costs.

DATED: June 22, 2001 RESPECTFULLY SUBMITTED:

Qiteuse, xo

ARLANDER KBYS
United States gistfate Judge

Counsel have ten days from the date of service to file objections
to this Report and Recommendation with the Honorable David H. Coar.
See Fep. R. Civ. P. 72(b); 28 U.S.C. § 636(b) (1). Failure to object
constitutes a waiver of the right to appeal. Egert v. Connecticut
Gen. Life Ins. Co., 900 F.2d 1032, 1039 (7th Cir. 1990).

-19-


III. This Court Does Not Recommend That Plaintiffs Be Allowed
Discovery With Respect To Potential Bias On The Part Of The
Arbitrators.

Plaintiffs argue that the AAA is biased in favor of corporate
defendants (such as Associates), and that, therefore, they should
be allowed discovery to prove this bias. However, the cases
Plaintiffs cite to support this proposition are not on point, as
they concern different arbitral forums than the AAA. Indeed, in
Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306, 309-10 (6th
Cir. 2000), cert. denied, 121 S. Ct. 763 (2001), Penn v. Ryan's
Family Steak Houses, Inc., 95 F. Supp.2d 940, 946 (N.D. Ind. 2000),
and Geiger v. Ryan’s Family Steak Houses, Inc., 134 F. Supp.2d 985,
994 (S.D. Ind. 2001), the arbitrator was Employment Dispute
Services, Inc. (“ESDI”) and not the AAA. This fact is significant
because, in the aforementioned cases, the court found that the
employer paid ESDI to provide an employment resolution forum,” and
that ESDI had an incentive to please the employer - a valued repeat
customer. In other words, these cases noted that, with ESDI, there
was a high probability of selecting biased arbitrators.

Significantly, the court in Floss specifically contrasted ESDI

'tronically, the fact that the AAA does not automatically
charge the corporate client the administrative fees helps shield
against bias, but then arguably supports Plaintiffs’ claim about
prohibitive costs.

-13-


DISCUSSION

In the case at bar, Plaintiffs advocate four reasons why they
should not be forced to arbitrate their claims: (1) they rescinded
the loan agreement that provides for arbitration (and, therefore,
there is no enforceable contract between the parties); (2) the cost

of arbitrating is prohibitively high; (3) the American Arbitration

3(...continued)
both individual and putative class claims pertaining to the
August 1999 Loan under TILA, TILA’s implementing regulations, and
state law, including the Illinois Consumer Fraud Act, 815 ILCA
505/2 (West 2001). (The class claims are not before this Court.)
On April 18, 2001, Defendants filed their Motion to Compel
Arbitration, requesting, inter alia, that the Court compel
arbitration of Plaintiffs’ individual claims and stay further
court proceedings pending completion of arbitration. On April
26, 2001, the District Court entered an Order staying all
discovery. On April 27, 2001, Plaintiffs filed their Discovery
Motion, seeking leave to take discovery pertaining to arbitration
costs and bias of the arbitrators. Defendants filed their
opposition to Plaintiffs’ Discovery Motion on May 2, 2001. The
next day - on May 3rd - Plaintiffs filed their Motion for
Extension of Time to respond to Defendants’ Motion to Compel
Arbitration. (This Motion for Extension of Time was predicated
on Plaintiffs’ request for discovery set forth in their Discovery
Motion.) On May 7, 2001, Plaintiffs filed their Preliminary
Response to Defendants’ Motion to Compel Arbitration
(“Preliminary Response”). On May 16 (or 18), 2001, the District
Court referred all discovery disputes to this Court, including
Plaintiffs’ Discovery Motion, and Plaintiffs’ Motion for
Extension of Time. (This Court assumes (as do the parties) that
it is also advising the District Court on Defendants’ Motion to
Compel Arbitration, which is intertwined with Plaintiffs’
Discovery Motion and Motion for Extension of Time.) On May 16th,
Defendants filed their Reply to their Motion to Compel
Arbitration.

