Wednesday, February 16, 2011

FYI: Ill App Ct Upholds Refusal to Enforce Arbitration Agreement as Arbitrators Not Available

The Appellate Court of Illinois, First District, recently held that an
arbitration agreement contained in a loan agreement between a lender and
borrower would not be enforced, notwithstanding the FAA's provision
allowing a court to appoint an arbitrator where there is a "lapse in the
naming of an arbitrator," where the arbitration agreement allowed for only
two organizations to administer a dispute between the parties and neither
was available. A copy of the opinion is attached.

The borrower obtained a loan from the lender by entering into a loan
agreement and promissory note. The loan agreement contained an
arbitration provision that provided that either party could choose to have
any claim related to the loan agreement arbitrated, but that the claim
must be arbitrated either by the American Arbitration Association ("AAA")
or the National Arbitration Forum ("NAF"). The lender initiated
collection proceedings against the borrower alleging that the borrower had
defaulted under the loan agreement and promissory note. The borrower filed
a counterclaim for herself and a putative class of similarly situated
Illinois consumers against the lender alleging violations of the Truth in
Lending Act, the Illinois Consumer Installment Loan Act (205 ILCS 670/1,
et seq.), and the Illinois Interest Act (815 ILCS 205/1, et seq.).

The lender then filed a motion to compel arbitration and stay proceedings.
The trial court denied the motion, finding the arbitration agreement
impossible to enforce because NAF ceased administering consumer
arbitrations and AAA issued a moratorium on consumer debt arbitrations.

In upholding the lower court's ruling, the appellate court held that the
agreement between the parties to arbitrate allowed for only two
organizations to administer any dispute between the parties in
arbitration, neither of which was available. Because the two exclusive
administrators were unavailable due to external constraints, the
arbitration agreement between the parties was impossible to enforce.
Additionally, the court held that an alternative administrator could not
be named by the court because the designation by the parties of two
exclusive arbitration organizations was an integral part of the agreement
between the parties.

In making its ruling, the appellate court noted that "[i]t is well
established that agreements to submit to arbitration, as an alternative
method of dispute resolution, are favored at both the state and federal
level." However, the court acknowledged that an agreement to arbitrate is
a contract and parties to an agreement to arbitrate disputes
"are bound to arbitrate only those issues they have agreed to arbitrate,
as shown by the clear language of the agreement and their intentions
expressed in that language."

The appellate court rejected the lender's argument that the court could
select a substitute arbitrator pursuant to Section 5 of the Federal
Arbitration Act, which allows a court to appoint an arbitrator where there
is a "lapse in the naming of an arbitrator." 9 U.S.C. §5. The appellate
court reasoned that Section 5 could not be used by the court to select a
new arbitrator where the chosen forum was "an integral part of the
agreement to arbitrate" rather than an "ancillary logistical concern."
The Court held that the designation of the NAF or the AAA was not
ancillary or a logistical concern.

The Court found that the arbitration agreement at issue made it clear that
if a party required arbitration it must choose either the NAF or the AAA.
Thus, although the parties agreed to arbitration, the exclusive
administrators required by the Arbitration Agreement were not available to
arbitrate the matter. Therefore, "external events to the parties'
agreement have foreclosed the arbitration of the parties' claims, and thus
the circuit court could not enforce the Arbitration Agreement."

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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