Source: https://casetext.com/case/burden-v-check-into-cash-of-kentucky-llc
Timestamp: 2020-03-28 18:07:42
Document Index: 298640565

Matched Legal Cases: ['§ 16', '§ 1', '§ 1601', '§ 1961', '§ 514', '§ 417', '§ 163', '§ 163', '§ 288', '§ 288', '§ 288', '§ 288', '§ 288', '§ 288', '§ 2', '§ 2']

Burden v. Check into Cash of Kentucky, LLC, 267 F.3d 483 | Casetext Search + Citator
Burden v. Check into Cash of Kentucky, LLC
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Full title:Beverly BURDEN, et al., Plaintiffs-Appellees, v. CHECK INTO CASH OF…
Date published: Oct 1, 2001
267 F.3d 483 (6th Cir. 2001)
holding plaintiffs' allegations that the high interest loan agreements were void as illegal was an issue to be decided by an arbitrator
Summary of this case from Jenkins v. First American Cash Advance of Georgia, LLC
No. 00-5807.
Decided and Filed: October 1, 2001.
Appeal from the United States District Court for the Eastern District of Kentucky at Lexington. No. 98-00170 — Karl S. Forester, Chief District Judge.
Barbara B. Edelman, (argued and briefed), Frank T. Becker (briefed), Dinsmore Shohl, Lexington, KY, for Appellants.
John O. Morgan, Jr., (argued and briefed), Lexington, KY, Richard A. Fisher (briefed), Logan, Thompson, Miller, Bilbo, Thompson Fisher, Cleveland, TN, Jack L. Block (briefed), Sachnoff Weaver, Chicago, IL, for Appellees.
Defendants, Check Into Cash of Kentucky, LLC, and W. Allan Jones, Jr., appeal from the district court's order denying Defendants' motion brought pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., to compel arbitration of claims brought by Plaintiffs, Beverly Burden, Chapter 13 bankruptcy trustee for multiple estates, et al., alleging violations of federal and Kentucky law arising from high-interest loan agreements between Plaintiffs and Defendants. We VACATE the district court's order and REMAND for further consideration of Defendants' motion to compel arbitration in light of Plaintiffs' allegations that the arbitration agreements are unenforceable due to burdensome costs, denial of statutory rights, and uninformed waiver of jury trial rights.
Plaintiffs filed their original complaint in the district court on April 28, 1998, which was amended on May 5, 1998. On July 6, 1998, Plaintiffs filed their second amended complaint, alleging violations of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1961 et seq., and several consumer protection statutes under Kentucky law. On June 2, 1998, Defendants moved to certify a question of law to the Kentucky Supreme Court: whether fees charged by a licensed check cashing company constituted interest subject to Kentucky usury laws. On August 25, 1998, the district court ordered Plaintiffs' action to be held in abeyance pending resolution of the question by the Kentucky Supreme Court.
On December 1, 1999, Plaintiffs moved to proceed as a class action pursuant to Fed.R.Civ.P. 23(c)(1). Defendants thereafter moved for an extension of time to respond to Plaintiffs' motion. On January 6, 2000, Defendants filed a motion under the FAA to compel arbitration of claims brought by Plaintiffs, and to stay litigation pending arbitration. The district court denied Defendants' motion on May 12, 2000, and it is from this order that Defendants now appeal.
Plaintiffs allege that Defendants have loaned money at usurious interest rates to hundreds of Kentucky consumers. The consumers entered into "check cashing agreements" with Defendants (the "loan agreements"). Under the loan agreements, Defendants would provide a borrower with, for example, $200 in cash in exchange for a check in the amount of $238. The loan agreement would refer to the $38 difference as a "finance charge," which, the agreement stated, "is deemed a service fee by Kentucky law and not interest. K.R.S. 368.100(2)." (J.A. at 458.)
Defendants would then hold the check until the payment due date, which was normally two weeks after the date of the loan agreement. These terms resulted in annual percentage rates of over 500%, which was stated in the loan agreement. If, as of the payment due date, the borrower lacked sufficient funds to cover the check, Defendants would permit the borrower to roll-over the debt by paying the "service fee," executing a replacement check in the same amount as the original check, and establishing a new payment due date two weeks from the roll-over date. Plaintiffs allege that Defendants coerced borrowers into rolling over their debt by threatening otherwise to prosecute under the Kentucky "bad check" law. See Ky. Rev.Stat. Ann. § 514.040 (Banks Baldwin 1994).
