defendant bank did not make the required TILA disclosures. Id. at *1. The defendant moved to
compel arbitration based on an arbitration clause in the loan agreement. Id, Judge Conlon denied
the motion, however, noting specifically that the arbitration agreement in that case excluded any
“self-help” remedies like rescission. Id. at *2.

Unlike the arbitration agreement in Franklin, the arbitration clause here is broad and it does
not specifically exempt “self-help” remedies. Contrary to Plaintiffs assertions, therefore, Franklin
is inapposite. As Judge Kennelly recently stated in a similar case, “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,” and “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.” Phillips v. Assoc. Home
Equity Servs., Inc., 179 F. Supp. 2d 840, 844 (N.D. Ill. 2001). Thus, this Court, finding Plaintiffs’
objections unpersuasive, accepts Judge Keys’ recommendation and rejects Plaintiffs’ argument
concerning recission of the loan agreement as a basis for denying Defendants’ motion to compel
arbitration,

B. Cost of Arbitration

The second issue before Judge Keys was whether the costs of arbitration are prohibitively
expensive for Plaintiffs. Plaintiffs asked for discovery so they can prove that the cost of arbitration
in their case will be prohibitively expensive while Defendants countered that the arbitration
agreement, as well as the Commercial Rules of the AAA, clearly establish that the costs will not be
prohibitive. Based on the Supreme Court’s recent ruling in Green Tree Financial Corp. - Alabama
v. Randolph, 531 U.S. 79 (2000), Judge Keys recommends that Plaintiffs be allowed limited

discovery regarding the costs of arbitration. Specifically, Judge Keys reasoned that “if the Supreme


clearly shows (Plaintiffs’ Exhibit E), while the AAA objected to broad requests for certain general
information, it was more than willing to provide that same information in those plaintiffs’ particular
case through affidavits. Finally, that the AAA aspires to achieve diversity in its arbitration panels
but cannot be held accountable on this promise bears absolutely no light on the issue of whether it
is biased toward corporations. Therefore, this Court adopts Judge Keys’ recommendation; the
Plaintiffs’ request for discovery into the bias of the AAA is denied.
D. Fraudulent Inducement

The final issue before Judge Keys was whether Plaintiffs were fraudulently induced to agree
to arbitrate their claims. Judge Keys recommends rejecting this argument because Plaintiffs’ fraud
claim is based on alleged fraud in the entire loan agreement and not just the arbitration agreement.

As Judge Keys noted, the Supreme Court in Prima Paint Corp. v. Flood & Conklin Mfg.. Co.

specifically stated that while courts may decide issues of fraud pertaining to an arbitration agreement
itself, issues of fraud pertaining to the contract must be arbitrated. 388 U.S. 395, 403-04 (1967).
Plaintiffs have not filed written objections to this recommendation; they merely have stated their
desire to preserve this issue on appeal. Because this Court agrees with Judge Keys’ reasoning and
Plaintiffs have offered no reasons why he was incorrect, this Court accepts Judge Keys’
recommendation and rejects Plaintiffs’ fraudulent inducement claim as a basis for not compelling
arbitration.
III. Conclusion

For the foregoing reasons, this Court adopts the R&R and GRANTS Plaintiffs’ motion for
extension of time to respond to Defendants’ motion to arbitration [39-1] and GRANTS in part
Plaintiffs’ motion for leave to pursue discovery on the issue of cost of arbitration only [38-1].

Discovery on this issue will be expedited and will close on April 15, 2002. This Court stays


on rTM

recommendation that Plaintiffs not be allowed to discover statistical information.’ Defendants object
to Judge Keys’ recommendations to allow limited discovery of the AAA and to grant Plaintiffs
extension of time. This Court addresses each issue in turn.
A. Enforceability of the Contract

The issue before Judge Keys was whether there was an enforceable contract between the
parties so that an arbitrator, and not a court, was authorized to decide the question of Plaintiffs’
recission of the contract. Plaintiffs argued that recission took place by operation of law and that any
basis for compelling arbitration no longer exists. Judge Keys acknowledged that recission may take
place by operation of law, but he concluded that “in the Seventh Circuit, whether an arbitration
agreement has, in fact, been rescinded is an issue for the arbitrator,” and he cited Sweet Dreams

Unlimited, Inc. v. Dial-A-Mattress Intern., Ltd., 1 F.3d 639, 642 (7th Cir. 1993) and Dorsey v.

H.C.P. Sales. Inc., 46 F. Supp. 2d 804, 806 (N.D. Ill. 1999) for support. Thus, Judge Keys
recommended that this Court reject Plaintiffs’ argument concerning recission of the loan agreement
as a basis for not compelling arbitration.

