Friday, March 9, 2012

FYI: Ill App Court Holds Confirmation of Arbitration Award Requires Filing of Arbitration Agreement, Proceeding to Compel Arbitration Only Required on Refusal to Arbitrate

The Appellate Court of Illinois for the First District recently held that:  (1) under the Federal Arbitration Act, only a party "aggrieved" by a refusal to arbitrate need petition a court for an order directing arbitration; and  (2) that a lender's alleged failure to attach an arbitration agreement between the relevant parties to its motion to confirm an arbitration award constituted a failure to meet its prima facie case. 
 
A copy of the opinion is available at:
 
A borrower incurred charges on a credit card he obtained from a bank, and failed to pay the balance.  A debt buyer ("Debt Buyer") purchased the borrower's account from the bank, and demanded for arbitration.  The borrower did not appear at the arbitration hearing.  The arbitrator awarded Debt Buyer the full amount it sought. 
 
Debt Buyer then filed a complaint in circuit court, requesting judgment against the borrower.  Debt Buyer also filed a motion to confirm the award.  Debt Buyer did not attach an agreement to arbitrate, made by the parties, to that motion. 
 
The borrower filed an answer with affirmative defenses and counterclaims in Debt Buyer's action to confirm the arbitration award, as well as several additional pleadings.  He alleged among other things that:  (1) Debt Buyer failed to establish its prima facie case to confirm the award, due to its alleged failure to attach the underlying arbitration agreement to its motion to confirm; and  (2) Debt Buyer was required to file a court action to compel arbitration before proceeding with the arbitration
 
The lower court granted Debt Buyer's motion to confirm the arbitration award, dismissed the borrower's counterclaims, and ruled that the borrower's affirmative defenses were unavailable in a proceeding to confirm an arbitration award.  The borrower appealed. 
 
The Appellate Court had little difficulty affirming the lower court's decision to dismiss the borrower's counterclaims, noting that the same "could not be asserted in a summary proceeding to confirm an arbitration award."  The Court's opinion, therefore, focused on whether Debt Buyer was required to file a court action to compel arbitration, and on whether Debt Buyer's alleged failure to attach an arbitration agreement to its motion to confirm constituted a failure to carry its burden of proof.  
 
As you may recall, Section 4 of the Federal Arbitration Act ("FAA") provides that "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition...for an order directing that such arbitration proceed in the manner provided for in such agreement.  See 9 U.S.C. Sec. 4 (2006). 
 
The Court began its analysis by noting a circuit split on whether Section 4 permits or mandates a court order directing that arbitration proceed.  The Court determined that under the plain language of the statute, "only a party 'aggrieved' by the refusal to arbitrate need petition a court for an order directing arbitration." 
 
Accordingly, the Court considered whether Debt Buyer was an "aggrieved" party within the meaning of Section 4.  It concluded that "[a] party is not 'aggrieved'...simply by the failure of the opposing party to participate in an arbitration hearing..."  The Court therefore held that "[b]ecause [Debt Buyer] was not an 'aggrieved' party, it was not required to invoke section 4 of the FAA before proceeding to arbitrate its dispute..." 
 
Next, the Court considered the effect of Debt Buyer's alleged failure to attach an arbitration agreement to its motion for confirmation.  It began by noting that Section 13 of the FAA provides that a party moving for an order confirming an award must attach the agreement, as well as the award.  9 U.S.C. Sec 13 (2006). 

With this standard in place, the Court noted that the record included two documents which contained arbitration clauses.  However, because neither document bore the borrower's name or credit card number, the Court observed that "the papers provide no evidence that they pertain to [the borrower's] account; or that [the borrower] received the papers; or that [the borrower] agreed to the terms set forth in the papers..."  Therefore, the Court held that Debt Buyer "failed to satisfy its burden to establish a prima facie case to confirm the arbitration award."
 
Although Debt Buyer argued that the issue was precluded by the borrower's failure to raise it in the arbitration proceedings, the Court disagreed.  It further held that "[t]he burden to challenge the arbitration award did not shift to [the borrower] until [Debt Buyer] established a prima facie case." 
 
Therefore, the Court affirmed the dismissal of the borrower's counterclaims, and reversed the lower court's order confirming the arbitration award. 
 


Ralph T. Wutscher
McGinnis Tessitore 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
Email: RWutscher@mtwllp.com
 

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Wednesday, March 7, 2012

FYI: 9th Cir Holds State AG Action Against Servicer Not Removable to Federal Court

The U.S. Court of Appeals for the Ninth Circuit recently held that:  (1) the Class Action Fairness Act did not provide a basis for removal of an action to federal court, where the state attorney general was the real party in interest in a lawsuit alleging violations of the Nevada Deceptive Trade Practices Act; and  (2) federal question jurisdiction did not exist where the complaint raised exclusively state law claims and did not raise any substantial issues of federal law. 
 
 
Seeking declaratory and injunctive relief, as well as civil penalties and restitution for allegedly defrauded consumers, the Nevada Attorney General filed a lawsuit against a bank and related entities, including a  home mortgage servicer (collectively the "Defendant Bank"). 
 