-4-


fraud in the inducement argument, they misread the import of this
influential case. The Supreme Court in Prima Paint 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. Id. at 403-04. See also Sweet Dreams, supra, 1 F.3d
at 642, fn. 4 ("[A] court may consider a claim that a contracting
party was fraudulently induced to include an arbitration provision
in the agreement but not claims that the entire contract was the
product of fraud.”); Harter v. Iowa Grain Co., 220 F.3d 544, 550

(7th Cir. 2000) (“The party must show that the arbitration clause

itself... is vitiated by fraud [in order to unravel a contractual
arbitration clause].”) (emphasis in original) (citation and internal
quotations omitted). Here, because there are no particular

allegations of fraud with respect to the specific arbitration
agreement itself, this Court recommends that Plaintiffs’ fraudulent

inducement claim be submitted to arbitration.*

4 plaintiffs’ reliance on Moseley v. Electronic & Missile
Facilities, Inc., 374 U.S. 167, 171 (1963), Hullum v. Sherbondy,
931 F.2d 60 (9th Cir. 1991) (Table) and Toppings, supra, to argue
that the court should decide the fraud in the inducement claim is
entirely unpersuasive. Mosley was decided before Prima Paint,
and, therefore, is not good law. See, e.g., Arnold v. Arnold
Corp.-Printed Communications for Business, 920 F.2d 1269, 1280-81
(6th Cir. 1990) (finding that “{a]lthough in Mosley, it was

(continued...)

-17-


were prohibitive, and compelling arbitration). However, both of
these cases were decided prior to the Supreme Court’s recent
pronouncement in Green Tree Financial Corp. - Alabama v. Randolph,
121 S. Ct. 513 (2000).

In Green Tree, the Supreme Court acknowledged that a legitimate
reason to deny arbitration is if a party might “be saddled with
prohibitive [arbitration] costs”. 121 S. Ct. at 522. Because the
arbitration agreement at issue in Green Tree was silent with respect
to who paid the relevant arbitration costs, and because there was
limited evidence before the Court that the costs were, indeed,
prohibitively expensive, the Court compelled arbitration, finding
the plaintiff's ‘unfounded assumptions” regarding costs to be
“speculative”. Id. Significantly, the Supreme Court stated that
it is the burden of the party resisting arbitration to establish
excessive costs: 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. The Supreme Court, however, did not
discuss how the party resisting arbitration would establish that the
costs were prohibitively excessive: “How detailed the showing of

prohibitive expense must be before the party seeking arbitration

-9-


Unlimited, Inc. v. Dial-A-Mattress Intern., Ltd., 1 F.3d 639, 642
(7th Cir. 1993) (finding that recission claim “arose out of” the
underlying contract, and, therefore, was a question for arbitrator
and not for court); Dorsey v. H.C.P. Sales, Inc., 46 F. Supp. 2d
804, 806 (N.D. Ill. 1999) (rejecting the plaintiff’s claim that the
arbitration clause was unenforceable because the plaintiff
exercised right of recission for TILA violations, and referring

recission claim to arbitrator) (citation omitted) .° Therefore, the

4(...continued)
dispute must be arbitrated; the validity of this arbitration

agreement; . . . any claim or dispute based on an allegation of
fraud or misrepresentation, including fraud in the inducement of
this or any other agreement . . . any claim or dispute based on a
federal or state statute .. .”. Here, Plaintiffs argue that

recission occurred by operation of the relevant statute (TILA).
But, as explained infra, that question is for the arbitrator to
decide.

Sindeed, in Dorsey, the plaintiff argued that her agreement
to arbitrate all claims arising out of a loan contract was
unenforceable because she had purportedly rescinded the contract
under Section 1635 of TILA and Regulation 2 - the same argument
advanced by Plaintiffs in the case sub judice. The court found
this argument “unavailing”, however, and recognized that the
asserted recission claim arose out of the contract itself, and,
therefore, required arbitration. 46 F. Supp. 2a at 806. In
Plaintiffs’ Preliminary Response, they do not even address the
import of Dorsey, but instead rely on case law outside of this
jurisdiction. In Wilson v. Par Builders II, Inc., 879 F. Supp.
1187, 1190 (M.D. Fla. 1995), the court decided that it (and not
the arbitrator) had to decide the effect, if any, of the
plaintiffs’ notice of recission under TILA. However, even if
this Court were to find Wilson persuasive, it cannot go against

(continued...)

