Buckeye Check Cashing, Inc. v. Cardegna, John, et al. (02/21/2006)

Question presented: Whether the Florida Supreme Court erred by holding, consistent with the Alabama Supreme Court but in direct conflict with six federal courts of appeals, that the Federal Arbitration Act allows a party to avoid arbitration by claiming that the underlying contract containing an arbitration clause (but not the arbitration clause itself) is void for illegality?

BY DAVID MURPHY & RUKHAYA ALIKHAN, MEDILL NEWS SERVICE

When John Cardegna needed $337.50 in 1999, he turned to Buckeye Check Cashing Inc.

Buckeye, operating as a fast money service, made Cardegna the same deal it had made to countless others.

Customers would come to Buckeye with a desired dollar amount, says Paul Bland, a staff attorney for Trial Lawyers for Public Justice. Buckeye would have them write a check for the sum of the advanced money plus a processing fee. The check wouldn't be cashed until a customer's next payday, giving the person a few weeks or so to come up with the money.

Cardegna agreed, and agreed, and agreed, continually renewing his loan each time it was due. Before he filed a class-action suit in a Florida state court, alleging that the rates of interest Buckeye charged on each loan were criminally usurious, Cardegna owed upwards of one thousand dollars.

When Cardegna entered into the financial agreement with Buckeye, he signed a contract stipulating that "any claim, dispute, or controversy" would be settled "by binding arbitration pursuant to this Arbitration Provision."

Consequently, once the suit was filed, Buckeye immediately moved for arbitration on the issue of the contract's illegality. Cardegna responded by arguing that the arbitration clause did not apply, since the contract with Buckeye was criminally usurious and therefore void. The Florida trial court agreed and denied the motion for arbitration.

A Florida appellate court panel reversed, holding that Cardegna's challenge to the contract's validity must be resolved by an arbitrator, not a court.

By a vote of 5-1, the Florida Supreme Court reversed again, reinstating the trial court's decision to have the case heard in court. "The underlying contract at issue would be rendered void from the outset if it were determined that the contract indeed violated Florida's usury laws," wrote Justice Harry Lee Anstead for the majority. The equation is simple under Florida law: no contract, no arbitration.

"If the transactions at issue here are determined by a state court not to be illegal per se, then of course any particular claims or disputes arising out of the transactions would presumably be referable to arbitration," wrote Justice Kenneth Bell in a concurring opinion. "But the question here is whether there even was an agreement to arbitrate -- an enforceable agreement to arbitrate."

But according to the lone dissenter, Justice Raoul Cantero, the majority was in error by ignoring the actual language of the Federal Arbitration Act (FAA). The arbitration clause in Cardegna and Buckeye's agreement stipulated that the arbitration itself is subject to the parameters of the FAA. Therefore, since the signing of the arbitration agreement is not disputed, the court – pursuant to section 4 of the FAA – must compel arbitration.

"In the last three years no fewer than three federal courts of appeals have decided the precise issue we confront today -- whether, under the FAA, the issue of whether a check-cashing transaction is void as usurious is for the court or the arbitrator to decide," said Cantero in his dissent. "Every one unanimously has held that the issue is one for the arbitrators. Nevertheless, the majority fails to distinguish one of them and simply ignores the others."

The U.S. Supreme Court accepted the case for review on June 20, 2005. With the ultimate question of Florida state law decided in Cardegna's favor, the Court is being asked to weigh Florida's decision against the judgments of six federal appeals courts.

In Prima Paint Corporation v. Flood & Conklin Manufacturing Co., the U.S. Supreme Court in 1967 held that when the arbitration clause itself is not contested, it can be separated from the contract in which it resides. As a matter of federal law, challenges to an underlying contract cannot be used to invalidate an included arbitration clause.

The opinions of the 4th, 5th, 6th, 7th, 9th and 11th circuit courts reached similar conclusions: questions regarding a contract's legality must be settled through arbitration, unless the challenge addresses the making of the arbitration agreement itself. Whether the contract is voidable under state law or not becomes an irrelevant issue, as the question is for an arbitrator to decide, explained the 5th Circuit.

But the Florida Supreme Court addressed discrepancies of Prima Paint's applicability in its opinion, holding that, "in Prima Paint, the claim of fraud in the inducement, if true, would have rendered the underlying contract merely voidable, whereas the claim of illegality here, if true, would render the contract void from the outset under state law."

"You can't change something that would normally be illegal into something that would be legal by putting the word arbitration over it," says Bland, who's arguing Cardegna's case before the U.S. Supreme Court. "For example, imagine a contract -- a totally illegal contract -- and the contract has a bunch of different smaller terms in it. Would you be able to make part of the contract enforceable by putting in a provision that says if there's dispute about the quality of the cocaine, you are going to go to the American Arbitration Association and have them decide it?"

Bland says that the teeth of the Prima Paint decision can only have bite as a matter of federal law. Since Cardegna v. Buckeye originated at the state level, Prima Paint is not applicable.

"We argue that there is no federal law that wipes away state law in this area," Bland says. "They are saying that federal law creates a nationwide rule of contract law that makes arbitration causes more enforceable than any kind of contract. I think that the right answer is that federal law says arbitration clauses are as good as other contract terms, but no better."

