Unable to Pay for Arbitration? The 9th Circuit Says You Still May Have Fulfilled Your Duty to Arbitrate
By: Komal Chokshi
In a June 2016 decision in Tillman v. Tillman, No. 13-56624, 2016 WL 3343785, the 9th Circuit allowed a party to retreat back to District Court after being ordered to arbitration. Renee Tillman was represented by the firm of Rheingold, Valet, Rheingold, Shkolnik & McCartney in a wrongful death lawsuit brought after her husband, Tim, died in a trucking accident. She prevailed, but both Tillman and the firm were sued by Tim’s son from a previous marriage, Sean Tillman, who alleged he was wrongfully excluded from the suit as an heir. The claim against the firm was dismissed, but the claim against Renee Tillman proceeded. She sued the firm, alleging legal malpractice for failure to advise her of the other heirs’ rights. The firm moved to compel arbitration under the retainer agreement it had with Renee Tillman, which required arbitration with the American Arbitration Association (AAA).
Renee Tillman challenged the necessity of certain costly aspects of the arbitration, including the “case-within-a-case” treatment of the arbitration which required the arbitrator to re-hear witnesses and evidence presented in the underlying wrongful death case. Despite borrowing money and having certain costs fronted by her attorney, Tillman was unable to make the required deposit of $18,562.50, the firm declined covering the costs and the arbitration was terminated due to the lack of a deposit. The firm turned to the District Court, invoking Federal Rule of Civil Procedure 41(b) which states, “[i]f the plaintiff fails to prosecute or to comply with these rules or a court order, a defendant may move to dismiss the action or any claim against it.” The firm claimed Renee Tillman’s failure to pay the arbitration deposit was a violation of the Court’s order to arbitrate. Before ruling on the firm’s 41(b) motion, Tillman was allowed to submit documentation demonstrating she was unable to pay for the arbitration because the funds from the wrongful death suit had been exhausted and the District Court agreed that Tillman did not have the financial resources to pay the arbitration deposit. Despite this finding, the District Court dismissed the case because (a) the AAA allowed the arbitrator to suspend the proceedings for non-payment and (b) under the Federal Arbitration Act (FAA), the Court was barred from hearing the claims that were subject to arbitration under the parties’ agreement.
The 9th Circuit disagreed. The Court of Appeals pointed out that the FAA only requires courts to stay proceedings on issues subject to arbitration “until such arbitration has been had in accordance with the terms of the agreement.” 9 U.S.C. § 3. Thus, the Court was required to determine whether the arbitration had “been had” despite the fact the proceedings were suspended prior to an award being rendered. The Court of Appeals determined all the requisite steps had been followed here (arbitration was compelled, the parties participated, arbitration was terminated, etc.). The Court of Appeals then looked to its other duties under the FAA which include compelling arbitration in the event of a party’s “failure, neglect or refusal” to arbitrate under 9 U.S.C. § 4 and to enforce a valid award resulting from an arbitration under 9 U.S.C. §§ 9-11. The Court found there was no “failure, neglect or refusal” to arbitrate on the part of Tillman who genuinely could not afford to go forward and there was no award to be enforced. Furthermore, the firm could not point to any authority under the FAA requiring dismissal of Tillman’s claims under these circumstances. The 9th Circuit reversed and remanded the case for the reasons cited above and because “[a]s Tillman’s arbitration terminated before the merits were reached or any award issued, allowing her case to proceed in district court is the only way her claims will be adjudicated.”