While arbitration is a common vehicle used to resolve disputes in the employment, labor and construction arenas, commercial finance firms have historically chosen to place their confidence in the courts when it comes to resolving financial disputes. Some lenders have viewed arbitration with hesitancy and perceived a lack of expertise of commercial finance transactions amongst arbitrators. Recently, however, there has been a growing acceptance of this time-tested practice and some lending firms are including arbitration clauses in their transaction agreements.

ABL Advisor recently sat down with two innovators advancing the use of arbitration in resolving commercial finance disputes. Jeffrey T. Zaino, Esq., is a vice president of the Commercial Division of the American Arbitration Association, where he oversees administration of the large, complex commercial caseload in New York. Jeffrey A. Wurst, Esq., is a veteran commercial finance attorney and a senior partner at Ruskin Moscou Faltischek, P.C. in New York, where he chairs the firm’s Financial Services, Banking and Bankruptcy Department.

ABL Advisor: Why at this point in your career are you focusing on alternative dispute resolution?

Jeffrey Wurst: Well, first let me say that mediation has long been a tool used to resolve commercial finance matters. Over 20 years ago I was involved in a bankruptcy dispute and then-Chief Judge Lifland ordered us to mediation. To my pleasant surprise, we were able to find a common ground and we resolved our differences without costly litigation. Since then I have been a firm believer in mediation and have participated in dozens of mediations. Some of these resulted in a resolution and some of did not. Where a resolution was not reached we generally made progress in narrowing the issues to be tried.
   
ABL Advisor: But what about arbitration? Why the interest in that?
   
Wurst: For over 30 years, I have devoted my professional life almost exclusively to commercial finance law. I started my career doing loan recovery work for a finance company that had been acquired by a major bank. That included litigation in state and federal court, as well as in bankruptcy courts. Over the years that experience grew into commercial finance transactions including factoring, asset-based lending, cash flow and C&I loans, as well as large syndicated facilities. Notwithstanding, I continued to be pulled back into what I considered to be the heart of lending—recovering loans that have not performed as originally anticipated. The majority of my work has been in the state and federal courts (and bankruptcy courts) in the State of New York, although I have always had matters throughout the United States and I do appear with some regularity in courts other than my home base. For example, I am admitted to practice in many of the federal district courts, and have been admitted pro hac vice in over a dozen other jurisdictions.

ABL Advisor: What makes this topic relevant today?

Wurst: I have recently been spending more and more time in federal courts outside the major commercial centers. When I am unfamiliar with a judge’s pedigree (decisions, experience) I engage in some research to discover the types of cases the judge has ruled on and also look at his or her calendar to get a sense of how familiar they are with commercial finance law. As a result it is my perception that federal judges spent most of their time on criminal, employment and civil rights cases. Once you get out of the major financial centers it is rare that you will find a judge who, other than deciding an occasional bankruptcy appeal, has written a decision concerning the Uniform Commercial Code or any doctrine related to commercial finance law. I have found that often we are finding judges who have few or no reported decisions on the UCC or other lending type of issues.

ABL Advisor: So, what does this mean to commercial lenders?

Jeffrey Zaino: It means that when it comes to commercial finance law, there is a shortage of experienced judges who sufficiently understand the issues that commercial lenders deal with every day. For many financial cases, institutions such as the American Arbitration Association (AAA) see industry experts being selected to serve on the Tribunal rather than former judges. The AAA has far more industry experts on its panel in comparison to judges. This is not to say that competent judges cannot and do not render fair and scholarly decisions in cases of commercial finance law. It does suggest, however, that the litigants may be subject to more of a judge’s learning curve than they should in addressing commercial finance law issues with them.

ABL Advisor: Are you saying that judges are not the best choice to determine commercial finance matters?

Zaino: No. I am saying that in some jurisdictions you may have a difficult time getting a judge experienced in commercial finance matters. Even in major commercial centers the judge assigned to your case may be inexperienced in financial matters. Judges, however, can play a valuable role in some financial cases with complicated legal issues.

Wurst: These revelations have caused me to consider alternatives to the traditional methods of resolving disputes between borrowers and lenders and even between lenders and other lenders.

Zaino: Over a dozen years ago the American College of Commercial Lawyers and the AAA compiled their joint Resolving Commercial Finance Disputes, A Practical Guide, including Sample Clauses and Mediation and Arbitration, Amended and Effective September 15, 2005.

Wurst: It appears that the Practical Guide, although an excellent and forethinking work, unfortunately did not result in a dispute resolution tool actually used by litigants in commercial finance disputes. Then in 2011, the American Bar Association Business Law Section’s Task Force on Alternative Dispute Resolution in Commercial Finance Transactions jointly with its Subcommittee of the Section on Dispute Resolution in Commercial Finance Transactions issued its Final Report and Supplementary Arbitration Rules For Commercial Finance Transactions. Again, an excellent effort and legal product but no one appears to have picked up the ball to advance the concept.

ABL Advisor: What is the concept?

Wurst: The concept is to change from the traditional use of courts to resolve disputes between lenders and borrowers, or between lead lenders and participants, or between parties to intercreditor agreements, etc. Courts take too long to resolve a dispute and the dispute is much too costly. And when what can’t go wrong does go wrong, it is a public record that is used for precedential effect on other lenders.

Zaino: Arbitration, on the other hand, is much quicker, generally involves less discovery, and requires a decision promptly following the close of the case - usually within thirty days. The word “discovery” is not even used in the AAA Commercial Rules, rather the rules reference “discovery” as being “an exchange of documents.” And, the decision is private and confidential.

ABL Advisor: How do you make the transition from litigation to arbitration?

Zaino: The first step in moving to arbitration and away from the court lies in the agreements. Instead of the typical jurisdictional clause (e.g. All disputes under this Agreement will be brought in the state or federal courts situated in the State of New York, County of New York) the agreement needs to contain an arbitration clause (e.g. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the rules of the American Arbitration Association then in effect). Institutions like the AAA have online tools like ClauseBuilder where clauses can be easily put together. The public can access the AAA’s ClauseBuilder at: www.clausebuilder.org

Wurst: Lenders typically utilize arbitration provisions in their employment agreements but rarely in their loan or intercreditor agreements. It is time for a change - for lenders to provide for arbitration in their loan agreements.

ABL Advisor: If arbitration is the panacea, as you think it is, how do you get it into practice?

Wurst: The first step is what Jeff and I are doing now – speaking up and trying to educate lenders of the advantages of arbitration over litigation. Start with the documents. In most cases the arbitration clauses will remain dormant but when a dispute does arise lenders will be able to slam the doors and kick the tires. We are comfortable that they will find the process to be less costly, more efficient, and they will take comfort knowing that the neutral will have a deeper understanding of their business. And in those circumstances when they may be wrong they won’t have to read about it in the papers because the arbitration process is generally a confidential proceeding and not subject to publication.