John CARDEGNA, et al., Petitioners,
v.
BUCKEYE CHECK CASHING, INC., Respondent.
Supreme Court of Florida.
E. Clayton Yates, Fort Pierce, FL, F. Paul Bland, Jr., Washington, D.C., Christopher C. Casper of James, Hoyer, Newcomer and Smiljanich, P.A., Tampa, FL, and Richard A. Fisher, Cleveland, TN, for Petitioner.
*861 John R. Hart of Carlton Fields, P.A., West Palm Beach, FL, Amy L. Brown, James P. Wehner of Squire, Sanders and Dempsey, LLP, Washington, D.C. and Pierre H. Bergeron of Squire, Sanders and Dempsey, LLP, Cincinnati, OH, for Respondent.
Deborah M. Zuckerman, AARP Foundation, Washington, D.C., and Lynn Drysdale, Florida Legal Services, Inc., Jacksonville, FL on behalf of AARP, Consumer Federation of America and National Consumer Law Center; and Daniel S. Pearson, Lenore C. Smith, and Scott B. Newman of Holland and Knight, LLP, Miami, FL on behalf of The Check Cashing Store, Inc., for Amici Curiae.
ANSTEAD, J.
We have for review Buckeye Check Cashing, Inc. v. Cardegna,
FACTUAL BACKGROUND
The relevant facts in Buckeye are summarized by the district court's opinion:
Appellant, Buckeye Check Cashing, Inc., timely appeals from an order that denied its motion to compel arbitration and to stay proceedings. We reverse and remand.
Appellees brought a class action lawsuit against Appellant. They alleged that Appellant made illegal usurious loans disguised as check cashing transactions in violation of various Florida Statutes. In response, Appellant filed a motion to compel arbitration and to stay proceedings, pursuant to the provisions for arbitration contained in the deferred deposit and disclosure agreement signed by Appellees. The agreement provided in pertinent part:
Arbitration provisions. Any claim, dispute, or controversy (whether in contract, tort or otherwise, whether pre-existing, present, or future, and including statutory, common law, intentional tort, and equitable claims) arising from or relating to this Agreement ... or the validity, enforceability, or scope of this Arbitration Provision or the entire Agreement (collectively "Claim"), shall be resolved, upon the election of you or us or said third-parties, by binding arbitration pursuant to this Arbitration Provision.... This arbitration Agreement is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. Sections 1-16.
Appellees filed a memorandum in opposition to Appellant's motion to compel arbitration in which they argued that the arbitration agreement should not be enforced because it is contained in an illegal usurious contract and is, therefore, void ab initio.
Buckeye,
The trial court denied Appellant's motion to compel arbitration, relying on Party Yards, Inc. v. Templeton,751 So.2d 121 (Fla. 5th DCA 2000), and FastFunding v. Betts,758 So.2d 1143 *862 (Fla. 5th DCA 2000). Appellant contends the Federal Arbitration Act applies and that the trial court erred when it failed to construe the arbitration provision in a manner consistent with Prima Paint Corp. v. Flood & Conklin Manufacturing Co.,388 U.S. 395 ,87 S.Ct. 1801 ,18 L.Ed.2d 1270 (1967), and its progeny. Appellant also contends the trial court misplaced its reliance on Party Yards and FastFunding. We agree.
Buckeye,
ANALYSIS
The petitioners claim that the Fourth District's holding in Buckeye conflicts with the Fifth District's decision in FastFunding, holding that arbitration could not be compelled under a contract that would be void under Florida law and that the issue of the contract's legality must be determined in Florida's courts.
FastFunding
In FastFunding, FastFunding the Company, Inc., appealed a trial court's order that denied FastFunding's motion to compel arbitration. See FastFunding,
FastFunding appealed the trial court's ruling to the Fifth District Court of Appeal, which, consistent with its recent decision in a similar case, held that the trial court properly denied FastFunding's motion to compel arbitration. The district court reasoned: "If Ms. Betts is correct in her complaint that the contract violates the usury laws, then the contract is illegal and an arbitrator could not require Ms. Betts to perform under the contract. Pursuant to Party Yards, Inc., the trial court was correct in refusing to order the parties to arbitrate Ms. Betts' claims." FastFunding,
In the earlier decision, Party Yards, Inc. v. Templeton,
A court's failure to first determine whether the contract violates Florida's usury laws could breathe life into a contract that not only violates state law, but also is criminal in nature, by use of an arbitration provision. This would lead to an absurd result. Legal authorities from the earliest time have unanimously held that no court will lend its assistance in any way towards carrying out the terms of an illegal contract. Illegal promises will not be enforced in cases controlled by federal law.
