and (5) the arbitration agreement was the result of fraud in the
inducement. Only Phillips' argument regarding the expense of the arbitral
forum is sufficient to defeat defendants' motion to compel, and on this
basis we deny the motion. We will deal with each of Phillips' arguments,
addressing the cost argument last.
Recission of the Loan Agreement
Phillips argues that the arbitration agreement is unenforceable because
prior to filing the lawsuit, she rescinded her loan contract pursuant to
TILA Section 1635 and accompanying Regulation Z, 12 C.F.R. § 226.23.
Therefore, Phillips asserts, "[b]y rescinding her contract, all
agreements and terms under the contract, including the right to arbitrate
claims were erased." Plaintiffs Objection to Arbitration, p. 6.
Defendants deny that Phillips effectively rescinded her loan contract.
Defendants' Memorandum in Support of Arbitration, p. 10.
The law in this Circuit is clear that arbitration "should not be denied
unless it may be said with positive assurance that the arbitration clause
is not susceptible of an interpretation that covers the asserted
dispute." Sweet Dreams, 1 F.3d at 641 (quoting United Steelworkers of
America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83 (1960)).
In making this determination, the court looks to the arbitration
agreement itself and "will not allow a party to unravel a contractual
arbitration clause by arguing that the clause was part of a contract that
is voidable." Colfax Envelope Corporation v. Local 458-3M Chicago Graphic
Communications International Union, 20 F.3d 750, 754 (7th Cir. 1994)
(citations omitted); cf. Sokaogon Gaming Enterprise Corporation v.
Tushie-Montgomery Associates, 86 F.3d 656, 659 (7th Cir. 1996)
(illegality of contract containing arbitration clause does not infect the
On its face, the arbitration agreement clearly applies to what is
apparently a disputed claim for recission, as well as Phillips' other
claims regarding TILA violations. Indeed, the agreement specifically
provides that the parties will arbitrate "all claims and disputes arising
out of in connection with, or relating to" the loan agreement. There is
no question that this all-inclusive language covers the issues at hand,
and Phillips' objection to arbitration on this basis fails.
Waiver of Substantive Rights
As Phillips correctly asserts, a prevailing consumer may recover
attorneys' fees and litigation costs under TILA. 15 U.S.C. § 1640
(a)(3). Phillips argues that because the arbitration agreement does not
specifically mandate the award of attorneys' fees and costs if she
prevails (the agreement is instead silent on the issue), the agreement
operates as an unenforceable waiver of her substantive TILA rights.
Plaintiffs Opposition to Arbitration, p. 11.
It is true that a party does not "forgo the substantive rights afforded
by the statute; it only submits to their resolution in an arbitral,
rather than a judicial, forum." Gilmer v. Interstate/Johnson Lane
Corporation, 500 U.S. 20, 26 (1991) (quoting Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)). We do not
agree, however, that the arbitration agreement waives Phillips'
substantive right to attorneys' fees and costs. While the agreement does
not mandate the award of attorneys' fees and expenses, neither does it
preclude the arbitrator from awarding the same relief as a court. TILA
clearly requires an award of attorneys' fees and expenses to a prevailing
consumer, and there is nothing to prevent an arbitrator from following
this statutory dictate, nor is there any reason to believe an arbitrator
would ignore the statute. See Johnson v. West Suburban Bank, 225 F.3d 366
(3rd Cir. 2000) (attorneys' fees recoverable in arbitration in a TILA
action, as arbitrators possess the power to fashion the same relief as
courts). Phillips' claim to attorneys' fees and costs is further
protected in that the arbitrator's award of fees is subject to subsequent
judicial scrutiny to ensure that the arbitrator complied with the
requirements of the statute. Gilmore, 500 U.S. at 32, n. 4. We
accordingly find no reason to deny enforcement of the parties'
arbitration agreement on this basis.
Bias of the American Arbitration Association
Phillips further argues the arbitration is inappropriate because the
American Arbitration Association is biased in favor of the defendants.
