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Supreme Court Gives Green Light to Arbitration Provisions

By: Charles G. Miller

A properly drafted arbitration clause will now allow small and large community banks to not only avoid having to be subject to draconian class actions, but provide an alternative to the crowded court dockets. It is extremely important for financial institutions to be able to promptly resolve loan issues with borrowers so they might avoid having to write the loans off. Banks are prone to use arbitration more now that the courts are no longer available to promptly resolve disputes due to funding limitations. Arbitration thus provides the economy with a speedy and efficient way to resolve financial institution disputes.

In May, the U.S. Supreme Court, in AT&T Mobility LLC v. Concepcion, gave a green light to clauses that prohibited maintenance of class actions in arbitration. In doing so, the Supreme Court nullified a 2005 California court decision finding such provisions unconscionable. The contractual arbitration provision in Concepcion otherwise passed muster because it was pro-consumer by requiring the telephone company to front the costs of arbitration, by requiring the arbitration to be in the county where the customer lived, by allowing expedited procedures and even allowing the customer to file a small claims action in court. The AT&T provision even gave the customer a bonus of $10,000 and double the amount of attorneys’ fees expended if the arbitrator awarded more than it offered to settle, encouraging AT&T to make reasonable settlement offers.

Arbitration clauses need to be carefully drafted to ensure that a court will not find them unconscionable and refuse to enforce them. They cannot be one-sided, such as allowing one party access to the courts for certain types of claims (known as carve-outs). Attempts should also be made to avoid an attack based on the cost of arbitration as being prohibitive, such as having the bank agree to pay the costs with the right to recoup if the claim is deemed frivolous. The chosen provider must be truly neutral and not part of an industry group. Shortened time periods for bringing claims, and limits on the types of damages that can be awarded should also be avoided and, if used, must truly be applicable to both parties.

In light of the Supreme Court’s pro-arbitration decisions, the issue has risen whether banks could require foreclosure actions to be arbitrated. This is unlikely because foreclosure is usually excepted from arbitration and due to strong policies protecting borrowers in judicial foreclosure proceedings that cannot be waived. Also, there are cases that hold that courts, not arbitrators, should wield the power to issue injunctions that affect the public and the same reasoning would apply to judicial foreclosure. While anti-trust cases were once exempt from arbitration, the courts have now indicated that arbitrators can decide anti-trust questions. It is unlikely, however, that courts will uphold attempts to have foreclosure actions arbitrated. For one thing, because strict compliance is required with judicial foreclosure procedures, there may be reluctance on the part of the courts to allow arbitrators the power to render foreclosure judgments because arbitration rulings are subject to little review. 

Charles G. Miller is an attorney with the San Francisco-based law firm of Bartko, Zankel, Tarrant & Miller, specializing in complex litigation and class actions. Contact him at or 415-956-1900.

Copyright (c) October 2011 by BankNews Media.