Kentucky's Uniform Arbitration Act provides that "[a] written agreement to submit any existing controversy to arbitration or a provision in written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract." Ky.Rev.Stat. Ann. § 417.050 (Banks Baldwin 1994).
The district court concluded, primarily under Three Valleys Municipal Water District v. E.F. Hutton Co., 925 F.2d 1136, 1139 (9th Cir. 1991), that Plaintiffs' allegations that the loan agreements containing the arbitration clause were void ab initio, must be determined by a court, not an arbitrator. Defendants contend that under Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), Plaintiffs' allegations of void loan agreements are to be determined by an arbitrator.
Under section 3 of the FAA, when an action is brought in federal court "upon any issue referable to arbitration under agreement in writing for such arbitration," the court must "stay the . . . action pending arbitration once it is satisfied that the issue is arbitrable under the agreement." Prima Paint Corp., 388 U.S. at 400, 87 S.Ct. 1801. "[A]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Wilson Elec. Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167, 169 (6th Cir. 1989) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).
Under Prima Paint, a court, rather than an arbitrator, may adjudicate a claim of fraud in the inducement only if the claim of fraud concerns the inducement of the arbitration clause itself, not the inducement of the contract generally. Prima Paint, 388 U.S. at 403-04, 87 S.Ct. 1801. The Court in Prima Paint found that arbitration clauses were "separable" from the contracts in which they were included, and that "a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced from fraud." Prima Paint, 388 U.S. at 402, 87 S.Ct. 1801. "If the arbitration clause is not at issue, then the arbitrator will decide challenges to the contract containing the arbitration clause." C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin Jenrette Sec. Corp., 912 F.2d 1563, 1567 (6th Cir. 1990).
The void/voidable distinction is relevant for Prima Paint analysis because a void contract, unlike a voidable contract, was never a contract at all. Thus, a valid arbitration agreement "cannot arise out of a broader contract if no broader contract ever existed." Sandvik, 220 F.3d at 108. Accordingly, Prima Paint "presumes an underlying, existent, agreement." Id. at 106.
Although the reasoning of the Third, Seventh, Eighth, Ninth, and Eleventh Circuits is clear, this reasoning appears to be in tension with language in C.B.S. Employees, wherein this Court discounted the role of the fraud in the factum/fraud in the inducement distinction under Prima Paint. The Restatement provides that § 163, which addresses void contracts, concerns misrepresentations in "the `factum' or the `execution' rather than merely the `inducement'" of the contract. Restatement (Second) of Contracts § 163 cmt. a (1979). Fraud in the factum or execution, "that is, the sort of fraud that procures a party's signature to an instrument without knowledge of its true nature or contents," renders a contract void, while fraud in the inducement renders a contract merely voidable. W.T. Langley v. FDIC, 484 U.S. 86, 93-94, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987) (citations omitted).
We note that this Court in C.B.S. Employees, in not wanting to confound the dispositive question, may in fact have begged the dispositive question. That is, it is not clear that citation to Prima Paint, without more, answers the void ab initio question, inasmuch as Prima Paint failed to address the void ab initio question. Indeed, if anything, we are inclined to find that Prima Paint supports, rather than prohibits, excluding nonexistent contracts from the severability doctrine, because an allegation of a void contract raises exactly the same question as an allegation of a fraudulently induced arbitration agreement: whether the arbitrator has any power at all. Cf. Prima Paint, 388 U.S. at 404 n. 12, 87 S.Ct. 1801 ("To immunize an arbitration agreement from judicial challenge on the ground of fraud in the inducement would be to elevate it over other forms of contract"). The Seventh Circuit recently captured the point in four words: "No contract, no power." Sphere Drake Ins., 256 F.3d at 591. Nevertheless, we need not reach the question here, because the district court's application of Three Valleys in this case was erroneous and requires reconsideration.
The district court, relying on Three Valleys, found that because Plaintiffs had alleged that the loan agreements were void ab initio, those allegations were to be determined by the court, rather than an arbitrator. First, the above is a correct statement of Ninth Circuit law, but the district court failed to address how Three Valleys can be reconciled with C.B.S. Employees. Second, the district court erred when construing Plaintiffs' allegations under § 288.991 and § 288.420 — that any loan contract made in violation of § 288.991 shall be void, and that Defendants were not licensed to enter into the loan agreements — as allegations of void ab initio contracts under the Three Valleys line of cases.