6-


Association (“AAA”) - the contractually-designated arbitrators -
are biased in favor of Defendants; and (4) Defendants fraudulently
induced them to enter into the arbitration agreement. Each of

these arguments will be addressed in turn.

I. There Is An Enforceable Contract Between the Parties; This
Court Recommends That The Question of Recission Should Be
Decided By the Arbitrator.

In their Preliminary Response, Plaintiffs argue that the
arbitration agreement is unenforceable because they rescinded the
August 1999 Loan pursuant to Section 1635 of TILA and its
implementing regulations, specifically Regulation Z. According to
Plaintiffs, the recission took place by operation of law, and any
basis for compelling arbitration no longer exists. While this may
be true, it is clear that, in the Seventh Circuit, whether an
arbitration agreement has, in fact, been rescinded is an issue for
the arbitrator, assuming that the scope of the arbitration
agreement includes all claims “related to” that agreement, which in

this case, it undisputedly does.‘ See, e.g., Sweet Dreams

4 The arbitration agreement, under the section “Disputes
Covered”, states, in pertinent part: “This agreement applies to
all claims and disputes between you and us. This includes,
without limitation, all claims and disputes arising out of, in
connection with, or relating to: your loan from us today; any
previous loan from us and any previous retail installment sales
contract or loan assigned to us; . . . whether the claim or

(continued...)

5-


CONCLUSION

The Court 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. Discovery, however, should be prescribed
to only allow Plaintiffs the ability to uncover information about
the specific costs they are likely to entail, and not general
statistical information. Accordingly, the Court further recommends
that Plaintiffs’ Motion for Extension of Time be granted, so that
Plaintiffs may undertake discovery, and have an opportunity to
present any significant findings in a new Response to Defendants’
Motion to Compel Arbitration. Finally, the Court, while outwardly
rejecting three of Plaintiffs’ four arguments for not compelling
arbitration, recommends that the District Court wait to decide
Defendants’ Motion to Compel Arbitration until Plaintiffs have had

an opportunity to pursue limited discovery regarding prohibitive

4, continued)
sufficient for the plaintiff to plead that the arbitration clause

was part of a broader fraudulent scheme, under Prima Paint, such
an allegation, without more, is no longer sufficient to overcome
the strong federal policy in favor of arbitration.”). Hullum is
an unpublished case in the Ninth Circuit and holds no
precedential value. Finally, Toppings does not involve
allegations of a scheme to defraud, and, in any event, holds no
precedential value in this Circuit.

-18-


Defendants’ point is well-taken, as there are cases within this
jurisdiction that have stated just that. See, e.g., Brown v. Surety
Fin. Serv., Inc., No. 99 C 2405, 2000 WL 528631, at * 3 (N.D. Tll.
March 24, 2000) (finding that the AAA Commercial Rules “contain
safeguards protecting plaintiffs from inordinate arbitration
costs.”); Thompson v. Illinois Title Loans, Inc., No. 99 C 3952,
2000 WL 45493, at *5 (N.D. Ill. Jan. 11, 2000) (rejecting plaintiff's

contention that arbitration costs, under the AAA, for TILA claims

6(.. continued)
deposit required by the American Arbitration Association . . . 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 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 the fees.” The Commercial Arbitration Rules confirm
that the “fees” only cover AAA administrative services and do not
cover arbitrator compensation or expenses, reporting services, or
any post-award charges incurred by the parties in enforcing the
award. (See Exhibit F of Plaintiffs’ Preliminary Response at 4.)
The Commercial Arbitration Rules also state that, while
administrative fees may be deferred or reduced, they will not be
waived. (Id. at 18.) Finally, the rules permit the arbitrator
to allocate or assess all arbitration expenses against any
specified party. (Id.) Therefore, it cannot be said with
confidence that Plaintiffs will not be saddled with prohibitive
costs.

-8-


© ‘Minute Order “Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge David H. Coar Sitting Judge if Other Arlander Keys
or Magistrate Judge than Assigned Judge
CASE NUMBER 01 C 1659 DATE 6/22/2001
CASE Mare Livingston vs. Associates Finance Inc
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 of the motion being presented.]

