In the

United States Court of Appeals

For the Seventh Circuit ____________

Nos. 02-2649, 02-2650

SHEILA SMITH, et al.,

Plaintiffs-Appellees,

v.

JOHN STEINKAMP, et al.,

Defendants-Appellants.

____________

Appeals from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. IP01-1290-C-H/S—David F. Hamilton, Judge.

____________

ARGUED JANUARY 6, 2003—DECIDED FEBRUARY 10, 2003

____________

Before POSNER, DIANE P. WOOD, and WILLIAMS, Circuit

Judges.

POSNER, Circuit Judge. The defendants appeal from

the denial of their motion to submit the claims of two of

the plaintiffs to arbitration. 9 U.S.C. § 16(a)(1)(B). The

defendants are Instant Cash, Inc., a small-loan company

active in Indiana, and its lawyer, Steinkamp (also Steinkamp’s firm, but it can be ignored). Instant Cash made

“payday” loans to the four plaintiffs. A payday loan is a

loan of short duration, typically two weeks, at an astronomical annual interest rate, here more than 500 percent. As

the name implies, it is a loan to poor or improvident

borrowers who have no savings or credit and run out

of money for their living expenses before they receive their
2 Nos. 02-2649, 02-2650

weekly or biweekly paycheck. The borrowers must be

desperate, since the annual percentage rate of the loans

is disclosed to them in clear and conspicuous type on the

loan instrument.

The plaintiffs defaulted and Steinkamp represented

Instant Cash in suits against them in small-claims court.

(The status of the small-claims litigation is unclear.) They

riposted with this federal suit, in which they charge the

defendants with RICO violations (Steinkamp they further

charge with violating the federal Fair Debt Collection

Practices Act) and also with violating Indiana usury law.

Indiana’s supreme court has held that payday loans at the

interest rates typically and here charged by the lenders

are usurious and therefore unenforceable. Livingston v.

Fast Cash USA, Inc., 753 N.E.2d 572, 574-77 (Ind. 2001). The

plaintiffs have other Indiana claims as well, but we can

ignore those.

The defendants moved for an order to arbitrate their

federal and state law disputes with the plaintiffs, invoking

an arbitration agreement that the plaintiffs had signed. It

might seem that the defendants would have little to gain

from arbitration, given Livingston. But they may think

that an arbitrator is more likely to ignore or mistake the

law than a judge would be; anyway there are other claims

in the case besides the usury claim and the defendants

may fear being dragged into class action suits if borrowers

can proceed against them in state or federal court. The

defendants’ desire to arbitrate is therefore understandable on multiple grounds.

All the plaintiffs had signed the arbitration agreement

but two of them had not signed it at the time they took out

the loans on which they base this suit. Sheila Smith had

borrowed $150 from Instant Cash on July 12, 2000, to be

repaid on the 26th. On the same day that she signed the
Nos. 02-2649, 02-2650 3

loan agreement she signed a separate agreement, entitled “Additional Terms and Conditions of This [Loan]

Agreement. Waiver of Jury Trial and Arbitration Agreement” (we’ll call this the “waiver agreement”), which

provided that all disputes would be resolved by arbitration with the exception of disputes within the jurisdiction

of a small-claims court. “Disputes” are defined in the waiver agreement to

include, without limitation (a) any federal or state law

claims, disputes or controversies, arising from or

relating directly or indirectly to the [loan-application form], this Agreement [i.e., the loan agreement]

(including this arbitration provision and the fees

charged), or any prior agreement or agreements between you and us; (b) all counterclaims, cross-claims

and third-party claims; (c) all common law claims,

based upon contract, tort, fraud, and other intentional

torts; (d) any claims based upon a violation of any state

or federal constitution, statute or regulation; (e) all

claims asserted by us against you, including claims

for money damages to collect any sum we claim you

owe us; (f) all claims asserted by you individually, as

a private attorney general, as a representative and

or member of a class of persons, or in any other Representative capacity, against us and/or any of our

employees, agents, [etc.].

The agreement thus (in clause (f)) also authorizes agents

of Instant Cash, such as Steinkamp, to demand arbitration of their disputes with the borrowers.

On August 15, Smith signed another loan agreement,

this one for $125, with repayment again due in two weeks.

But this time she didn’t sign a waiver agreement. Although the back of the loan agreement contains a list of

additional terms and conditions (the same list had ap-
4 Nos. 02-2649, 02-2650

peared on the back of her July loan agreement) including

a waiver clause, this clause, unlike what we are calling

the waiver agreement, does not refer to arbitration or litigation.

