## Facts

- In December 1998, John Brown and his mother, Catherine Brown, obtained a debt-consolidation loan from CitiFinancial, Inc.
- The loan documents included a written arbitration clause requiring the Browns to submit covered disputes against CitiFinancial to arbitration.
- CitiFinancial required both John and Catherine to sign the loan agreement.
- John Brown later filed a civil action against CitiFinancial in Mississippi state court arising out of the loan transaction, notwithstanding the arbitration clause.
- Catherine Brown did not join as a plaintiff in John Brown’s state-court suit.
- CitiFinancial responded by filing a petition in federal district court seeking an order compelling arbitration under the Federal Arbitration Act (FAA) and a stay of the pending state-court action.
- John Brown resisted arbitration on the ground that he was severely mentally disabled and lacked the capacity to understand and assent to the loan agreement, including the arbitration provision.

## Issues

1. When a borrower asserts that he lacked the mental capacity to assent to a contract containing an arbitration clause, is that a threshold contract-formation dispute the court must decide before ordering arbitration under the FAA?
2. May a federal court compel arbitration (and stay a related state-court action) when the “making” of the arbitration agreement is placed in issue by a claim of incapacity?

## Decision

- The court treated Brown’s asserted mental incapacity as a dispute over whether any valid agreement to arbitrate was ever formed.
- Because the “making of the arbitration agreement” was in issue, the court determined that it could not compel arbitration without first resolving the capacity/formation question.
- The court declined to order arbitration on the existing record and required that the formation dispute be addressed in court before any order compelling arbitration could issue.
- In light of the unresolved formation issue, the court did not grant the requested relief to halt the state-court litigation at that stage.

## Legal Principles

- Under the FAA, arbitration is a matter of contract: a court may order arbitration only if a valid agreement to arbitrate exists.
- A challenge asserting mental incapacity to assent is a contract-formation challenge (whether the parties ever formed an agreement), not merely a challenge to enforceability of an otherwise-formed contract.
- When the “making of the arbitration agreement” is in issue, FAA § 4 requires the court to decide that threshold question before compelling arbitration; the arbitrator does not decide formation.
- State contract law governs issues such as capacity to contract and whether assent was validly given.
- A request to pause related litigation generally depends on the court first determining that an enforceable arbitration agreement exists and that arbitration should be ordered.

## Conclusion

CitiFinancial, Inc. v. Brown held that where a borrower claims severe mental disability and lack of capacity to assent to a loan agreement containing an arbitration clause, the dispute concerns contract formation and must be resolved by the court before arbitration can be compelled; because the existence of a valid arbitration agreement had not yet been established, the court declined to order arbitration (and related stay relief) until that threshold issue was determined.


CitiFinancial, Inc. v. Brown, 2001 WL 1530352 (2001)