Phillips cites a series of cases against Ryan's Family Steak Houses,
which involved employees' agreements to arbitrate disputes with their
employer though an organization called the Employment Dispute Services,
Inc. ("ESDI"). Plaintiff's Opposition to Arbitration, p. 18-19. These
cases are clearly distinguishable; in those cases, the defendants had
on-going service contracts with ESDI and paid ESDI to maintain an
employment dispute resolution forum. Here, Phillips provides no evidence
that the AAA, one of the country's leading non-for-profit dispute
resolution organizations, is on defendants' payroll or any other evidence
of actual bias on the part of the AAA. The fact that the AAA has
submitted amicus briefs on behalf of parties seeking to uphold
arbitration agreements does not suggest that the AAA is biased in favor
of those parties, but only that it is in the AAA's own interest to
encourage arbitration. In the absence of any credible evidence of actual
bias in favor of lenders, we "decline to indulge the presumption that the
parties and arbitral body conducting a proceeding will be unable or
unwilling to retain competent, conscientious and impartial arbitrators."
Gilmore, 500 U.S. at 30.
As Phillips correctly notes, if a claim of fraudulent inducement goes
to "fraud in the inducement of the arbitration clause itself — an
issue which goes to the `making' of the agreement to arbitrate —
the federal court may proceed to adjudicate it." Prima Paint Corporation
v. Flood & Conklin Manufacturing Company, 388 U.S. 395, 403-04 (1967). In
other words, in order to remain in the judicial forum, a plaintiff "must
show that the arbitration clause itself . . . is vitiated by fraud, or
lack of consideration or assent, . . .; that in short the parties never
agreed to arbitrate their disputes." Colfax Envelope, 20 F.3d at 754
(citations omitted) (emphasis supplied).
Phillips argues that the arbitration agreement was fraudulently induced
because the defendants "[r]equir[ed] the use of an arbitration contract,"
while "misrepresenting" the fact that Associates Home Equity was under
investigation by the FTC. Plaintiffs Opposition to Arbitration, p. 20.
Phillips' argument misses the mark. Her claim regarding defendants'
alleged misrepresentations about the FTC does not address whether the
arbitration agreement itself is vitiated by fraud. There is no evidence
that Defendants misrepresented the purpose of the agreement or the
operation thereof, nor did anything else that would lead us to conclude
that the parties "never agreed to arbitrate their disputes."
Accordingly, this argument provides no basis to defeat the motion to
compel arbitration. See Hill v. Gateway
2000, Inc., 105 F.3d 1147, 1150-51 (7th Cir. 1997) (rejecting plaintiffs
argument that the arbitration clause is unenforceable as part of a scheme
to defraud, and noting that such argument does "not require more than a
citation to Prima Paint Corp. v. Flood & Conklin Manufacturing Co.").
Costs Associated With Arbitration
We finally address Phillips' argument that the costs associated with
pursuing her claims in the arbitral forum are prohibitively high. As the
Supreme Court recognized in Green Tree, "[i]t may well be that the
existence of large arbitration costs could preclude a litigant . . . from
effectively vindicating her federal statutory rights in the arbitral
forum." Green Tree, 531 U.S. at 90. The Court further determined that
where "a party seeks to invalidate an arbitration agreement on the ground
that arbitration would be prohibitively expensive, that party bears the
burden of showing the likelihood of incurring such costs." Id. at 92. At
that point, the onus is on the party seeking arbitration to provide
contrary evidence. Id. In Green Tree, the record contained no evidence
regarding the costs associated with arbitration, and the Court thus
refused to invalidate the arbitration agreement based on an entirely
speculative "risk" that the plaintiff would be "saddled with prohibitive
costs." Id. at 91.
