Appellate Court Holds that Trial Is Needed to Determine Whether Commercial Dispute Must be Arbitrated

by Brian C. Haussmann

The recent case of Sturgill v. Santander Consumer USA, Inc., 2016 IL App (5th) 140380, demonstrates that while most motions to compel arbitration pursuant to a written contract will be determined based only upon the allegations of the plaintiff’s complaint and the language of the contractual arbitration clause, there are times when more information is needed for the court to determine the propriety of arbitration.  In such circumstances, the litigants may need to try the issue before the circuit court.

In Sturgill, the plaintiff purchased an automobile from Tri Ford Mercury, Inc., a dealer, pursuant to an installment contract that was financed pursuant to an assignment between plaintiff and Triad Financial Corporation (“Triad”).  Neither the installment contract with the dealer nor the assignment to Triad contained an arbitration clause.  About three years later, plaintiff and Triad entered into a “Modification and Extension Agreement” (the “Extension Agreement”) under whichTriad agreed to extend the payment schedule.  The Extension Agreement contained an arbitration clause requiring arbitration of a defined set of disputes with Triad.  It also prohibited class action arbitration and joinder of parties.    

Shortly thereafter, defendant Santander entered into an “Interest Purchase Agreement” with Triad in which it purchased certain membership interests in Triad and one of its affiliates.  The purchase agreement did not specifically identify any installment contracts as among the assets being purchased.  Nonetheless, plaintiff began making his installment payments to Santander rather than Triad.

Plaintiff alleged that he and Santander settled the balance of the debt for less than was owed, and he produced a one-page “Settled in Full” letter from Santander indicating as much.  He also produced an e-mail from Santander confirming the settlement and indicating plaintiff would shortly receive the title to his automobile.  When he did not receive the title, plaintiff filed a one-count putative class action complaint under the Illinois Vehicle Code, which requires delivery of a certificate of title within 21 days of an owner satisfying a lender’s lien.  Santander responded by moving to compel arbitration under the Extension Agreement between plaintiff and Triad.  Among other things, Santander disputed the authenticity and validity of the alleged settlement agreement.

Plaintiff argued in opposition to the motion to compel arbitration that (1) he had no agreement with Santander to arbitrate any claim; (2) the arbitration clause did not permit its assignment by Triad to third parties; (3) in any event there was insufficient evidence that Santander was the successor in interest to Triad under the Extension Agreement; and (4) that the settlement with Santander mooted the arbitration. 

In considering the motion, the circuit court expressed doubt that it had sufficient information to rule upon the validity of the settlement agreement or whether Santander was a successor in interest to Triad under the Extension Agreement.  Nonetheless, the court denied the motion to compel arbitration without expressly ruling upon those issues.

The appellate court first noted that because the arbitration clause expressly stated that the rules governing the arbitration were controlled by the Federal Arbitration Act (“FAA”), the question of arbitrability would be decided “under the substantive law of the FAA.”  2016 IL App (5th), ¶ 23.  Because the case was filed in state court, however, the case was still governed by Illinois procedures, including those set forth in the Illinois Uniform Arbitration Act (the “Uniform Act”).  Id.

Section 2(a) of the Uniform Act says that the court shall “proceed summarily” to determine the issues presented by a motion to compel arbitration and to render a “substantive disposition” of the issues raised by the motion.  Id., citing 710 ILCS 5/2(a) (West 2010).  The court noted that the directive to “proceed summarily” has been interpreted in Illinois to require “a civil or criminal proceeding in the nature of a trial conducted without the formalities (as indictment, pleadings and a jury) and used for the speedy and peremptory disposition of some minor matter.”  Id. at ¶ 25 (quotations and citations omitted).  The appellate court was careful to note that the trial court is not permitted to rule on the merits of the claims or defenses at this stage of the case. 

In other words, where the motion to compel calls for evidence, the court must conduct a limited bench trial.  In this case, because the circuit court had identified fact questions that were important to the question of arbitrability but had not resolved them through any summary proceeding, the appellate court reversed and remanded the case with instructions to conduct such a proceeding and resolve the factual disputes.

Litigators should take note of this case and be prepared to request and conduct an evidentiary hearing in cases where arbitrability cannot be decided as a matter of law on the face of the pleadings.  The Sturgill case also presents at least two important lessons for drafters of arbitration clauses.  First, attorneys should be careful to note in any arbitration agreement whether and how it can be assigned by either party to a successor.  Second, when drafting a settlement agreement of a contractual claim that contained an arbitration clause, counsel should not assume that a dispute arising out of the settlement will automatically be arbitrated.  If your client prefers arbitration, a new arbitration clause should be included in the settlement agreement or the old clause should be incorporated by reference.