In a recent opinion released by the Seventh Circuit court of Appeals, the court found that the attorney in charge of a trust was liable for all of the costs of arbitration when the arbitration committee sees fit to assess expenses against specific parties. This case is important because the costs applied after the trustee had settled all claims with the other party and applied even though the trustee had applied for bankruptcy. It also highlights the importance of knowing the level of fiduciary duty and responsibility taken when agreeing to become the trustee for a trust.
Facts of the Case
In 2008, Ms. Lauralee Bell sued Mr. Philip Ruben, a lawyer, for negligently and fraudulently mismanaging her trust, inflicting a loss of $34 million. Mr. Ruben asked to arbitrate the claims and she agreed, but before Ms. Bell could initiate arbitration Mr. Ruben filed for Chapter 7 bankruptcy. Ms. Bell filed an adversary complaint opposing discharge of Ruben’s fraud-based debt to her, and the bankruptcy judge granted Ruben a discharge of his other debts, but not of that fraud debt to Ms. Bell.
The parties went to arbitration where Ms. Bell settled her fraud and negligence claims against Mr. Ruben, even though his liability insurance did not cover fraud. The arbitration panel ruled that in respect to the fraud claim Mr. Ruben must pay the administrative fees and expenses of the American Arbitration Association (AAA), which totaled $21,200, and that the compensation and expenses of the arbitrators that had been advanced by Ms. Bell, totaling $150,304,54, must be the responsibility of Mr. Ruben, as well.
The rules of the AAA state that the expenses of arbitration shall be borne equally unless the parties agree otherwise or if the arbitrator assesses expenses against specific parties. Mr. Ruben refused to pay, and a bankruptcy judge ruled in favor of him. On appeal, the district court reversed and ruled in favor of Ms. Bell. Mr. Ruben then appealed to the Seventh Circuit Court of Appeals.
Ruling of the Court
The court ruled that Mr. Ruben was responsible for paying for the entirety of the arbitrator’s assessment against him, $171,504.54. The court reasoned that Mr. Ruben willingly chose to participate in the arbitration, thereby voluntarily exposing himself to the assessments of the AAA. In addition, the appeals court found that the total sum was meant as a sanction against Mr. Ruben for his fraudulent activity regarding Ms. Bell’s trust. If the amount was discharged in bankruptcy, the sanction would disappear.
The court also found that its belief that the assessment was meant as a punishment was reinforced by the findings in an Illinois Attorney Registration and Disciplinary Commission hearing against Mr. Ruben for his fraudulent conduct. Not only did the hearing find him guilty of fraud, it also noted additional aggravating factors like Mr. Ruben hiring additional counsel, incurring significant expense, and dragging the litigation with Ms. Bell out over the course of years.