2020.  It did not go well.   A provision in the Retail Installment Sale Contract (RISC) that provided that . . .

Any claim or dispute . . . which arises out of or relates to your credit application, purchase or condition of the vehicle, this contract or any resulting transaction or relationship . . .  shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action (emphasis added). 

DCH chose not to exercise its option to arbitrate its claims, and it sued Murray in state court, alleging breach of contract, unjust enrichment/quantum meruit, and conversion, alleging that Murray had failed to pay for the car under the terms of the RISC.   DCH sought a preliminary injunction.  Murray defended himself pro se and filed cross-claims, and he filed a third-party complaint in the state court.

Now represented by counsel, Murray brought a claim in federal court, alleging a violation of the Truth in Lending Act, materially misleading conduct in violation of GBL § 349, and fraud.  DCH moved to compel arbitration.  On April 20th, in Murray v. DCH Toyota City, the District Court for the Southern District of New York granted DCH’s motion.  The court found that DCH had not waived its right to move to compel arbitration in the federal action by bringing its own claims in state court.  The general rule is that a party does not waive its right to arbitrate by litigating unrelated issues in a separate action.  Here, the allegations all arise from the same transaction, but the legal issues are different, and Murray did not raise any of his claims in the federal action when defending himself, cross-claiming, and raising issues in a third-party complaint in the state action.

This all sounds perfectly fine as a matter of law, and it might be the right result in this case.  Murray defended himself, brought cross claims, and filed counter-claims in the state court action.  Perhaps he is a sophisticated party who knew what he was doing.  However, the fact that he brought completely different claims in the federal court suggests that having legal counsel helped him see the case in a new light.  The aid of legal counsel might have helped him to respond to DCH’s motion to show cause seeking a temporary restraining order.  A well-advised defendant might have responded with a motion to compel arbitration, if only to avoid  the stress of the litigation-by-ambush that a TRO involves.  If DCH is going to compel arbitration of Murray’s claims, is it too late for him to seek arbitration of DCH’s claims.  Would he want to?  

While this blog has often highlighted the disadvantages to consumers and employees of mandatory arbitration provisions, this case highlights the potential danger of optional arbitration provisions.  A consumer will not notice an arbitration clause, nor will they know the relative advantages and disadvantages of arbitration over litigation.  That can lead to de facto one-sided arbitration clauses, as the drafter will know its options.  Caveat emptor!

H/T @NY_Contracts