Id. at 123 (citation omitted). Thus, the Fifth District concluded: "A party who alleges and offers colorable evidence that a contract is illegal cannot be compelled to arbitrate the threshold issue of the existence of the agreement to arbitrate; only a court can make that determination." Id. at 123-24. We agree with Judge Sharp's reasoning and analysis.
*863 Prima Paint
Buckeye asserts that the U.S. Supreme Court's decision in Prima Paint Corp. v. Flood & Conklin Manufacturing Co.,
In Prima Paint, the Supreme Court resolved the issue of "whether a claim of fraud in the inducement of the entire contract is to be resolved by the federal court, or whether the matter is to be referred to the arbitrators." Id. at 402,
However, we conclude that the rationale of Prima Paint should not be extended to the facts of this case. There is a key distinction between the claim in Prima Paint and the claim presently before us: in Prima Paint, the claim of fraud in the inducement, if true, would have rendered the underlying contract merely voidable. In the case before us today, however, 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. Therefore, if the underlying contract is held entirely void as a matter of law, all of its provisions, including the arbitration clause, would be nullified as well.
Appellate courts in other states have also distinguished Prima Paint and reached conclusions similar to those of the Fifth District in FastFunding and Party Yards, Inc. See Rosenthal v. Great Western Fin. Sec. Corp.,
We acknowledge that recently, under similar facts, the Eleventh Circuit Court of Appeals rejected the argument that a contract's legality was to be determined by a trial court, not an arbitrator. See Bess v. Check Express,
We conclude that Florida public policy and contract law prohibit breathing life into a potentially illegal contract by enforcing the included arbitration clause of the void contract. Florida's law has long held that contracts which are determined to be against public policy and void should not be enforced. "A contract which violates a provision of the constitution or a statute is void and illegal and will not be enforced in our courts." Harris v. Gonzalez,
The inherent and inalienable right of every man to enter into contracts or refuse so to contract is not only recognized but well established. Competent persons have the utmost liberty of contracting and when these agreements are shown to be voluntarily and freely made and entered into, then the courts usually will uphold and enforce them. The general right to contract is subject to the limitation that the agreement must not violate the Federal or State Constitutions or state statutes or ordinances of a city or town or some rule of the common law.
Wechsler v. Novak,
In other words, there are no severable, or salvageable, parts of a contract found illegal and void under Florida law. Judge Sharp's observation in Party Yards, Inc., that a contrary holding would lead to an absurd result is right on point. We do not believe federal arbitration law was ever intended to be used as a means of overruling state substantive law on the legality of contracts.
*865 CONCLUSION
Accordingly, we hold that where a party sufficiently alleges that a contract is void for violation of Florida's usury laws, the Florida courts, and not an arbitrator, must first determine the contract's legality before a party may be required to submit to arbitration under a provision of the contract. Hence, Cardegna's claim that the underlying check cashing contract is illegal and void ab initio as being usurious must be resolved by a trial court before arbitration of any other disputes may be compelled. We approve the Fifth District's opinions in FastFunding and Party Yards, Inc., and we quash and remand Buckeye for further proceedings consistent with this opinion.
It is so ordered.
WELLS, LEWIS, QUINCE, and BELL, JJ., concur.
BELL, J., concurs specially with an opinion.
CANTERO, J., dissents with an opinion.
PARIENTE, C.J., recused.
BELL, J., specially concurring.
I agree with Justice Cantero that the issue before us is one of federal law, and in that respect I agree that the decisions of federal courts of appeals should be considered as persuasive authority on the issue. But I do not agree with the conclusion reached by Justice Cantero or the federal decisions on which he relies. Although we should carefully consider the decisions of intermediate-level federal courts on issues of federal law, we are not bound by such decisions. Until the United States Supreme Court resolves the issue, we must independently consider the federal question for ourselves. Because I disagree with the conclusions that have been reached by the federal courts cited by Justice Cantero, I join the majority's decision.
I.
I will begin by briefly restating the issue. The petitioners (hereinafter referred to collectively as "Cardegna," the named petitioner) entered into numerous check-cashing transactions (also known as "payday loans") with Buckeye Check Cashing. Cardegna brought a class action (on behalf of himself and those similarly situated) in which he argues that these check-cashing transactions were actually nothing other than usurious loans under Florida law, which would make the check-cashing contracts void ab initio and unenforceable. Buckeye sought to stay the trial court proceedings and compel arbitration of Cardegna's claims pursuant to the arbitration clause contained in the check-cashing contracts. The arbitration clause provided that
[a]ny claim, dispute, or controversy (whether in contract, tort or otherwise ... including statutory, common law, intentional tort, and equitable claims) arising from or relating to this [check-cashing] Agreement ... or the validity, enforceability, or scope of this Arbitration Provision or the entire Agreement... shall be resolved ... by binding arbitration pursuant to this Arbitration Provision.