The Nevada AG's complaint alleged that the Defendant Bank had engaged in deceptive practices with respect to mortgage servicing, loan modifications, and foreclosures in violation of the Nevada Deceptive Trade Practices Act, Nev. Rev. Stat. §§ 598.0903-.0999 ("NDTPA").  As part of its NDTPA allegations, the Nevada AG alleged that the Defendant Bank misrepresented consumers' credit histories to credit agencies in violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692e et seq.  ("FDCPA"), and that the Defendant Bank made various misrepresentations about loan modification requirements under the federal Home Affordable Mortgage Program ("HAMP"), 12 U.S.C. § 5219a.  The Nevada AG also sought enforcement of a consent judgment entered against the Defendant Bank in a prior action.
 
The Defendant Bank removed the action to federal district court, asserting various bases for federal jurisdiction including the Class Action Fairness Act, 28 U.S.C. § 1332(d)(10),(d)(11) ("CAFA"), and federal question jurisdiction under 28 U.S.C.  § 1331 by virtue of the FDCPA allegations.  Denying Nevada's motion to remand, the district court concluded that federal question jurisdiction existed because of issues related to HAMP and that this action moreover constituted a "mass action" under CAFA.  Nevada appealed. 
 
The Ninth Circuit reversed, concluding federal subject matter jurisdiction did not exist.
 
As you may recall, the NDTPA authorizes the state attorney general to file a lawsuit in the state's name for deceptive trade practices.  Nev. Rev. Stat. § 598.0963(3).  In addition, CAFA provides for the removal of "class actions" and "mass actions" involving claims that meet certain jurisdictional requirements related to numerosity of claimants, minimal diversity, and amount in controversy. 28 U.S.C. § 1332(d).   CAFA defines "mass action" in part as an action involving "monetary relief claims of 100 or more persons . . . proposed to be tried jointly" due to the presence of common questions of law or fact.  CAFA's definition of "mass action," however, excludes civil actions in which all the claims arise from a single event or occurrence.  See 28 U.S.C. § 1332(d)(11)(B)(ii)(I).
 
The Ninth Circuit first considered the Bank's argument that CAFA provided a basis for removal of this case as a "class action."  In ruling that this case did not involve a class action under CAFA, the Court relied on its recent opinion in Washington v. Chimei Innolux Corp., 659 F.3d 843 (9th Cir. 2011), which held that attorney general enforcement actions were not removable as "class actions" under CAFA, because the attorney general -- and not a class representative -- was the real party in interest in such "parens patriae" actions.   
 
The Court next considered the Defendant Bank's argument that the suit was removable as a "mass action" under CAFA.  The Ninth Circuit ruled that CAFA's "event or occurrence" exclusion did not apply here, because multiple alleged acts of fraud and misrepresentation gave rise to the claims in this case.  
 
Analyzing conflicting opinions from the Fifth and Seventh Circuits, the Court concluded that the characterization of this case as a "mass action" hinged on identifying the real party in interest.  The identity of the real party in interest, the court noted, would determine whether CAFA's numerosity and diversity requirements were satisfied.  Compare LG Display Co., Ltd. v. Madigan, 665 F.3d 768 (7th Cir. 2011)(viewing complaint as a whole and thus concluding that parens patriae suit was not a mass action because the Attorney General was the only plaintiff) with Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008)(adopting a claim-by-claim approach to conclude that parens patriae antitrust action against insurance companies was mass action because insurance policyholders were the real parties in interest).
 
Relying on its opinion in Department of Fair Employment and Housing v. Lucent Technologies, Inc., 642 F.3d 728 (9th Cir. 2011), which held that the "aggrieved" party was the real party in interest, the Ninth Circuit considered the complaint as a whole and determined that Nevada was the real party in interest.  In so ruling, the Court considered various factors including Nevada's interest in protecting the integrity of the mortgage servicing business, eliminating the causes of the state's foreclosure crisis, and Nevada's sovereign interest in protecting its citizens.  The Court also determined that Nevada's claim for restitution on behalf of its consumers did not change its status as the real party in interest and render the action removable under CAFA's diversity and numerosity requirements.
 
With regard to the Defendant Bank's assertion that federal jurisdiction existed because the claims involved federal law, namely the Nevada AG's allegations regarding HAMP and the FDCPA raised under the rubric of state consumer fraud violations, the Court ruled that this case did not raise a substantial federal issue that justified removal.  See, e.g., Grable & Sons Metal Prods. V. Darue Eng'g & Mfg., 545 U.S. 308, 314 (2005).  The Court determined that the complaint raised exclusively state claims despite the allegations referencing the HAMP program and the FDCPA.  The Court held that any "glancing reference" to federal law in the complaint was not sufficient to confer federal jurisdiction, because the federal issues here were not "pivotal" to the resolution of Nevada's claims, and that Nevada's strong sovereign interest in enforcing the consent judgment and its state laws weighed in favor of remanding the case back to state court. 



Ralph T. Wutscher
McGinnis Tessitore 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
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


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