Supreme Court to Hear Challenge to Mandatory Arbitration Clauses

By Seiberg, Jaret | American Banker, October 4, 1994 | Go to article overview
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Supreme Court to Hear Challenge to Mandatory Arbitration Clauses


Seiberg, Jaret, American Banker


WASHINGTON -- The U.S. Supreme Court today hears a controversial Case that will determine whether banks can include mandatory arbitration clauses in contracts with customers. The high court will hear the dispute on the second day of a fall term that features a variety of cases that can affect the banking industry.

The arbitration case, Allied-Bruce Terminex vs. Dobson, could dictate the future of mandatory arbitration clauses that banks have started using, said Michael F. Crotty, general counsel to the American Bankers Association. "The question is whether the federal arbitration act overrides any state anti-arbitration laws,"' Mr. Crotty said.

If the court sides with the state, it would make many arbitration clauses unenforceable, according to briefs filed in the case.

The contracts, used mainly by West Coast banks including Bank of America, require that all disputes go to arbitration, a quasi-judicial proceeding where experts rather than judges issue decisions.

Businesses are increasingly looking at mandatory arbitration as one way to reduce legal expenses because these sessions are considerably less costly to litigate than suits tried in court.

The ABA, in a friend of the court brief, argues that Alabama cannot be allowed to scuttle the clear intent of Congress.

"Alabama's policy against arbitration must not be allowed to tramp federal policy in favor of arbitration," Mr. Crotty wrote in the brief.

Also scheduled for oral argument today is a case pitting a mortgage company against a bankrupt development company.

U.S. Bancorp Mortgage Co. vs. Bonner Mall Partnership could have determined how likely bankers would be to recoup money from bankrupt estates.

The 9th Circuit had ruled that debtors should be allowed to retain their equity stakes if they bring new money to the deal.

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Supreme Court to Hear Challenge to Mandatory Arbitration Clauses
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