Buckeye Check Cashing, Inc. v. Cardegna,
The language of the arbitration clause certainly was broad enough to cover the claims brought by Cardegna. The clause even goes so far as to purport to settle the very issue before us: the clause provides that even a claim relating to the validity or enforceability of the arbitration clause itself, or a claim relating to the validity or enforceability (that is, the legality) of the check-cashing agreement as a whole, will *866 be submitted to arbitration. So the scope of the arbitration clause agreed to by the parties is not in question. Nor is Cardegna's assent to the arbitration clause in question: Cardegna does not claim that he did not assent to the clause, and he does not claim to have been defrauded into giving his assent to the clause.
It is also important to note that Cardegna does not claim that the arbitration clause itself (separately, as opposed to the contract as a whole) somehow is invalid. His claim, rather, is that the contract in its entirety is invalid and unenforceable because the check-cashing transaction underlying the contract was illegal. That issue whether the check-cashing transaction is illegal has not yet been decided. Indeed, the issue before us here is who will (or must) decide that issue: a court or an arbitrator. The issue, in other words, is whether the trial court was bound to enforce the arbitration clause and required to compel arbitration of Cardegna's claims. The majority holds that it was not, and I agree.
II.
To explain why I agree with the majority that the trial court was not required to enforce the arbitration clause and compel arbitration of Cardegna's claims, I begin with the language of the Federal Arbitration Act (FAA). The FAA provides that
[a] written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. § 2 (2000). Essentially, the FAA requires that an arbitration clause be treated in the same manner as any other contractual provision: Legislatures cannot create rules, and courts cannot apply rules, that discriminate against or give a less-favored status to arbitration clauses. See, e.g., Southland Corp. v. Keating,
I believe the decisions cited by Justice Cantero go too far towards treating arbitration clauses as a class of "super" clauses, immune from a state's otherwise generally applicable contract law. I do not believe the FAA was intended to preempt a state's generally applicable consumer protection laws (as opposed to laws directed specifically at the validity or enforceability of arbitration clauses, either in general or in certain types of contracts, see, e.g., Southland Corp.,
*867 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. But the question here is whether there even was an agreement to arbitrate an enforceable agreement to arbitrate. "The FAA directs courts to place arbitration agreements on equal footing with other contracts, but it `does not require parties to arbitrate when they have not agreed to do so.'" Equal Employment Opportunity Comm'n v. Waffle House, Inc.,
The issue of the underlying contract's legality must be determined by the courts before any claim or dispute arising out of the contract may be referred to arbitration pursuant to the contract's arbitration clause not because we are applying a more stringent standard to the enforceability of the arbitration clause (a course of action that would violate the FAA), but because we are, as the FAA allows, applying the generally applicable "grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. If, under Florida law, no contract ever existed here, then by definition no enforceable agreement to arbitrate ever existed. The dissenting opinion and the federal decisions on which it relies have elevated arbitration clauses to a more favored status, exempting them from the state's otherwise generally applicable contract law. The FAA, however, mandates only that arbitration clauses be given equal status. In this case, if a valid and enforceable contract exists, then a valid and enforceable arbitration clause exists. The problem is that we do not yet know if a valid and enforceable contract exists. I therefore concur in the majority's decision.
CANTERO, J., dissenting.
The issue in this case is not whether a check-cashing contract is void as usurious. That issue will be determined under Florida law. The issue here is who decides whether the contract is void the arbitrator, as provided in the contract itself, or the court. That issue must be decided under federal law, specifically the Federal Arbitration Act. The majority confuses these issues. The majority also disregards the plain language of the Federal Arbitration *868 Act, fails correctly to apply the United States Supreme Court's decision in Prima Paint Corp. v. Flood & Conklin Manufacturing Co.,
I. The FAA and Prima Paint
Contrary to the majority's assumption, the issue in this case arises under federal, not Florida, law. As no one disputes, the arbitration agreement itself provides that it "is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. Sections 1-16." The parties concede they are governed by the FAA.
Any discussion of the arbitrability of the parties' dispute should therefore begin with the plain language of the FAA language conspicuously absent from the majority opinion. Section 2 of the FAA provides that an agreement to arbitrate "in any maritime transaction or a contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (2000). Section 4 of the FAA provides in pertinent part as follows:
The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.... If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.