Consistent with the nature of fraud in the factum allegations, courts have addressed questions of void ab initio contracts as questions of signatory power, not contract content. See Aircraft Braking Sys. Corp. v. Local 856, Int'l Union, 97 F.3d 155, 157-58 (6th Cir. 1996) (examining whether interim contract existed despite failure to ratify); Sphere Drake Ins., 256 F.3d at 590-91 (determining whether signatory had power to bind company); Sandvik, 220 F.3d at 110 (determining whether signatory had power to bind company); Chastain, 957 F.2d at 854 (determining whether signatory had power to bind family member); Three Valleys, 925 F.2d at 1140 (examining whether signatory had power to bind principals); I.S. Joseph Co., 803 F.2d at 400 (determining whether assignee of signatory had power to enforce arbitration agreement); Cancanon v. Smith Barney, Harris, Upham Co., 805 F.2d 998, 1000 (11th Cir. 1986) (finding that an allegation of fraud in the factum is an allegation of ineffective assent to the contract); Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 55 (3d Cir. 1980) (determining whether signatory had power to bind company); ND Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722, 729 (8th Cir. 1976) (examining whether signatory had power to enter into arbitration agreement).
Further, although Plaintiffs' allegations under § 288.420 do concern signatory power, in that Defendants were allegedly not licensed to enter into the loan agreements and thus, Plaintiffs contend, had no authority to enter into the loan agreements, we must nevertheless vacate the district court's application of Three Valleys to the allegations under § 288.420 as well. First, Plaintiffs have not addressed why Three Valleys, rather than C.B.S. Employees, should control the determination of their allegations. Second, Plaintiffs have not addressed the distinction between entering into a loan agreement with an unlicensed lender and not assenting to a loan agreement at all. Although § 288.420, like the Three Valleys line of cases, raises a question of signatory power, the question in this case is different in that the signatory issue arises only on the side of the parties moving for arbitration. Whether Three Valleys requires that parties resisting arbitration allege that they never agreed to any contract at all, is of no moment here because Plaintiffs have not addressed the issue.
Nevertheless, under Prima Paint, issues relating to the making of an arbitration agreement, separate from the underlying contract, are to be determined by the court, not the arbitrator. Prima Paint, 388 U.S. at 404, 87 S.Ct. 1801. "So, for example, a challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, while a challenge based on the lack of mutuality of the arbitration clause would be for the court." Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 868 (7th Cir. 1985) (citations omitted). "If the fraud relates to the arbitration clause itself, the court should adjudicate the fraud claim." Ferro Corp. v. Garrison Indus., 142 F.3d 926, 933 (6th Cir. 1998) (quoting R.M. Perez Assocs., Inc. v. Welch, 960 F.2d 534, 539 (5th Cir. 1992)). Because the district court relied on Three Valleys in denying Defendants' motion to compel arbitration, Plaintiffs' allegations concerning the making of the arbitration agreements, separate from the loan agreements, were not considered.
Although C.B.S. Employees declined to adopt the fraud in the factum/fraud in the inducement distinction when applying Prima Paint, nevertheless this Court remanded to the district court in that case allegations of fraud in the inducement of the arbitration agreement itself. C.B.S. Employees characterized the Prima Paint question as "whether CBS' fraud claim involves the making of the arbitration clause." C.B.S. Employees, 912 F.2d at 1568. Specifically, where "the plaintiff affirmatively pleads that the contract and the arbitration agreement included therein were procured through fraud, the court should determine whether the arbitration clause was used to further the fraudulent scheme." Id.
Specifically, for a complaint of fraud in the inducement to survive Prima Paint, the complaint must contain "a well-founded claim of fraud in the inducement of the arbitration clause itself, standing apart from the whole agreement, that would provide grounds for the revocation of the agreement to arbitrate." Arnold, 920 F.2d at 1278 (emphasis in original). The only aspect of Plaintiffs' fraud allegations which concerns the arbitration agreements, standing apart from the loan agreements, is the claim that Plaintiffs were not aware that the arbitration clauses had been added to the reverse side of the loan agreements in December of 1997. However, one who signs a contract is presumed to know its contents. Stout, 228 F.3d at 715.
