Arbitration Can’t Be Efficient if the Parties (or Any Party) Won’t Let It Be
Sometimes the parties themselves conspire, wittingly or unwittingly, to make the process slower and more expensive than litigation.
Arbitration forum providers, arbitrators, and lawyers who regularly appear in arbitration proceedings all agree that arbitration should be managed as efficiently as possible, to the end that the process is, as intended, a speedier and less expensive dispute resolution process than litigation.
But, as a recent decision of the Tennessee Court of Appeals illustrates, the parties themselves sometimes conspire, wittingly or unwittingly, to make this admirable goal impossible. Rafia Nafes Khan v. Regions Bank, E2017-02454-COA- R3-CV (Tenn. Ct. App. Sep. 24, 2018), has already been to the Tennessee Court of Appeals three times, to the Tennessee Supreme Court and the U.S. Supreme Court, and appears likely to lead to yet another appellate go-round.
The plaintiff, Rafia N. Khan, and her husband obtained a joint line of credit with a ceiling of $80,000 in 2004. The line of credit was secured by real estate that Mrs. Khan purchased in her own name and quitclaimed to the Rafia N. Khan Irrevocable Trust shortly before she and her husband took out the line of credit. Mrs. Khan signed the deed of trust securing the line of credit both individually and as Trustee.
Mrs. Khan wanted to close the credit line in 2008; but before she could do so, her husband drew $40,000 on the line and deposited the proceeds in his individual checking account, evidently without her consent. The Khans then divorced.
Mrs. Khan requested the bank to release the lien on the deed of trust. The bank refused because of the debt resulting from her husband’s withdrawal. Mrs. Khan filed suit against the bank, in both her individual and fiduciary capacities, under the Tennessee Consumer Protection Act (TCPA) for its alleged “unfair act” in declining to release the lien on the deed of trust. The loan documents contained an arbitration provision, and the trial court stayed the action pending arbitration.
The bank sought to join Mr. Khan as a party to the arbitration. Mrs. Khan successfully resisted her former husband’s joinder. After a hearing, the arbitrator issued an award holding that (1) Mrs. Khan was not personally liable for the $40,000 draw on the line, (2) the bank did not violate the TCPA, (3) the lien of the deed of trust was valid, and the bank was not required to release it, and (4) Mrs. Khan owed the bank its attorney fees under the line of credit loan agreement. The arbitrator made no finding with respect to Mr. Khan, because he was not a party.
The bank moved the trial court to confirm the award. Mrs. Khan moved to vacate, arguing that the arbitrator had exceeded his powers under the arbitration agreement by failing to make any finding concerning her former husband’s liability. The trial court denied the bank’s motion and granted Mrs. Khan’s. The bank appealed. The Tennessee Court of Appeals reversed the trial court, holding that Mrs. Khan was precluded from arguing that the arbitrator exceeded his powers in the way she alleged because she had successfully resisted her husband’s joinder as a party to the arbitration.
Thus, the appeals court remanded the case to the trial court with directions to confirm the award as to the Trust, but not as to Mrs. Khan individually because she had received a discharge in bankruptcy while the appeal was pending. Mrs. Khan unsuccessfully sought review in the Tennessee Supreme Court and in the U.S. Supreme Court. Khan v. Regions Bank, 461 S.W.3rd 505 (Tenn. Ct. App. 2014), perm. app. den., id. (Tenn. 2015), cert. den., 136 S.Ct. 129 (2015). Before the trial court could confirm the now final award, Mrs. Khan was back in court in a new action, containing much the same allegations. But the trial court dismissed this case on the basis of the doctrine of prior suit pending, and the court of appeals affirmed. Khan v. Regions Bank, 2016 WL 3094917 (Tenn. Ct. App. 2016).
Back in the first case, the bank on remand moved the court for an award of post-arbitration attorney fees. Before ruling on this motion, however, the trial court entered a judgment confirming the arbitration award, as to the Trust and as to Mrs. Khan as Trustee. This prompted Mrs. Khan to bring a third complaint in which she attacked the judgment as void because the court had no jurisdiction over the Trust and because it imposed personal liability against her contrary to her discharge in bankruptcy. The trial court dismissed the third complaint, holding that the claims it asserted were res judicata under the first case. Mrs. Khan appealed again.
On September 24, 2018, the Tennessee Court of Appeals affirmed the dismissal. Khan v. Regions Bank, No. E2017-02454-COA- R3-CV (Tenn. Ct. App. 2018). The appeals court held that the doctrine of res judicata did not apply because the judgment of the trial court, which had yet to rule on the bank’s application for attorney fees, was not a final judgment. But the dismissal was nonetheless affirmed because the complaint failed to state a claim for which relief could be granted. Mrs. Khan’s argument that the court lacked jurisdiction over the Trust failed because Mrs. Khan’s joinder in her capacity as Trustee effectively made the Trust a party. Her other argument, that the trial court had improperly imposed personal liability, failed because the judgment she attacked had done no such thing.
So now, the saga is over. Or is it? The bank has never sought to foreclose the lien of its deed of trust. If and when it does, it is not a sure bet that the parties won’t be back in court again. Or maybe, in light of the arbitration provision in the loan agreement, back in arbitration. At the end of the day, will the clients complain about the inefficiency of the arbitration process?