9 U.S.C. § 4 (2000) (emphasis added). Therefore, as many courts have recognized, under the FAA the issue for a court confronted with a plaintiff seeking to avoid arbitration is whether the plaintiff is contesting the making of the arbitration agreement or the underlying contract.
Given the parties' agreement to be governed by the FAA, the district court in this case correctly recognized its task as simply to apply controlling federal law to the case at hand. See Buckeye Check Cashing, Inc. v. Cardegna,
Federal law favors arbitration. As the United States Supreme Court has recognized, the purpose of the FAA is to override the judiciary's reluctance to enforce arbitration agreements. See Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ.,
In concluding that the check-cashing agreement's enforceability should be decided in arbitration, the district court relied in part on Prima Paint, where the United States Supreme Court addressed "whether the federal court or an arbitrator is to resolve a claim of `fraud in the inducement,' under a contract governed by the [FAA]."
Accordingly, if the claim is fraud in the inducement of the arbitration clause itself an issue which goes to the "making" of the agreement to arbitrate the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally.... We hold, therefore, that in passing upon a § 3 application for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate.
Id. at 403-04,
Applying these principles, the Court held that because the fraud claim did not specifically address the arbitration agreement and the arbitration clause was sufficiently broad to encompass the dispute, including "legal" issues, the parties must proceed to arbitration. Id. at 406-07,
The import of Prima Paint, then, is that under the FAA, arbitration agreements or arbitration clauses contained in contracts are treated separately from the underlying contracts. The FAA expressly limits courts to determining whether the making of the arbitration agreement itself not the underlying contract is disputed. The only exception, as explained later, is where a party contests its very assent to the underlying contract, and therefore to the arbitration agreement as well.
The majority violates the FAA's express directive. It dismisses Prima Paint as applicable only to voidable as opposed to void contracts. Nothing in that opinion makes that distinction, and even though the issue in that case involved a voidable contract it was allegedly fraudulently induced the Court did not limit its holding. Cf. Sandvik AB v. Advent Int'l Corp.,
II. Federal Appellate Cases on Point
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. 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.
Most recently, the Eleventh Circuit Court of Appeals decided this issue. In Bess v. Check Express,
The majority acknowledges Bess, but distinguishes it on the purported ground that the federal court was deciding an issue of federal law, while this Court is deciding an issue of state law. Majority op. at 864. That conclusion is blatantly wrong.
The majority cites a footnote in which the Eleventh Circuit stated the following in pertinent part:
Colburn contends that we are bound by Alabama law in deciding defenses to the arbitration agreement, and therefore, [Alabama case law] requires that the void ab initio argument be decided by the court. In reaching our decision, however, we are not deciding questions of Alabama contract law; rather we are deciding the scope of the district court's authority under [the FAA], a question of federal law.
Id. at 1306 n. 3.
The identical situation exists here. Just as the Eleventh Circuit did not decide questions of Alabama law, we are not deciding questions of Florida law. Specifically, we are not deciding whether the check-cashing contract is usurious. The sole issue before both courts is the same: who decides the legality of the underlying contract? The issue here, as in Bess, is one of federal law because the FAA governs *871 the arbitration agreement. Bess cannot be distinguished.
The Fourth Circuit Court of Appeals also has addressed the precise claim presented here. In Snowden v. CheckPoint Check Cashing,
Finally, in Burden v. Check Into Cash of Kentucky, LLC,
We should follow Bess, Snowden, and Burden, which considered the identical issue under identical facts and held that, under the plain language of the FAA, the issue of whether a check-cashing transaction is usurious must be determined by the arbitrators. These decisions are persuasive on matters of federal law. See State v. Dwyer,
Justice Bell, specially concurring, agrees with me that "the issue before us is one of federal law" and that "the decisions of federal courts of appeals should be considered as persuasive authority." Concurring op. at 864-65. He is not persuaded by those decisions, however, because he thinks they "go too far towards treating arbitration clauses as a class of `super' clauses, immune from a state's otherwise generally applicable contract law." Concurring op. at 866. I disagree with Justice Bell for two reasons.
First, the federal circuit courts have treated arbitration clauses not as a class of "super" clauses, but as a class of separate clauses separate, that is, from the other clauses in a contract. Under the reasoning of the federal courts, arbitration clauses are not immune from state contract law. They are simply evaluated independently of the rest of the contract under "the state's otherwise generally applicable contract law." Concurring op. at 866.
