Granting a motion to compel arbitration of a bank account dispute, a New York federal court held that a bank's participation in small claims litigation did not estop it from seeking arbitration nor amount to a waiver of arbitration rights.

In Haenel v. Washington Mut. Bank, No. CV 07-2320, 2007 WL 4326828 (E.D.N.Y. Dec. 06, 2007), the Haenels obtained a checking account with Dime Savings Bank, which transferred the account to Washington Mutual in 2002. In May 2005, Washington Mutual froze the Haenels' account, resulting in non-payment of their monthly bills.

The Haenels sued in small claims court seeking redress for alleged injuries suffered when their account was frozen. Washington Mutual defended itself. The small claims court ruled in the Haenels' favor, awarding damages for improper late fees, service charges, overdraft charges, and charges incurred in repairing their credit.

The Haenels then sued in state court for violation of the Federal Fair Credit Reporting Act and various New York laws. Washington Mutual removed to federal court and moved to compel arbitration pursuant to an arbitration agreement in the bank's regulation. The Haenels opposed the motion, arguing Washington Mutual waived its right to arbitrate by participating in the small claims action and that the small claims ruling collaterally estopped the bank from arguing about the propriety of its actions with the checking account.

The Court held that Washington Mutual did not waive its right to arbitrate by participating in the small claims action. Federal law disfavors finding waiver of arbitration rights unless "the party seeking to arbitrate has already engaged in 'protracted litigation' of the same issue alleged to be subject to arbitration and that participation results in prejudice to the party opposing arbitration."

The Court held that the small claims dispute was a separate proceeding involving only a claim for minor damages in a court of limited jurisdiction. As a separate matter, Washington Mutual's participation did not prejudice the Haenels. Moreover, Washington Mutual did not protractedly litigate the matter, as it promptly removed the case from state court to federal court and sought arbitration. Finally, the Court rejected the Haenels' argument that the findings of the small claims court estopped the bank from arbitrating the dispute finding the determination was for the arbitrator to make.