MOTION:

DOCKET ENTRY:

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

(2) a Brief in support of motion due

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

(4) im) Ruling/Hearing on__set for___—_at

(5) im) Status hearing[held/continued to] [set for/re-set for]on___setfor__at

(6) a Pretrial conference{held/continued to] [set for/re-set for] on_ setfor at

(7) a Trial[{set for/re-set for] on ____ at

(8) im) {Bench/Jury trial] [Hearing] held/continued to____at

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}
COFRCP4(m) General Rule 21 CFRCP41(a)(1) CO FRCP41(a)(2).

(10) a [Other docket entry] Report and Recommendation recommending that plaintiff’s 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. The Court further recommends that Plaintiff's Motion for Extension of Time be granted, so that
Plaintiffs may undertake discovery and have an opportunity to present any significant findings in a new response to Defendants’
Motion to Compel Arbitration. The Court, while outwardly rejecting three of plaintiffs’ four arguments for not compelling
arbitration, recommends that the District Court wait to decide Defendants’ motion to Compel Arbitration until plaintiffs have
had an opportunity to pursue limited discovery regarding prohibitive costs.

ql) x [For further detail see order attached to the original minute order.]

No notices required, advised in open court. 2Q

No notices required.
ea number of notices

XxX Notices mailed by judge's staff.

Notified counsel by telephone.

Docketing to mail notices.

Mai! AO 450 form.
K | Copy to judge/magisteate judge.

bfez/or

led notic
courtroom date mailed notice

AC6 deputy’s
initials

Gl JUN 22 PH 3:09

Date/time received in
central Clerk’s Office

mailing deputy initials



that they will be saddled with prohibitive costs, the Court
recommends that they at least be allowed limited discovery into this
arena, or the Supreme Court’s burden of proof enunciated in Green
Tree becomes a nullity.* The Court recommends, however, that such
discovery be strictly limited to the likely costs that Plaintiffs
will incur in this particular case if Plaintiffs are compelled to
arbitrate, as well as procedures regarding the waiving of fees and

costs.? Discovery requests shall not include requests for general

8 while there are no published cases after Green Tree that
explicitly discuss whether a party resisting arbitration should
be allowed limited discovery into the question of prohibitive
costs, this Court notes that Judge Guzman, in a minute order
dated May 25, 2001, — citing Green Tree - allowed limited
discovery into the likely costs that the plaintiff would incur if
compelled to arbitrate. Significantly, Judge Guzman noted that
Green Tree did not hold that, if the arbitration agreement
provides for arbitration fee allocations (as does the case sub
judice), there is no need for discovery as to the likelihood of
amassing prohibitive costs in arbitration. Rather, Judge Guzman
recognized that, without discovery, the plaintiff would be
foreclosed from trying to establish excessive costs, when the
Supreme Court placed that burden squarely on the plaintiff.
Arellano v. Household Finance Corp., No. 01 C 2433. While Judge
Guzman’s order is not published, and, therefore, holds no
precedential value, this Court notes that its reasoning is
persuasive and seems to be entirely consistent with the Supreme
Court's approach in Green Tree.

° In Bradford v. Rockwell Semiconductor Systems, Inc., 238
F.3d 549, 557 (4th Cir. 2001), the court noted that Green Tree
suggested a showing of individualized prohibitive expense to
invalidate an arbitration agreement. Bradford stated that an
individual who claims to be financially burdened by the fee-

(continued...)

-ll-


must come forward with contrary evidence is a matter we need not
discuss; for in this case neither during discovery nor when the case
was presented on the merits was there any timely showing at all."
Id. at 522-23 (emphasis added). Therefore, it appears that the
Supreme Court implicitly indicated that discovery would be the
appropriate vehicle to make particularized findings regarding
excessive costs.

