Tuesday, February 9, 2016

“Substantive” Summary Rulings Required to Resolve Disputes over the Existence and Enforceability of Arbitration Agreements

By Jonathan B. Amarilio 
Associate, Taft Stettinius & Hollister LLP

Mandatory individual arbitration agreements as a means of defeating class action lawsuits are a hot topic of late, and a recent decision from the Illinois Appellate Court has clarified the standard of proof and standard of decision parties and trial courts must meet to resolve disputes over the existence and enforceability of those agreements.

In Sturgill v. Santander Consumer USA, Inc., 2016 IL App (5th) 140380, Franklin Sturgill brought a putative class action lawsuit against Santander, a financing company, alleging the company failed to deliver the certificate of title to his truck within the time provided by law following the satisfaction of a lien placed on it at the time of purchase. In line with a litigation trend that has skyrocketed since the U.S. Supreme Court decision in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), Santander moved to compel individual arbitration and dismiss or stay the suit. Santander claimed that Sturgill agreed to mandatory arbitration as a term of the financing agreement with Santander’s predecessor in interest. Sturgill contested whether Santander had inherited the right to compel arbitration and argued that, either way, the arbitration provision did not apply because his cause of action arose after the installment contract was satisfied. Both Santander and Sturgill’s arguments depended on several unresolved factual and legal questions. The trial court thus ordered limited discovery to address those issues, but when the parties failed to comply, the court summarily denied the motion to compel arbitration.

Reviewing that denial under Illinois Supreme Court Rule 307, the appellate court explained that in cases where a party denies the existence of an arbitration agreement, the Illinois Uniform Arbitration Act, 710 ILCS 5/2(a), demands that the trial court render a “substantive disposition” of the factual and legal issues raised in the motion to compel arbitration. “A substantive disposition is a more considered disposition in which the trial court separately addresses each issue raised by the motion, supporting its resolution of each issue with specific factual findings or legal reasons.” Sturgill, 2016 IL App (5th) 140380, ¶ 24. This requires the trial court to have a summary proceeding to flesh out any issues relating to the existence and enforceability of an arbitration agreement, whether the controversy falls within the scope of the arbitration agreement, and whether any affirmative matters exist that would defeat the right to arbitrate. In this case, those issues included whether the arbitration agreement was assignable, whether it was in fact assigned, and whether it terminated prior to Sturgill’s suit. Because the trial court did not resolve these issues, the appellate court reversed and remanded with instructions to hold a summary proceeding to do so.

The lesson from this case is clear. If you are a defendant seeking to compel arbitration in a case where the plaintiff has called the existence and enforceability of the arbitration agreement into question, you must prove, often through discovery and an evidentiary hearing, the validity and applicability of the agreement. The burden will then shift to the plaintiff seeking to defeat the motion based on other affirmative matters. And if you are a trial judge—or a party seeking to attack or defend a trial judge’s decision on a motion to compel arbitration—you must resolve these factual and legal issues in reasonable detail in your ruling. Anyone who fails to meet these standards will have to do so on remand.

DISCLAIMER: The Appellate Lawyers Association does not provide legal services or legal advice. Discussions of legal principles and authority, including, but not limited to, constitutional provisions, statutes, legislative enactments, court rules, case law, and common-law doctrines are for informational purposes only and do not constitute legal advice.