The facts pertaining to plaintiff Hicks are the same. But

the other two plaintiffs signed the waiver agreement

every time they borrowed from Instant Cash, and the

district judge held that they were bound by the agreement

and so had to arbitrate their RICO and other claims. These

other two plaintiffs do not appeal from this ruling,

and could not if they wanted to because the grant of a

motion to compel arbitration is not appealable unless the

judge dismisses the case. 9 U.S.C. § 16(b); McCaskill v. SCI

Management Corp., 298 F.3d 677, 678 (7th Cir. 2002). But

the judge held that Smith and Hicks did not have to arbitrate, because, he ruled, the waiver agreement that

they had signed when taking out the earlier loans was

inapplicable to the later ones. It is this ruling that the

appeals challenge.

The defendants pin their contention that Smith and

Hicks must arbitrate on clause (d) of the waiver agreement (“any claims based upon a violation of any state or

federal constitution, statute or regulation”). But it is apparent that clauses (b) through (f), including therefore

(d), relate back to (a), which limits the duty to arbitrate

to disputes arising under “this Agreement,” that is, the

loan agreement, and to disputes arising under “prior . . .

agreements.” The function of clauses (b) through (f) is to

make clear that neither the legal theory nor the procedural vehicle for a claim arising out of an agreement as

defined in clause (a) is relevant to arbitrability; all that

matters is that the claim arise from either the current

loan agreement or a prior loan agreement.
Nos. 02-2649, 02-2650 5

Thus the waiver agreement that Smith signed on July 12

related to the loan agreement that she signed the same

day plus any prior agreements between her and Instant

Cash. But the dispute on which she bases her claim in

this lawsuit (likewise Hicks, mutatis mutandis) arose out

of the loan agreement that she signed on August 15. If (b)

through (f) are read as standing free from any loan agreement, absurd results ensue, for example that if Instant

Cash murdered Smith in order to discourage defaults

and her survivors brought a wrongful death suit against

Instant Cash (a “common law” suit, thus encompassed by

(c)), Cash could insist that the wrongful death claim be

submitted to arbitration. For that matter, if an employee

of Instant Cash picked Smith’s pocket when she came in

to pay back the loan, and Smith sued the employee for

conversion, he would be entitled to arbitration of her claim.

It would make no difference that the conversion had

occurred in Smith’s home 20 years after her last transaction with Instant Cash.

The defendants’ lawyer blanched when confronted

with such hypothetical cases at oral argument but was

unable to suggest a limiting principle. Or to explain why, if

the agreement applies to subsequent as well as prior loan

agreements, clause (a) refers explicitly to prior agreements but contains no reference to subsequent ones. We

do not put too much weight on this point, however, lest

it seem that if the word “prior” had not appeared in the

waiver agreement the defendants would prevail. Considering who the borrowers are, an agreement requiring

them to arbitrate disputes arising out of future agreements (unless perhaps they were merely rollovers, that

is, renewals or extensions of previous loan agreements)

might be thought unconscionable. See, e.g., Weaver v.

American Oil Co., 276 N.E.2d 144, 145-48 (Ind. 1971); Ferguson

v. Countrywide Credit Industries, Inc., 298 F.3d 778, 782-85
6 Nos. 02-2649, 02-2650

(9th Cir. 2002). (The applicability of the doctrine of unconscionability to arbitration clauses governed by the

Federal Arbitration Act was confirmed in Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996).) Or might

not (we needn’t decide), since the borrowers knew what

they were getting into when they took out payday loans

and must have thought themselves better off as a result

despite the stratospheric interest rates. Those interest

rates, moreover, may be as high as they are simply because

of administrative costs, which are a higher percentage

of the cost of making a loan the smaller the loan is—and

these loans are tiny—plus the risk of default, which may

be very high, the borrowers obviously being people

who have difficulty living within their income. The paydayloan business is competitive, and we are given no reason

to suppose that the loans of which the plaintiffs are

complaining are in fact extortionate. And it is not uncommon for borrowers to contract with reference to future

events, as in clauses entitling the lender to the benefit of

after-acquired collateral, though remember that the defendants do not confine their submission to future loans,

contending rather that the duty to arbitrate imposed by

the waiver agreement applies to all future legal disputes

that Instant Cash or Steinkamp may have with the signatories.

All that is certain is that the waiver agreement, read

sensibly and as a whole, with careful attention to the

relation among the clauses, does not apply to future disputes, including disputes over future loan agreements.

But that is enough to defeat the appeals.

A cynic might argue that, given the desperation of people who take out payday loans, these plaintiffs would have

signed anything, so that relieving them from the duty to

arbitrate gives them a windfall based on an oversight by
Nos. 02-2649, 02-2650 7

Instant Cash. The defendants do not make this argument, however, perhaps fearing that it would invite a

conclusion that payday loans are unconscionable and

therefore unenforceable even in states that do not deem

them usurious.

AFFIRMED.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—2-10-03