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September 28, 2001


The opinion of the court was delivered by: Matthew F. Kennelly, U.S. District Judge:


Plaintiff Juan Phillips filed a class action complaint alleging violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., in connection with defendants' handling of residential mortgage transactions. This case is before the Court on defendants' motion to compel arbitration and stay these proceedings based on an arbitration agreement executed by Phillips and defendant Associates Home Equity, and defendants' motion to dismiss all class claims pursuant to Fed. R. Civ. P. 23(d)(4) and 12(b)(6). For the reasons outlined below, defendants' motion to compel arbitration is denied, and ruling on defendants' motion to dismiss is deferred.


In May 2000, Phillips obtained a residential mortgage loan in the amount of $72,900 from defendant Associates Home Equity*fn1 to finance home improvements and pay off her existing consumer debts. Associates Home Equity offers financial products and services such as home equity loans, personal loans, automobile loans, and retail sales financing to consumers, and it specializes in providing credit to the "subprime" market, which consists of persons who are considered to be poor credit risks. Phillips' loan was initially arranged by a mortgage broker, Ficus Financial, which is not named in the complaint. As part of her loan transaction, Phillips received and/or signed a standard form mortgage broker agreement, a loan agreement, a rate reduction rider, a trust deed, a TILA disclosure statement, a HUD-1 settlement statement, and a notice of her right to cancel.

On May 23, 2000, in connection with the loan transaction, Phillips and Associates Home Equity also entered into a written arbitration agreement. Among other things, the agreement contains a section entitled "DISPUTES COVERED" that provides that the parties agree to arbitrate "all claims and disputes between you [Phillips] and us [Associates Home Equity]," including "without limitation, all claims and disputes arising out of, in connection with, or relating to" the May 2000 loan. See Arbitration Agreement, Plaintiff's Objection to Arbitration, Exhibit D. The agreement further provides that arbitration will be conducted through the American Arbitration Association ("AAA"), pursuant to its then-current "Commercial Arbitration Rules."

In addition, the agreement includes a provision governing the costs associated with arbitration:

COSTS OF ARBITRATION: If you start arbitration, you agree to pay the initial filing fee and required deposit required by the American Arbitration Association. If we start arbitration, we will pay the filing fee and required deposit. If you believe you are financially unable to pay such fees, you may ask the American Arbitration Association to defer or reduce such fees, pursuant to the Commercial Arbitration Rules, If the American Arbitration Association does not defer or reduce such fees so that you are able to afford them, we will, upon your written request, pay the fees, subject to any later allocation of the fees and expenses between you and us by the arbitrator. There may be other costs during the arbitration, such as attorney's fees, expenses of travel to the arbitration, and the costs of the arbitration hearings. The Commercial Arbitration Rules determine who will pay those fees.

Arbitration Agreement, p. 2, Plaintiff's Objection to Arbitration, Exhibit D.

On March 19, 2001, Phillips wrote a letter to Associates Home Equity purporting to rescind her loan agreement pursuant to TILA. One day later, Phillips filed this suit seeking declaratory rulings and damages based on Defendants' alleged TILA violations.


"It is beyond peradventure that the Federal Arbitration Act embodies a strong federal policy in favor of arbitration." Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress International Ltd., 1 F.3d 639, 641 (7th Cir. 1993) (citing Moses H. Cone Memorial Hospital v. Mercury Construction, 460 U.S. 1 (1983)). The party opposing arbitration bears the burden of proving that the claims at issue are not subject to arbitration. Green Tree Financial Corp. v. Alabama, 531 U.S. 79, 91-92 (2000). Phillips makes five arguments in opposition to arbitration: (1) she rescinded the entire May 2000 loan transaction (which included the arbitration agreement), and therefore the arbitration agreement cannot now be enforced; (2) the arbitration agreement is an unenforceable waiver of her substantive rights under TILA because it does not guarantee her an award of attorneys' fees and litigation expenses if she is successful in arbitration; (3) the arbitral forum is prohibitively expensive; (4) the American Arbitration Association is biased in favor of the defendants; 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 ...

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