Plaintiffs argue that Judge Keys was incorrect in determining there is an enforceable contract
because the contract was rescinded by operation of law. Specifically, Plaintiffs assert that under
TILA and Regulation Z, where the right to rescind is exercised, the agreement imposes no further
obligation. Plaintiffs argue that Sweet Dreams is inapposite because the statute in Sweet Dreams
did not provide an automatic right of recission and TILA does. Plaintiffs further argue that Franklin

vy. Hartland Mortgage Curs., Inc., No. 01 C 2041, 2001 WL 726986 at * 2 is more on point. In

Franklin, the plaintiff rescinded his loan agreement pursuant to TILA after learning that the

*Plaintiffs also filed “observations” to Judge Keys’ reasoning in deciding that Plaintiffs
are entitled to discovery regarding the cost of arbitration. With the exception of their objection to
a specific recommendation, this Court will not consider Plaintiffs’ “observations” as objections.


Court places a burden of proof on a party [as it does on the plaintiffs in Green Tree], then that party
must be given an opportunity to pursue discovery related to the issue that it has the burden to prove

. or [this burden] becomes a nullity.” R&R, 2001 WL 709465, at *2. Judge Keys suggests
limiting this discovery only to the likely costs that Plaintiffs will incur in this particular case and not
allowing requests for general statistical information.

Defendants object to Judge Keys’ recommendation that Plaintiffs be allowed limited
discovery into the cost of this arbitration. They argue that Plaintiffs should not be granted limited
discovery because the arbitration agreement incorporates the safeguards against prohibitive costs
embodied by the AAA’s Commercial Arbitration Rules. Defendants argue that the incorporation
of safeguards distinguishes this case from Green Tree, where the arbitration clause was silent as to
costs, and therefore no cost-based discovery is appropriate here. They also argue that Plaintiffs
should not be allowed an extension of time to respond to the motion to compel arbitration.

Plaintiffs object to the limitation on discovering statistical information, arguing that statistical
information is highly relevant because it gives a context in which the plaintiffs’ costs may be
assessed. Defendants argue that if this Court grant discovery at all, it should adopt Judge Keys’
limitation.

This Court finds both parties’ objections unpersuasive. The fact that there are safeguards in
the rules against prohibitive costs does not alleviate the possibility that the ultimate costs Plaintiffs
will have to bear will be prohibitive. Plaintiffs should be granted the opportunity to show that their
costs could be prohibitive. Further, just as Defendants cannot rest on the safeguards in the rules as
an appropriate method of preventing prohibitive costs, Plaintiffs cannot rely on general statistical
information to show the likelihood that their costs will or will not be waived. Thus, this Court

adopts Judge Keys’ recommendations that Plaintiff be granted limited discovery to prove prohibitive


Defendants’ motion to compel arbitration, stay proceedings, and dismiss class claims [24-1], [24-2],

and [24-3] until Plaintiffs conduct their discovery and file their response.

Enter:

“Dowd U loa

David H. Coar

United States District Judge

Dated: March 4, 2002


Minate Order Form (06/97) , rn

rTM “
United St_.es District Court, Northern Districe of [inois

“Name of Assigned Judge i Sitting Judge if Other
or Magistrate Judge David H. Coar than Assigned Judge

CASE NUMBER 01 C 1659 DATE 3/4/2002

CASE Livingston, et. al. v. Associates Finance, Inc., et. al.

TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
Defendants’ motion to compel arbitration and
Plaintiffs’ motions for extension of time and for leave to pursue discovery

DOCKET ENTRY:

qd) a Filed motion of [ use listing in “Motion” box above.]

(2) a Brief in support of motion due

(3) Q Answer brief to motion due . Reply to answer brief due.

(4) Oo Ruling/Hearing on set for at

6 a Status hearing [held/continued to] [set for/re-set for] on set for at

(6) Oo Pretrial conference [held/continued to] {set for/re-set for] on setfor at .

(7) GC Trial [set for/re-set for] on at

(8) im [Bench/Jury trial] [Hearing] held/continued to at

(9) QO This case is dismissed [with/without] prejudice and without costs [by/agreement/pursuant to]

OCOFRCP4(m) {General Rule21 CFRCP41(a)(1) CO FRCP41(a)(2).

(io) =o [Other docket entry] For the reasons stated in the attached memorandum opinion and order, this
Court adopts the R&R and GRANTS Plaintiffs’ motion for extension of time to respond to Defendants’
motion to arbitration [39-1] and GRANTS in part Plaintiffs’ motion for leave to pursue discovery on the
issue of cost of arbitration only [38-1]. Discovery on this issue will be expedited and will close on April
15, 2002. This Court stays Defendants’ motion to compel arbitration, stay proceedings, and dismiss class
claims [24-1], [24-2], and [24-3] until Plaintiffs conduct their discoveryand file their,re:

(il) [For further detail see order attached to the original minute order.] is VY

No notices required, advised in open court. Document
No notess required umber of notices Number
Notices mailed by judge’s staff. \\e Q
Notified counsel by telephone. 2 ean Ya
VY | Docketing to mail notices. 0)
Mail AO 450 form 2 PES! docketinig deputy initials
27 Copy to judge/magistrate judge. ot
courwoom date mailed notice
mds(le) deputy’s F
initials os
Date/time received in
central Clerk’s Oftice nating dep



costs with respect to their specific case only and that they be granted the related motion for extension
of time to respond to the motion to compel arbitration.
C. AAA Bias

The third issue before Judge Keys was whether Plaintiffs should be granted discovery to
prove that the AAA is biased in favor of corporate defendants (such as Associates). Judge Keys
distinguished the cases Plaintiffs relied on for support by pointing out that those cases concerned
arbitral forums other than the AAA, and those arbitral forums were paid for by the employer and
were forums that had an incentive to please the employer. He also distinguished the cases by noting
that the AAA has taken precautions against bias and by expressly prohibiting the parties from
making compensation arrangements directly with the arbitrator. Thus, Judge Keys recommends
denying Plaintiffs’ request for discovery with respect to AAA bias.