In contrast to the plaintiff in Green Tree, Phillips has come forward
with evidence that the costs associated with arbitration would
effectively preclude her from pursuing her TILA claims. Specifically,
Phillips offers evidence from the AAA that she will be forced to pay
upwards of $4,000 simply to file her claim. Plaintiffs Opposition to
Arbitration, p. 14 and Exhibit E. It is true that the arbitration
agreement provides that defendants agreed in the parties' contract to
front this amount, but the agreement makes this subject to later
allocation by the arbitrator. Furthermore, the initial filing fee is far
from the only cost involved in the arbitration. The AAA's Commercial
Rules provide that the arbitrator's fees (which range from $750 to $5,000
per day, with an average of $1800 per day in the Chicago area), travel
expenses, rental of a hearing room, and other costs are borne equally by
the parties, absent some agreement between the parties — an
agreement that is lacking in this case — or a different division
made at the discretion of the arbitrator. In further support of her
argument, Phillips provides an affidavit stating that she "cannot afford
to pay" the filing fees and other costs, and that she is in severe
financial straits." Plaintiffs Opposition to Arbitration, Exhibit F,
¶ 9, 10. We see no reason to doubt Phillips' assertion regarding her
financial viability, particularly in light of Phillips' inclusion in the
"subprime" market targeted by Associates Home Equity. Thus even if we
disregard the filing fee, the cost of pursuing arbitration appears to be
prohibitive for Phillips, and it is likely to be at least twelve times
what it currently costs to file a case in federal court.
In response, defendants do not dispute that Phillips cannot afford the
costs associated with arbitration. Instead, defendants argue that the
AAA's Commercial Rules contain certain safeguards to protect Phillips
against incurring exorbitant costs. These arguments are unavailing.
First, defendants argue that Phillips is protected from the expenses of
the arbitration because the parties can agree that the costs will be
borne by one party. That argument is beside the point here, as defendants
have not offered to bear the costs (aside from their agreement to front
the filing fee). Second, defendants note that the arbitrator at his or
her discretion can assess all expenses to one party at the conclusion of
the case. Defendants' Reply
in Support of Arbitration, p. 8. But that is nothing more than an
argument that there exists some possibility that Phillips ultimately may
not have to bear a prohibitively expensive portion of the arbitration
costs. This is not enough to defeat Phillips' evidence that she would
have to expend thousands of dollars that she does not have in order to
pursue her claim, with no solid way of getting the money back. Finally,
defendants' assertions that AAA arbitrators "customarily" serve without
compensation for the first day of service in smaller cases does not
appear to apply here, as Phillips is seeking rescission of a loan
agreement involving over $70,000, and the AAA rules cited by defendants
apply to claims involving less than $10,000. See Defendants' Memorandum in
Support of Arbitration, p. 7, n. 5.
Defendants further argue that Phillips' cost showing amounts only to
"pure speculation," and that Phillips' "generalized assertions" of
possible costs should not defeat arbitration. Defendants' Reply in Support
of Arbitration, p. 8. We disagree. Phillips has made a reasonable, good
faith effort to estimate her arbitration costs with assistance from the
AAA, and without actually going through arbitration and receiving a final
bill, we see no way for her to provide a more precise showing of her
costs than she has done here. We are satisfied that Phillips has met her
burden under Green Tree of showing that the expense of arbitration would
be prohibitive in this case, and we find that defendants have failed to
adequately contest that showing. See Green Tree, 531 U.S. at 92; See also
Giordano v. Pep-Boys — Manny, Moe & Jack, Inc., No. 99-1281, 2001
WL 484360 (E.D. Pa. March 29, 2001) (finding that arbitration costs in
the thousands of dollars would deter plaintiffs vindication of his
claims; thus the cost-sharing provisions of the arbitration agreement
were unenforceable). We caution, however, that the cost showing made by
Phillips does not create some bright-line rule for future litigants.
Instead, the inquiry must be determined on a case-by-case basis.
In sum, Phillips has carried her burden of proving that the costs
associated with arbitration would effectively preclude her from
vindicating her federal statutory rights. Accordingly, we deny
defendants' motion to compel. In the event, however, that defendants were
to agree to bear the costs associated with the arbitration, the Court
would be willing entertain a motion to reconsider its ruling on that
For the reasons stated above, Defendants' Motion to Compel Arbitration
and Stay Proceedings is denied. Ruling on Defendants' Motion to Dismiss
Class Claims is denied pending inquiry by the Court regarding why
plaintiff has not responded to the motion.