When A Third Party (And Non-Party) Can Enforce An Arbitration Provision

arbitrationThe Northern District compelled arbitration of a multi-count fraud suit filed by a software company against a former salesman and his new employer in Paragon Micro, Inc. v. Bundy, 2014 WL 2441969 (N.D.Ill. 2014).

The ex-employee formed his own company and started steering business from his former employer.  The former employer sued for computer tampering, breach of fiduciary duty, unfair competition, and conversion.

The Independent Contractor Agreement signed by the defendant salesman said “any and all disputes” would be resolved by binding arbitration.  After the plaintiff refused defendants’ demand for arbitration, the defendants moved to compel arbitration.

Result: motion granted.


The Federal Arbitration Act, 9 U.S.C. § 1 (FAA), reflects a liberal policy favoring arbitration agreements;

– Courts should enforce arbitration clauses unless they are tainted by fraud, duress, unconscionability or other standard contract defenses;

– The FAA permits a court to compel arbitration where there is (1) a written agreement to arbitrate; (2) a dispute covered by or within the scope of an arbitration agreement; and (3) a refusal to arbitrate;

– Federal courts rely on state contract formation rules in deciding whether parties agreed to arbitrate a particular issue and a party can be compelled to arbitrate only those issues he agreed to arbitrate;

– The party opposing arbitration agreement bears the burden of showing why the agreement is unenforceable;

– Any doubts concerning arbitration, should be resolved in favor of it;

– Contractual arbitration provisions survive termination of the contract unless the contract expressly states otherwise;

–   “arising out of”, “relating to” and “any and all” phrasing leads to a strong presumption of arbitrability.

(**3-5, 8).


The Court held that the contract’s arbitration clause applied to the plaintiff’s various claims against the defendants.  Finding that plaintiff’s Complaint allegations fell within the scope of the arbitration clause, the Court pointed to the arbitration clause’s applicability to “any and all disputes” connected to the individual defendant’s account representative duties.

The Court also found that the corporate defendant – a non-party to the Independent Contractor Agreement – could still enforce the arbitration clause against the plaintiff.

Under Illinois law, a non-party can require arbitration where (1) the plaintiff lodges claims against the non-party that reference a written agreement (that has an arbitration clause); and (2) when the plaintiff’s claims against the third party are factually intertwined with the claims against another party that did sign the contract.

Here, both non-party exceptions applied.  The plaintiff’s claims referred to a written agreement – the Independent Contractor Agreement –  and the allegations directed to the corporate defendant (non-party) were enmeshed with the plaintiff’s claims against the individual defendant (the account rep).

Finally, the court nixed the plaintiff’s waiver argument.  The Court cited case law that suggests that at least a several-month delay – from suit filing to the arbitration demand – is usually required for a party to waive an arbitration provision. (*10).


This case illustrates that contractual arbitration clauses will be upheld where they are broad and clearly worded.  The presence of “any and all disputes” or “arising out of” verbiage will likely signal all-encompassing arbitration coverage. 

Non-parties can enforce an arbitration clause where they’re third-party beneficiaries of the contract or where the claims against the third party are factually connected to claims against a party that did agree to arbitration.


Defendant Bank Not Liable for Permitting Judgment Debtor to Transfer Over $700,000 from Accounts

The Citation to Discover Assets to a Third Party or “third-party citation”  allows a judgment creditor to serve a citation on a third-party –  a bank, for instance – who holds property of the judgment debtor and attach that property until the court orders the property released.  See 735 ILCS 5/2-1402(f)(1). 

The third-party citation prohibits the citation respondent from allowing any transfer or other disposition of debtor’s property pending further order of court or termination of the citation. 

When a bank is the third-party citation respondent, the creditor serves the citation upon the bank (either by personal service or certified mail) and upon receipt of the citation, the bank must freeze the debtor’s account until the court enters an order dismissing the citation or releasing the account. 

What’s simultaneously enticing (to a creditor) and sinister (to a debtor) about third-party citation practice is that the creditor doesn’t have to notify the debtor of the third-party citation until 3 business days have passed. 735 ILCS 5/2-1402(b).  This makes it next to impossible for a debtor to deplete his bank account(s) and hide funds – something which could easily happen if he caught wind of a creditor’s attempts to seize his accounts. 

Mendez v. Republic Bank, 2013 WL 3821532 (7th Cir. 2013), examines whether a bank that unfreezes the wrong bank accounts (and allows a judgment debtor to transfer hundreds of thousands of dollars in the process) can be liable to the judgment creditor for violating a citation’s restraining provisions. 

The Court affirmed the trial court’s finding that the bank was not liable to the plaintiff.

The plaintiff won a judgment and froze some 22 separate accounts of the corporate judgment debtor.  After several of the banks moved to quash various citations, the district court judge entered an order requiring that all bank accounts except for three (3) specified accounts be unfrozen. 

The defendant bank released from the citation two of the debtors’ accounts which totalled over $700,000 – all of  which of course was dissipated by the debtors within a few months. 

Plaintiff then moved to refreeze the accounts and to hold the bank liable for violating the citation restraining provision.

The District Judge, while originally siding with plaintiff, reversed herself and found the bank not liable.  The reason: the prior judge’s order requiring the bank to unfreeze accounts was ambiguous “at best” and the bank’s actions were a reasonable response to and interpretation of that order.  *4.

The Seventh Circuit affirmed, noting that the prior judge’s order unfreezing certain accounts was poorly drafted and the defendant bank followed the most reasonable interpretation of the order. 

Acknowledging that under Illinois law, a citation respondent can be liable for any transfer that violates a citation’s restraining provisions (regardless of whether there is intent or contempt), the bank’s actions were reasonable in light of the order’s text.* 11. 

Take-away: In my experience, from a creditor’s standpoint, attaching a corporate debtor’s bank account via a third-party citation is often my only real chance of collecting anything on a judgment.  Any real estate is usually mortgaged to the hilt, and the corporate debtor often lacks sufficient accounts receivable, inventory or personal property to meaningfully make a dent in the judgment amount.  

This case shows why hyper-precision in drafting citation orders is critical in post-judgment enforcement proceedings.  If the order is not drafted by the parties (i.e. it’s prepared by the court) and it’s text is unclear, it is incumbent on a party to file a motion seeking clarification of the order.