Plaintiffs object to Judge Keys’ recommendation and argue that there already is evidence of
AAA bias in favor of the Defendants in this matter. Specifically, Plaintiffs point to the fact that the
AAA has objected to all of the plaintiffs discovery requests in Phillips, which essentially are the
same requests Plaintiffs here made prior to this Court’s stay of discovery earlier this year. Plaintiffs
also offer that the fact that the AAA files amicus briefs on behalf of defendants indicates bias and
that the AAA’s “promise” of balance and diversity amounts to nothing more than puffing.

This Court, however, is not persuaded that Plaintiffs’ offer of “evidence” establishes AAA
bias. Regarding AAA’s filing of amicus briefs, that the AAA supports arbitration is hardly
surprising considering that arbitration is precisely its business. Contrary to Plaintiffs’ beliefs,
corporations and the AAA can favor arbitration for vastly different reasons so that their interests are
not “completely intertwined in this regard.” Further, that the AAA objected to some of the discovery

requests in another case likewise does not indicate they are biased. As the letter from the AAA


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS — |

EASTERN DIVISION }} He METER

MAR = 6 2002

MARC LIVINGSTON and MICHELLE
LIVINGSTON

Plaintiffs,

No. 01 C 1659

HONORABLE DAVID H. COAR
CITIGROUP, INC.; CITIFINANCIAL

CREDIT COMPANY; ASSOCIATES

FIRST CAPITAL CORPORATION; and

ASSOCIATES CORPORATION OF

)

)

)

)

)

)

)

)

ASSOCIATES FINANCE, INC.; )
)

)

)

)

NORTH AMERICA )
)

)

)

Defendants.

MEMORANDUM OPINION AND ORDER
Marc and Michelle Livingston (“Plaintiffs”) sue Associates Finance, Inc., Citigroup, Inc.,
CitiFinancial Credit Company, Associates First Capital Corporation, and Associates Corporation of
North America (“Defendants”) under the Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq.
and various state laws. On May 14, 2001, this Court referred all discovery disputes, including
Plaintiffs’ motion for extension of time to respond to Defendants’ motion to arbitration and
Plaintiffs’ motion for leave to pursue discovery in response to Defendants’ motion to compel

arbitration. Intertwined with Plaintiffs’ motions is Defendants’ motion to compel arbitration.


cTMN rTM~

Magistrate Judge Arlander Keys issued his Report and Recommendation (“R&R”)! on June
22, 2001. Judge Keys recommends that Plaintiffs’ discovery motion be granted in part, and that
Plaintiffs be allowed limited discovery to pursue the possibility of prohibitive costs associated with
arbitrating their claims. Judge Keys further recommends that Plaintiffs’ related motion for extension
of time be granted so that Plaintiffs may undertake their discovery and have an opportunity to present
any significant findings in a new response to Defendants’ motion to compel arbitration. Judge Keys
rejected three of Plaintiffs’ four arguments against compelling arbitration, but he recommends that
this Court wait to decide Defendants’ motion to compel arbitration until afier Plaintiffs have
conducted their limited discovery regarding prohibitive costs.

Before this Court are both Plaintiffs and Defendants written objections to the R&R. For the
reasons stated below, this Court adopts the R&R and GRANTS Plaintiffs’ motion for extension of
time to respond to Defendants’ motion to arbitration and GRANTS in part Plaintiffs’ motion for
leave to pursue discovery in response to Defendants’ motion to compel arbitration.

I. Discussion

Under Federal Rule of Civil Procedure 72(b), this Court conducts de novo review of those
recommendations to which the parties object. Plaintiffs gave four reasons for why they should not
be forced to arbitrate their claims: (1) Plaintiffs rescinded the loan agreement that provides for
arbitration (and, therefore, there is no enforceable contract between the parties); (2) the cost of
arbitration is prohibitively high; (3) the AAA—the arbitral forum designated by the contract-is biased
in favor of Defendants; and (4) Defendants fraudulently induced Plaintiffs to enter into the
arbitration agreement. In his R&R, Judge Keys rejected arguments 1, 3, and 4, and Plaintiffs have

filed written objections to the rejection of these arguments, as well as an objection to Judge Keys’

' Livingston v. Assoc. Finance. Inc., No. 01 C 1659, 2001 WL 709465 (N.D. Ill. 2001).