76 J. Kan. Bar Assn. 5, 28 (2007). Jurisdiction of Arbitrators to Decided Their Own Jurisdiction: Competence-Competence in Kansas and MBNA America Bank N.A. v. Credit.

• Author: By Christopher R. Drahozal

Kansas Bar Journals

Volume 76.

76 J. Kan. Bar Assn. 5, 28 (2007).

Jurisdiction of Arbitrators to Decided Their Own Jurisdiction: Competence-Competence in Kansas and MBNA America Bank N.A. v. Credit

Kansas Bar Journal Volume 76, May 2007 76 J. Kan. Bar Ass'n 5, 28 (2007) Jurisdiction of Arbitrators to Decided Their Own Jurisdiction: Competence-Competence in Kansas and MBNA America Bank N.A. v. Credit By Christopher R. Drahozal I. Introduction

An arbitration decision by the Kansas Supreme Court is a rare thing - sufficiently rare that when one comes along it is important that it be right. Unfortunately, the Court's recent arbitration opinion, MBNA America Bank N.A. v. Credit,1 while reaching a defensible result, contains an unfortunate dictum that, if followed, would put Kansas out of step with well-accepted principles of American arbitration law.

The issue is one of arbitral authority: do arbitrators have jurisdiction to decide their own jurisdiction, and, if so, to what extent? The Kansas Supreme Court asserted in Credit that an arbitration proceeding must stop if a party complains to the arbitrators that it has not agreed to arbitrate - in other words, arbitrators have no authority to address the issue of assent (which is the basis for their jurisdiction), even in the first instance. Such a view is flatly contrary to the usual approach under both the Uniform Arbitration Act (UAA), which Kansas has enacted, and the Federal Arbitration Act (FAA). Practicing attorneys should recognize that the language is dictum and challenge such assertions in future cases.

II. Facts

MBNA initiated an arbitration proceeding under the Code of Procedure of the National Arbitration Forum (NAF)2 against Loretta K. Credit, in which it sought to recover an alleged credit card debt of more than $21,000. Credit did not participate in the arbitration proceeding, other than to write a letter to the arbitrator objecting that she had not agreed to arbitrate.3 Nor did she seek to enjoin the arbitration proceeding. Likewise, MBNA did not petition a court to compel Credit to arbitrate. Instead, it proceeded with the arbitration in Credit's absence - i.e., on an ex parte basis.

On Sept. 7, 2004, the arbitrator ruled in favor of MBNA and awarded it $21,094.74. In the award, the arbitrator found that "the Parties entered into an agreement providing that this matter shall be resolved through binding arbitration."4 The award included a certificate of service, signed by the director of arbitration for the NAF, which provided as follows:

This award was duly entered and the Forum hereby certifies that a copy of this Award was sent by first class mail postage prepaid to the parties at the above referenced addresses on this date.5

The record contained no evidence that Credit actually received the award. At oral argument, she stated that the address listed on the award was her correct address but that she did not know if she had ever received the award.

MBNA moved to confirm the award at the end of December 2004. It did not file a copy of the arbitration agreement with its motion. In response, Credit filed a pro se motion to vacate the award, arguing that she had never agreed to arbitrate the dispute. MBNA challenged the motion as untimely because it was filed more than 90 days after the date shown on the certificate of service.6 The district court nonetheless vacated the award, finding that "there is no existing agreement between the parties to arbitrate and therefore the award entered against Defendant is null and void."7

III. The Kansas Supreme Court Decision

The Kansas Supreme Court affirmed. It identified one controlling question: "Did Credit's effort to thwart confirmation of the award come too late? If so, the district court did not have authority to vacate the award. If not, the district court had the authority it needed to enter its rulings."8 In answering that question, the Court indicated that it "evaluated both federal and state law as well as National Arbitration Forum rules when relevant."9

The Court's analysis proceeded in four steps. The first two steps addressed the timeliness issue, and the last two steps addressed the correctness of the district court's rulings on MBNA's motion to confirm and Credit's motion to vacate.

First, the Court stated that MBNA could not "rely on Credit's tardiness in challenging the award" because she denied that she had agreed to arbitrate.10 There is authority supporting that proposition, although the Court does not cite it.11 In MCI Telecommunications Corp. v. Exalon Industries Inc.,12 for example, the 1st Circuit held (under the FAA) that the time limits for challenging an award do not apply when a party challenges the existence of an arbitration agreement. According to the court of appeals:

A party that contends that it is not bound by an agreement to arbitrate can, therefore, simply abstain from participation in the proceedings, and raise the inexistence of a written contractual agreement to arbitrate as a defense to a proceeding seeking confirmation of the arbitration award, without the [time] limitations contained in section 12, which are only applicable to those bound by a written agreement to arbitrate.13

There is contrary authority as well,14 although professor Alan Scott Rau states that "[t]he correct rule is undoubtedly stated in MCI Telecommunications."15

Second, because the arbitration award was not served on Credit as required by the Kansas Uniform Arbitration Act (KUAA), the Court held that the time for filing a motion to vacate the award never began to run.16 As a result, Credit's motion to vacate was not untimely. The Court found service flawed in two respects under the KUAA. First, the certificate of service recited that the NAF (rather than the arbitrator) had served the award. Second, the award was served by regular mail rather than by certified mail or personal service.17 Of course, service of the award appears to comply with the NAF Code of Procedure, which provides that the "Forum shall serve a copy of the Award upon all Parties or their Representatives or as directed by any Party"18 using "the postal service of the United States or any country, or . . . a reliable private service, or . . . facsimile, e-mail, electronic, or computer transmission."19 Because the KUAA requirements for service apply only when the parties have not agreed otherwise,20 service appeared improper to the Court only because of the dispute over the existence of an arbitration agreement (compounded by MBNA's inexplicable failure to attach the arbitration agreement to its motion to confirm the award).

Third, the Court concluded that the district court properly denied MBNA's motion to confirm. According to the Court, MBNA's failure to attach a copy of the arbitration agreement to its motion "violated the Federal Arbitration Act" and "alone would have justified the district court in its decision to deny MBNA's motion to confirm the award."21 The Court does not suggest, however, that the KUAA contains such a requirement.

Fourth, the Court held that the district court properly vacated the award. The fact that a party did not agree to arbitrate is a ground for vacating an award under both the KUAA (because "[t]here was no arbitration agreement")22 and the FAA (because "the arbitrators exceeded their powers").23 The Court emphasized that "MBNA made no legally sufficient response" to Credit's contention that she had not agreed to arbitrate.24

At the end of its opinion, the Court noted a number of other cases (including one from the Kansas Court of Appeals25) that "appear to reflect a national trend in which consumers are questioning MBNA and whether arbitration agreements exist."26 Interestingly, of the six non-Kansas cases cited by the Court, two actually upheld lower court decisions confirming awards in favor of MBNA.27 Moreover, the Court did not cite two very recent cases from the U.S. District Court for the District of Kansas, both of which compelled cardholders to arbitrate their disputes with MBNA.28 The...