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Dreher Tomkies LLP
Attorneys at Law
2750 Huntington Center
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Columbus, Ohio 43215
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On September 10, 2008, the Ohio Supreme Court agreed to hear discretionary appeals in Coleman v. American General Financial Services and Alexander v. Wells Fargo Financial Ohio 1, Inc. Nos. 2008-1009, 2008-0905. These cases concern the applicability of agreements to arbitrate to class action claims against lenders for failure to file documents after payment in full of a loan (in Coleman, the termination of a UCC-1 financing statement and in Alexander, the satisfaction of mortgage).

The plaintiffs in Coleman and Alexander filed class action complaints seeking to represent persons who paid their loans in full but for whom no document releasing their security had been filed as required by law. In both cases, the lenders filed motions to compel arbitration, claiming that the duties to file arose out of or related to the underlying loan transactions that were the subject of the loan agreements containing the relevant arbitration clauses and so fell within the scope of intended claims. The trial court in Coleman denied the lenders motion to compel, holding that the arbitration clause had no effect on a cause of action arising after the completion of the contract, but the trial court in Alexander granted the lenders motion in finding that the borrowers claims would not exist but for the transaction that was the subject of the arbitration agreement.

On appeal to the Eighth District Court of Appeals of Ohio, the Court of Appeals in both cases determined that the disputes were not subject to arbitration. See Coleman v. American General Financial Services, 2008 WL 803039 (Ohio App. 8 Dist., Mar. 27, 2008); Alexander v. Wells Fargo Financial Ohio 1, Inc., 2008 WL 803044 (Ohio App. 8 Dist., Mar. 27, 2008).

Despite the fact that the arbitration provision itself stated that mandatory arbitration applied even if [the borrowers] loan has been paid in full, the court in Coleman found that the dispute regarding the filing of a termination statement was not within the scope of the arbitration provision. The court relied on its prior holding in Bluford v. Wells Fargo Fin. Ohio 1, Inc., 176 Ohio App.3d 500 (Ohio App. 8 Dist., Feb. 21, 2008), a case presenting similar facts in which the court determined, despite similar language in an arbitration agreement that extended to disputes arising out of future dealings, that the arbitration agreement was not applicable to the borrowers claim against the lender for failure to file a termination statement. The opinions in both Coleman and Bluford also relied on the Ohio Supreme Courts decision in Pinchot v. Charter One Bank, F.S.B., 99 Ohio St.3d 390 (Ohio 2003), in which the Ohio Supreme Court determined that the recording of a mortgage satisfaction is not an integral part of the lending process because it occurs after the debt is satisfied and the extension of credit is extinguished.

The Eighth District Court came to a similar conclusion in Alexander, also refusing to enforce the arbitration agreement with respect to the borrowers class action claim. The opinion in Alexander also relied on Pinchot for the proposition that the recording of a mortgage satisfaction is not an integral part of the lending process. The court pointed out that a party cannot be required to arbitrate that which has not been agreed to as a subject of arbitration, and cited to Shumaker v. Saks, Inc., 163 Ohio App. No. 86098 (Ohio App. 8 Dist., Aug. 25, 2005), a case in which the court determined that a claim for violation of the Ohio Consumer Sales Practices Act, stemming from a department store employees preying on an elderly customer, was not related to the customers credit account. Because the lenders duty to release the mortgage lien arose after the note was satisfied by payment in full, the court in Alexander determined that the arbitration clause was not related to the lenders statutory duty to release the mortgage lien.

The Coleman and Alexander cases triggered strong dissents which advocated for the enforcement of the arbitration agreements with respect to the borrowers class action claims. Both dissents question the majority opinions reliance on Pinchot, as the Pinchot case did not involve the interpretation or applicability of arbitration clauses contained with loan agreements, but dealt solely with the issue of whether federal law preempted the application of a state statute requiring the recording of a mortgage satisfaction. The dissent in Alexander also questioned the relevance of the Shumaker case, as the claim in Shumaker could have been brought whether or not the department store customer had a credit account but the claim in Alexander could not have arisen without the loan agreement. Lastly, the dissenting opinions in both cases highlight the majority opinions failure to recognize that the lenders duties to file documents after payment in full of a loan, and the corresponding right to claim damages for failure to do so, do not arise until the loan agreements are extinguished.

These cases have not yet been scheduled for oral argument.

As lenders commonly use arising out of or relating to language in their arbitration clauses in an attempt to be as inclusive as possible, the outcome of these cases may have a broad impact on the ability of lenders to rely upon existing arbitration clauses. The law governing arbitration agreements continues to evolve. Contact us if you need assistance reviewing your arbitration clauses and responding to the latest trends and thinking.

-Mike Tomkies