*872 Second, although it is true that Bess, Snowden, and Burden are only persuasive, they are all based on Prima Paint, which is binding. All three cases reached the same conclusion on similar facts because they each found Prima Paint indistinguishable, as I do, and therefore controlling. See Bess,
III. Federal Cases Based on Different Circumstances
Instead of following the federal cases that have decided this identical issue under identical facts, the majority relies on other cases that considered different attacks on different types of contracts. In particular, the majority cites cases refusing to refer issues to arbitration. Majority op. at 863-64. As the Sixth Circuit emphasized in Burden,
In Bess, the Eleventh Circuit similarly distinguished its earlier decision in Chastain v. Robinson-Humphrey Co.,
In Bess, the Eleventh Circuit noted both the distinctive facts of Chastain and its narrow holding.
At bottom, Colburn challenges the content of the contracts, not their existence. Indeed, unlike the contracts in Chastain, both the arbitration agreement and the deferred payment contracts were signed by Colburn, and there is no question about Colburn's assent to those contracts. Thus, this case falls within the "normal circumstances" described in Chastain, where the parties have signed a presumptively valid agreement to arbitrate any disputes, including those about the validity of the underlying transaction. Therefore, the issue raised by Colburn whether the deferred payment transactions are void as illegal is one for the arbitrator, not the court.
Thus, the distinction in the cases is not between voidable contracts (which are arbitrable) and void contracts (which are not), as the majority finds. Rather, it is between contracts to which the plaintiff admittedly assented, but now claims are either void or voidable, and contracts to which the plaintiff gave no assent. If no contract was formed, then the arbitration agreement, which was part of that contract, was not formed, either. Courts must determine this threshold issue. The plaintiffs in this case, however and in all the cases involving check-cashing transactions do not allege that no contract was formed. They admit assenting to both the arbitration agreements and the underlying contracts. Rather, they argue that the contracts were usurious. Therefore, the "making of the agreement for arbitration" is not at issue, and under the FAA the arbitrators, not the courts, must decide the issue.
IV. The Majority's Reliance on Party Yards
The majority also relies on and approves Party Yards, Inc. v. Templeton,
In Lawrence v. Comprehensive Business Services Co.,
Contracts are presumed valid until held to be illegal. In National Railroad Passenger Corp. v. Consolidated Rail Corp.,
For a court to intervene before the arbitrator has determined what the contract means, and what it requires in the particular circumstances of their dispute, because he may determine that it requires the performance of an unlawful act, prematurely disrupts the system of private ordering upon which "public policy" as declared in the Arbitration Act and in the Supreme Court cases liberally interpreting it places maximum possible reliance....
In sum, if parties have validly agreed to submit a dispute to arbitration, we see no reason not to enforce that agreement. If the arbitrator construes the contract so as to require someone to commit an illegal act, a court can then refuse to enforce the arbitrator's decision. A court cannot, however, bypass the arbitration process simply because a public policy issue might arise.
Id. at 1071 (emphasis added).
The majority here commits the same error as did the court in Party Yards. The majority holds that "an arbitration provision contained in a contract which is void under Florida law cannot be separately enforced while there is a claim pending in a Florida trial court that the contract containing the arbitration provision is itself illegal and void ab initio." Majority op. at 861 (emphasis added). Thus, the majority assumes the illegality of the contract in determining that a court should decide the legality of a contract. Under the parties' arbitration agreement, however, that issue is for the arbitrator.
Finally, the court in Party Yards relied on cases such as Three Valleys,
At their heart, Party Yards and the majority opinion evince a basic distrust of arbitration and place the court as jealous *875 guardian of the determination of legal issues. By endorsing Party Yards, the majority not only disregards controlling federal law and the federal preference for enforcing arbitration clauses, but it has created a new analysis for arbitration claims. Under the express terms of the FAA, a party opposed to arbitration must challenge the making of the arbitration agreement itself. Under the majority's reasoning, the opponent need only allege that the underlying contract violates a state statute or public policy in a way that renders it void. Because the majority's decision contradicts federal law favoring arbitration and fails to follow federal cases directly on point, I respectfully dissent.
NOTES
Notes
[1] There is, of course, a somewhat troubling "circularity" to this reasoning. After all, we do not yet know if the check-cashing transactions are illegal under Florida law, so we do not know if the contract here really was void ab initio. Yet the dissenting position itself rests on a sort of circular reasoning. The dissent would compel the arbitration of the legality claim on the ground that until that claim is resolved, there are no grounds for invalidating the arbitration clause. But if the arbitrator were to conclude that the contracts were illegal and unenforceable, we then would have enforced an unenforceable contract.
[2] The Fifth District has since decided that deferred payment transactions such as those involved in Party Yards and in this case are not usurious. See Betts v. Ace Cash Express, Inc.,