Furthermore, it seems axiomatic that, if the Supreme Court
places a burden of proof on a party, then that party must be given
an opportunity to pursue discovery related to the issue that it has
the burden to prove. While Defendants argue that Plaintiffs have
all the information related to costs that they need (i.e. the
arbitration agreement itself and the AAA Commercial Rules), the
Supreme Court noted in Green Tree that such generic information is
not enough to satisfy the party’s burden of proof to prove excessive
costs.’ While this Court is extremely doubtful that Plaintiffs, in

the case sub judice, will ultimately be able to prove the likelihood

7 This limited evidence that the Supreme Court rejected as
too speculative to prove excessive costs was informational
material from the AAA and an article in the Daily Labor Report.
Green Tree, 121 S. Ct. at 522, fn. 6. Therefore, it appears that
more specific information is needed, and the only way that
Plaintiffs would be able to reasonably undercover such specifics
is through limited discovery.

-10-


Court recommends that the District Court reject Plaintiffs’
argument concerning recission of the loan agreement as a basis for
not compelling arbitration.

IL Based on the Supreme Court's Recent Opinion in Green Tree,
Infra, This Court Recommends that Plaintiffs Be Allowed
Limited Discovery Regarding the Costs of Arbitration.

as one of their reasons for urging the Court to reject
Defendants’ Motion to Compel Arbitration, Plaintiffs argue that the
costs of arbitration are prohibitively expensive, and seek discovery
to prove such an assertion. Defendants counter that the arbitration
agreement, as well as the Commercial Rules of the AAA, clearly
establish that the costs will not be prohibitive, as they are to be

allocated by the arbitrator at the conclusion of arbitration.®

ee

5(...continued)
the clear precedent established in this Circuit. The Seventh
Circuit case, Sweet Dreams, supra, clearly rejected Plaintiffs’
argument that recission may occur by operation of the pertinent
statute and, therefore, preclude arbitration. Rather, the
Seventh Circuit held that the recission claim “arose out of” the
underlying contract and was, therefore, a question for
arbitration. 1 F.3d at 642. The fact that Sweet Dreams
concerned the Illinois Franchise Act (and not TILA) is
insignificant, as its holding was not limited to any one statute.
Furthermore, the Seventh Circuit recently reaffirmed its holding
in Sweet Dreams in Harter v. Iowa Grain Co., 220 F.3d 544, 550-51
(7th Cir. 2000).

‘Phe arbitration agreement, in a section called “Costs of
Arbitration”, states, in pertinent part: “I£ you start
arbitration, you agree to pay the initial filing fee and required

(continued...)

-7-


BACKGROUND

From May 1995 to August 1999, Plaintiffs, Marc and Michelle
Livingston, entered into nine loan agreements with Defendant
Associates Finance, Inc. (“Associates”) . The loan agreements
contained an arbitration agreement, in which Plaintiffs and
Associates agreed to submit to arbitration “all claims and disputes
arising out of, in connection with, or relating to” the mortgage or
any other loan from Associates. At some point during the last
loan transaction (in August 1999), Plaintiffs became dissatisfied
with their relationship with Associates, and purported to rescind
the loan agreement under the federal Truth In Lending Act, (“TILA”),
15 U.S.C. § 1601, et. seq. (West 2001), and the federal regulations
associated with TILA, 12 C.F.R. § 226 (West 2001). Plaintiffs do
not want to arbitrate their claims, and the Motions before the
Court all center around whether Plaintiffs should be compelled,
pursuant to the arbitration agreement, to arbitrate their claims

against Associates.?

ee

2(...continued)
recommends that the District Court decide that issue after
Plaintiffs have had an opportunity to pursue limited discovery in
that area.

3The relevant procedural history of this case is as follows:
On March 8, 2001, Plaintiffs filed their Complaint, which raised

(continued...)

3.


which had a potential for bias, with the AAA, which implicitly the
court felt did not. See Floss, 211 F.3d at 314.