Both Bland and Christopher Landau, who is arguing on behalf of Buckeye Check Cashing, agree that the case resembles a chicken-or-egg scenario. In this case, however, the question is whether arbitration comes before the provisions of contract, or the legality of a contract negates its own arbitration.

If the Supreme Court rules in favor of arbitration, banks will be the true winners, Bland says. A number of companies would prefer to have arbitration exist above the normal rules governing contract law.

"If they get that, it's going to strip away all kinds of rules of state law that have applied to tens of thousands of cases for many years. I think they have a really sweeping agenda," Bland says. "All they want to do is ban class actions. They think that if they stick a provision that bans class actions in an arbitration clause, it makes it more enforceable than if you put it in a regular contract."

Buckeye's allegedly illegal mode of business follows a specific industry model. According to Bland, a person is expected to roll over an average of eight loans, each of which can carry interest rates in excess of 1,300 percent. With the threat of criminal prosecution for check kiting hanging over their shoulders, people will cough up for payday lenders even before taking care of their personal, day-to-day financial needs.

"In Florida, usury at some point becomes a crime; it becomes loan sharking," Bland says. "And you don't have to be Tony Soprano to be a loan shark. You can have a nice building with bricks, and mortar, and a sign, but if you're charging people interest rates over 50 percent, it becomes a crime."

A pending case before the Florida Supreme Court, McKenzie Check Advance v. Betts, may ultimately decide the legality of Buckeye's check cashing operation. According to Landau, Bland offers a flawed comparison when he relates Buckeye's business practices to other, currently illegal activities.

"There is absolutely no question, and Cardegna does not deny, that Buckeye's business is completely legal in Florida today under the State's Deferred Presentment Act of 2001," Landau said. "Rather, the only question is whether Buckeye's business was legal in Florida before the enactment of that statute. In other words, did that statute clarify previous law, or change previous law?"

During the Court's oral arguments on Nov. 29, 2005, the justices thoroughly questioned whether a loan company like Buckeye Check Cashing could enforce an arbitration clause despite claims of contract illegality. The justices expressed concern over whether an arbitration clause would interfere with the function of state courts and their role in resolving in contract claims.

"The state itself makes a decision that certain contracts can't be entered into," Justice Sandra Day O'Connor emphasized, after hearing arguments from Christopher Landau, counsel for Buckeye. Chief Justice John Roberts stressed that if a contract is void for illegality, then a state would not enforce any part of it, including an arbitration clause.

Landau disagreed with Roberts' analysis, relying on the outcome in Prima Paint. He argued that Prima Paint established that an arbitration clause is an enforceable, underlying contract itself. Even if a contracting party challenges legality, a claim would still have to go through arbitration, Landau explained.

Justice Ruth Bader Ginsburg was not entirely convinced of Prima Paint's applicability at the state level since the case involved the Federal Arbitration Act.

"Prima Paint [discusses] matters within the jurisdiction of the federal court. So the answer to everything you said could be, fine, if this proceeding were in, say, the Southern District of Florida, but it's in the state court," Ginsburg said.

Justice Anthony Kennedy, however, disagreed with Ginsburg on Prima Paint's effect on state cases.

"Prima Paint certainly displaced the states and state law from this area [to] a very substantial extent," Kennedy said, acknowledging that later Supreme Court cases had altered the scope of Prima Paint and created confusion as to how state courts should handle arbitration clauses.

Another issue the Court explored was how the economic interests of businesses drive arbitration. Arbitrators, some of the justices surmised, have a strong policy of avoiding litigation.

"The arbitrator always has an interest in finding that the contract is valid and arbitrable because that's his source of business—arbitrating disputes," Justice John Paul Stevens said, alluding to the notion that arbitration may not always be an impartial process. Like Stevens, Roberts also pointed out the pitfalls of arbitration.

"There may be dozens of other subsidiary issues apart from illegality. They [the arbitrators] may say…we think we're entitled to these damages or those damages…just because there's a threshold issue doesn't mean there aren't other issues that an arbitrator might decide," Roberts said, arguing that arbitration can lead to a host of other, extraneous legal issues for the challenging party.

Later, Justice Antonin Scalia raised the possibility that allowing a party to circumvent arbitration might open the floodgates and undermine judicial efficiency. Ginsburg agreed with Scalia, adding that those cases which should go to arbitration first, may end up cluttering the docket.

"Public policy has been called an unruly horse. All you have to do is open the door and you will have litigation in court, and then the court will decide what the arbitrator would otherwise decide," Ginsburg said.

On Feb. 21, 2006, the Court reversed, agreeing 7-1 with Buckeye that the challenge to the contract had to go before an arbitrator before being considered in the courts. Justice Antonin Scalia wrote the majority opinion. In a one-paragraph dissent, Justice Clarence Thomas reiterated an argument he had made in previous cases that the Federal Arbitration Act does not apply to proceedings in state courts.

Justice Samuel Alito, who had not been on the Court when the case was argued orally, did not participate in the decision.