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
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