Furthermore, in Toppings v. Meritech Mortg. Services, Inc., No.
Civ. A. 2:00-1055, 2001 WL 408990 (S.D. W. Va. Apr. 23, 2001) ~-
another case relied on by Plaintiffs - the arbitral forum was the
National Arbitration Forum (“NAF”) and not the AAA. The Toppings
court noted the plaintiffs’ assertions that the NAF was “a creditor-
friendly arbitrator organization” whose directors “are former
employees of lending institutions and members of the defense bar
that have specialized in representing lenders in litigation against
consumers.” 2001 WL 408990. The Toppings court also noted the
plaintiffs’ assertion regarding the way NAF marketed its services.
Id. Therefore, the Toppings court allowed discovery into possible
pias of the NAF forum. Here, however, the AAA has taken precautions
against such bias, such as publishing The Code of Ethics for
Arbitrators in Commercial Disputes (attached to Defendants’ Reply
as Exhibit A), and by expressly prohibiting the parties from making
compensation arrangements directly with the arbitrator and, instead,
mandating that they be paid through the AAA itself. (Commercial

Rule R-53(d), attached as Exhibit F to Plaintiffs’ Preliminary

-14-


plaintiff was merely seeking to embark on a fishing expedition on
that issue.

IV. The Court Recommends That The Fraud In The Inducement Claim Be
Decided By An Arbitrator.

The Plaintiffs’ final argument is that they should not be
compelled to arbitrate their claims, as Defendants fraudulently
induced them to agree to arbitrate. However, fatal to this argument
is that Plaintiffs’ fraud claim is based on alleged fraud in the
entire loan agreement - and not just the arbitration agreement. In
their Preliminary Response, Plaintiffs explain that, by August 1999,
when Plaintiffs entered their last loan transaction with Associates,
Associates already knew that it was under investigation by the
Federal Trade Commission, and failed to disclose this material fact,
in violation of the Illinois Consumer Fraud Act. However, assuming
this allegation is true, the fraudulent scheme alleged implicates
the entire loan agreement and is not particularized to the
arbitration agreement. While Plaintiffs cite Prima Paint Corp. v.

Flood & Conklin Mfg., Co., 388 U.S. 395 (1967) to support their

8. continued)
NAF, Judge Guzman noted that the NAF rules provide for the
exercise of one peremptory strike of a proposed arbitrator.
Here, with the AAA, this Court notes that both parties are
involved in selecting the arbitrator, and any arbitrator may be
subject to disqualification for bias. (Commercial Rule E-5.)

-16-


limited discovery with respect to the likely fees and costs that
they will be expected to incur pursuant to the arbitration
agreement, and for the reasons set forth below, this Court
recommends that Plaintiffs’ Discovery Motion be granted in part,
that Plaintiffs’ Motion for Extension of Time be granted, and that
Defendants’ Motion to Compel Arbitration be stayed until after
Plaintiffs have had an opportunity (after limited discovery) to

respond to Defendants’ Motion to Compel Arbitration.?

2By recommending that Plaintiffs be allowed limited
discovery into the area of costs and fees associated with
arbitrating their claims, the Court must necessarily recommend
that they be allowed to file a new Response (they have only filed
a Preliminary Response) to Defendants’ Motion to compel
Arbitration, if their discovery bears any fruit. As discussed
infra, the Court has serious doubts that limited discovery into
costs will result in Plaintiffs being able to effectively
challenge arbitration on the grounds of “prohibitive costs”.
Nonetheless, by allowing discovery, Plaintiffs necessarily need
an avenue to present any significant findings. Therefore, at
this juncture, this Court cannot recommend a definitive ruling on
Defendants’ Motion to Compel Arbitration, as discovery has not
yet been completed. However, this R & R does, indeed, discuss
all of the substantive issues raised by Defendants in their
Motion to Compel Arbitration, and recommends that, except for the
issue of prohibitive costs (which cannot be addressed until after
discovery), Plaintiffs be forced to arbitrate their claims. In
other words, as discussed in detail infra, this Court finds that
the issues of recission of the underlying contract and fraud in
the inducement can be properly addressed by the arbitrator. This
Court also finds that there does not need to be any discovery
with respect to the potential bias of the arbitrators.
Therefore, this R & R contemplates only one potential avenue of
challenging the arbitration agreement - prohibitive cost - and
(continued...)

-2-


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

MARC LIVINGSTON and
MICHELLE LIVINGSTON, No. 01 C 1659
Plaintiffs,
Judge David H. Coar
Vv.