Plaintiffs' "fraudulent scheme" claim is unavailing because no aspect of the claim concerns the arbitration agreements, separate from the loan agreements. That is, under Prima Paint and Arnold, Plaintiffs' fraudulent scheme claim does not constitute a claim of fraudulent inducement concerning the making of the arbitration agreements. Moreover, as noted by Defendants, Plaintiffs did not raise below the claim that the arbitration agreements were used in furtherance of a fraudulent scheme. Thus, in addition to the claim's failure to survive Prima Paint, it is also waived. See Foster v. Barilow, 6 F.3d 405, 408 (6th Cir. 1993).
Under the FAA, generally available contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). We note, however, that Plaintiffs' claims as to the unenforceability of the arbitration agreements, separate from the loan agreements, goes against strong precedent. As to the potentially burdensome costs of arbitration, the party resisting arbitration has the burden of showing the likelihood that "arbitration would be prohibitively expensive." Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 81, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). As to Plaintiffs' waiver of statutory class action rights, it is Plaintiffs' burden to show that Congress intended such rights to be non-waivable, a burden that the Eleventh Circuit recently found had not been met under TILA. Randolph v. Green Tree Fin. Corp., 244 F.3d 814, 818 (11th Cir. 2001). As to the failure of the arbitration clause to include a jury waiver provision, "the loss of the right to a jury trial is a necessary and fairly obvious consequence of an agreement to arbitrate." Sydnor v. Conseco Fin. Servs. Corp., 252 F.3d 302, 307 (4th Cir. 2001).
We set out this precedent as an indication of the limited prospects such claims ultimately face. Nevertheless, because these claims attack the enforceability of the arbitration clause separate from the underlying loan agreements, the claims are to be determined by a court, not an arbitrator. When determining the enforceability of an arbitration agreement, a court "can investigate the existence of such grounds as exist at law or in equity for the revocation of any contract . . . However, the grounds for revocation must relate specifically to the arbitration clause and not just to the contract as a whole." Hooters of Am. v. Phillips, 173 F.3d 933, 938 (4th Cir. 1999) (citing 9 U.S.C. § 2; Prima Paint, 388 U.S. at 402-04, 87 S.Ct. 1801) (internal quotation marks omitted).
We note that the district court's order in this case, denying Defendants' motion to compel arbitration, was based only on the preliminary determination that Plaintiffs had alleged void ab initio contracts, without a subsequent determination that the contracts were actually void ab initio. Allegations concerning the validity of an arbitration agreement "should ordinarily be decided in the trial court before final resolution of a motion to compel arbitration." Chastain, 957 F.2d at 856 (citations omitted; emphasis omitted). Accordingly, because the district court merely identified, and did not decide, Plaintiffs' allegations concerning the existence and enforceability of the arbitration agreements, we do not construe its order in this case to be a final resolution of Defendants' motion to compel arbitration. Further, we only remand Plaintiffs' allegations that the arbitration agreements, separate from the loan agreements, are not enforceable against them, on "`grounds as exist at law or in equity for the revocation of any contract.'" Doctor's Assocs., 517 U.S. at 683, 116 S.Ct. 1652 (quoting 9 U.S.C. § 2).
It is not uncommon to obtain appellate review of a district court order denying a motion to compel arbitration brought pursuant to the FAA, prior to the district court's actual determination of the allegations giving rise to the order. See C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin Jenrette Sec. Corp., 912 F.2d 1563, 1566 (6th Cir. 1990) ("The district court concluded that the allegation of fraud in this case is one of `fraud in the factum' and [thus] the case is one for the court and not the arbitrator to decide."); Sandvik AB v. Advent Int'l Corp., 220 F.3d 99, 102 (3d Cir. 2000) ("[T]he District Court concluded that it could not order arbitration until it determined the validity of the underlying contract."); Chastain v. Robinson-Humphrey Co., Inc., 957 F.2d 851, 852 (11th Cir. 1992) (finding that the district court's denial of a motion to compel arbitration "implicitly" ruled that the FAA proscribed compelling arbitration until the district court determined that the party resisting arbitration was "contractually obligated to submit to arbitration").
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