Supreme Court Season Opens with Green Tree: High Court Also to Hear Farm Credit Tax Case

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The United States Supreme Court today was to hear arguments in a case challenging the enforceability of mandatory arbitration clauses in customer contracts, the first of three cases with implications for the banking industry that are before the high court this session.

In addition to Tuesday's case, Green Tree Financial Corp.-Alabama v. Randolph, the court has scheduled Nov. 28 oral arguments in Missouri Director of Revenue v. CoBank ASB, in which it will decide the tax status of Farm Credit System banks. A third case, Murphy v. Beck, which questions the extent to which the Federal Deposit Insurance Corp. can protect failed banks from lawsuits, has not been scheduled, but will likely be heard early next year.

Of the three, it is the Green Tree Financial case that could have the broadest impact on the banking industry. Many institutions, particularly credit card banks, require that customers sign a contract promising to avoid lawsuits and submit to binding arbitration in the event of billing disputes and other disagreements. Arbitration is less costly for lenders, and typically reaches a conclusion much sooner than a lawsuit.

"Bankers that already use mandatory arbitration clauses in their consumer contracts have an obvious interest in the case, and those that don't should be thinking about it," said Michael F. Crotty, the American Bankers Association's deputy general counsel for litigation. "This decision, however it turns out, ought to be a factor in deciding whether to adopt this policy or not."

The case was sent to the high court after a federal appeals court ruled that an arbitration clause in a contract between an Alabama affiliate of Green Tree and Larketta Randolph was unenforceable.

Ms. Randolph, who financed a $39,000 mobile home through the company, claimed that the contract unfairly hid the potential costs of arbitration from her, and the U.S. Court of Appeals in Atlanta ruled in her favor. However, the appellate court failed to rule on a separate issue: whether or not the case should have reached the appeals court in the first place.

Green Tree's appeal to the Supreme Court contends that Ms. Randolph should not have been allowed to appeal a lower-court ruling that compelled her to enter arbitration, and that the appeals court ruling should be voided because it did not have jurisdiction in the case.

Second, Green Tree claims that the finance contract contained all the necessary disclosures to let Ms. Randolph understand the implications of agreeing to binding arbitration.

An attorney knowledgeable about the case said that the court cannot avoid deciding the question of whether the appeal should have been allowed, but may elect to stop there instead of wading into questions about the contract itself.

"If the court reaches beyond the purely procedural issue regarding the timing of appeals," he said its decision "will either reinforce or disrupt the long-standing federal policy in favor of arbitration. …