ASSOCIATES FINANCE, INC.,
CITIGROUP, INC.,
CITIFINANCIAL CREDIT COMPANY,
ASSOCIATES FIRST CAPITAL
CORPORATION, and ASSOCIATES
CORPORATION OF NORTH AMERICA

Magistrate Judge
Arlander Keys

JUN 25 2001

Defendants.

TO: THE HONORABLE DAVID H. COAR
UNITED STATES DISTRICT COURT JUDGE

REPORT AND RECOMMENDATION
Before the Court are Defendants’ Motion to Compel Arbitration
and Stay Proceedings, and, In Addition, To Dismiss Class Claims
(“Defendants’ Motion to Compel Arbitration”); Plaintiffs’ Motion
for Leave to Pursue Discovery In Response to Defendants’ Motion to
Compe] Arbitration (*“Plaintiffs’ Discovery Motion”) ; and
Plaintiffs’ Motion for Extension of Time to Respond to Defendants’

Motion to Compel Arbitration (“Plaintiffs' Motion for Extension of

Time”). Because this Court recommends that Plaintiffs be allowed

! The Court will not address the class claims in this Report
and Recommendation (“R & R”). That issue is before the District
Court.


statistical information, because such information is irrelevant as
to Plaintiffs’ costs in this specific case. In sum, while cognizant
that Plaintiffs should not be allowed to embark on a fishing
expedition, this Court believes they should at least be given a
fighting chance to prove prohibitive costs with respect to the
specific statutory right at issue. The total costs, of course, are
not just the administrative fee, but include all fees associated
with arbitration, including (but not limited to) the arbitrator's

fees and expenses.”°

%(...continued)
splitting provision in an arbitration agreement should raise
objections to the fee-splitting arrangement by including a
specific forecast of his expected costs and his expected
financial burden prior to the beginning of arbitration. Id. at
559, fn. 7. Here, Plaintiffs are, essentially, requesting
discovery so that they can try to make the requisite showing
prior to arbitration.

Was an alternative, the District Court could follow the
approach in Giordano v. Pep Boys - Manny, Moe, & Jack, Inc., No.
CIV. A. 99-1281, 2001 WL 484360, at *5-6 (E.D. Pa. March 29,
2001), where the court, noting Green Tree, compelled arbitration,
but found the cost-sharing provision in the arbitration agreement
(which required both parties to equally share the expenses, and
the initiating party to pay the filing fees) unenforceable. The
court, then, merely struck the cost-sharing provision of the
arbitration agreement - resulting in the defendant employer
paying all the costs - but still compelled arbitration.
Therefore, to the extent that Plaintiffs prove the costs are
prohibitive with respect to the specific statutory right at
issue, the District Court could compel arbitration, and then
order Associates to pay the costs associated with arbitration.

-12-


Response. )??

The only case cited by Plaintiffs in which a court allowed
discovery regarding potential bias of the AAA forum was in Phillips
v. Associates Home Equity Services, Inc., No. 01 c 1944, in which
Judge Kennelly, in an oral ruling on June 6, 2001, did not preclude
it. In that case - while expressing his doubts that the plaintiffs
would be able to show that the AAA is biased in favor of lenders in
cases such as this - Judge Kennelly, nevertheless, granted expedited
discovery on that issue. Because the ruling was made from the
bench, with little argument, the rationale for that ruling is not
known. This Court notes, however, that, in his May 25, 2001 Order
in Arellano, supra, contrary to the court in Toppings, Judge Guzman
specifically denied a plaintiff's motion to pursue discovery with
regard to the potential bias of the NAF. In his ruling, Judge
Guzman rejected the plaintiff's argument regarding a “strong

potential for bias” on the part of the NAF,*? and agreed that the

2 plaintiffs also argue that the AAA has filed amicus curiae
briefs in support of corporations — instead of individuals - and
that such support illustrates potential bias. However, the AAA
merely supported the non-substantive result in favor of the
extra-judicial arbitral forum in such cases, and did not advocate
for or against the corporation in the underlying claim.
Therefore, Plaintiffs’ argument in this regard is unavailing.

Btn not allowing discovery into the potential bias of the
(continued...)

-15-