Opinion ID: 75874
Heading Depth: 2
Heading Rank: 2

Heading: The Legality of the Deferred Payment Transactions

Text: 15 That brings us to Colburn's alternative argument that the deferred payment transactions are void ab initio because they violate the Alabama Small Loan Act. 2 Colburn contends that the court, rather than the arbitrator, must decide the legality of these transactions, and the district court therefore was correct in not compelling arbitration until this issue is resolved. PayDay, by contrast, maintains that the validity of the transactions is an issue for the arbitrator, not the court, and it asserts that its motion to compel arbitration should therefore have been granted. Thus, before considering the legality of the deferred payment transactions, we must decide whether this issue is one for the court or the arbitrator. 16 The starting point for our analysis is the FAA. The FAA makes valid any written agreement to arbitrate a dispute arising out of a transaction involving interstate commerce, save upon such grounds as exist at law or in equity for the revocation of any contract. See 9 U.S.C. § 2. Where a party to such an agreement fails or refuses to arbitrate, the other party may move the district court for an order compelling arbitration. See id. § 4. The district court must grant the motion if it is satisfied that the parties actually agreed to arbitrate the dispute. See id. § 4. If the making of the arbitration agreement is in issue, however, the court must first adjudicate whether the agreement is enforceable against the parties. See id.; see also Chastain v. Robinson-Humphrey Co., 957 F.2d 851, 853-54 (11th Cir.1992). 17 The resolution of our question, then, turns on whether Colburn's assertions of illegality with regard to the deferred payment transactions place the making of the arbitration agreement in issue. Our answer is informed by the Supreme Court's decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). The plaintiff in that case brought an action in federal court to rescind a contract on the grounds that the contract was fraudulently induced. Invoking the contract's arbitration clause, the defendant moved to stay the action pending arbitration, which the district court granted. The Supreme Court upheld the district court's stay, concluding that a claim of fraudulent inducement of the contract generally was a matter to be resolved by the arbitrator, not the court. Id. at 403-04, 87 S.Ct. at 1806. The Court distinguished this claim from a claim that the arbitration clause itself was fraudulently induced, a claim that clearly would put the making of the arbitration agreement in issue. Id. Because the plaintiff alleged fraudulent inducement only as to the underlying contract generally, and not as to the arbitration clause specifically, the district court properly stayed the litigation. 18 Because Colburn's allegations of illegality go to the deferred payment transactions generally, and not to the arbitration agreement specifically, it would appear that, under Prima Paint, an arbitrator should decide those questions. Colburn, however, contends that this court's decision in Chastain, supported by several decisions from other circuits, mandates a different conclusion. In Chastain, this court held that the district court, rather than the arbitrator, must decide the validity of two contracts containing arbitration clauses where it was undisputed that one of the parties to the litigation never signed the contracts. See Chastain, 957 F.2d at 853-54. The court distinguished the allegations of fraudulent inducement in Prima Paint by noting that, in the case before it, the allegation was that a contract never existed at all,  an allegation that the holding in Prima Paint did not reach. Id. at 855 (emphasis in original). The court also distinguished the unique facts of the case before it with what it described as normal circumstances, under which an arbitration provision within a contract admittedly signed by the contractual parties is sufficient to require the district court to send any controversies to arbitration. Id. at 854. Under such circumstances, the parties have at least presumptively agreed to arbitrate any disputes, including those disputes about the validity of the contract in general.  Id. (emphasis in original). Where the party seeking to avoid arbitration admittedly did not sign any contract requiring arbitration, however, there is no presumptively valid general contract which would trigger the district court's duty to compel arbitration pursuant to the [FAA]. Id. Accordingly, before it could decide whether the FAA mandated it to compel arbitration, the district court had to determine whether valid contracts existed, or more specifically, whether both of the parties assented to the contracts containing the arbitration provisions. 19 Likening his void ab initio allegations to the contentions in Chastain that no contract ever existed, Colburn argues that, as in Chastain, the court must determine the legality of the deferred payment transactions before deciding whether to compel arbitration. But the focus of the court's decision in Chastain, as just explained, was on the question of assent, i.e., whether the parties mutually had agreed to the contracts. By contrast, Colburn urges that the transactions in this case are void, not because he failed to assent to the essential terms of the contracts, but because those terms allegedly render the contracts illegal under Alabama law. 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. 20 None of the decisions cited by Colburn from our sister circuits counsels a different conclusion. Like Chastain, all of those cases involved questions of assent to the general contract. See Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587, 590-91 (7th Cir.2001) (concluding that court, rather than arbitrator, should determine whether agent had authority to bind principal to underlying contract); Sandvik AB v. Advent Int'l Corp., 220 F.3d 99, 104-10 (3d Cir.2000) (same); Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1140-41 (9th Cir.1991) (same); I.S. Joseph Co. v. Michigan Sugar Co., 803 F.2d 396, 400 (8th Cir.1986) (concluding that court, rather than arbitrator, should decide whether assignee of original party could enforce arbitration clause). We are aware of only one other circuit to address the question presented in this case — whether an attack on a deferred payment transaction as illegal under state law is to be decided by the court or by the arbitrator — and that circuit reached the same conclusion that we reach today. See Burden v. Check into Cash of Kentucky, LLC, 267 F.3d 483, 489-90 (6th Cir.2001) (concluding that plaintiffs' allegations that deferred payment contracts were void as illegal constituted challenge to substance of loan agreements and should thus be decided by arbitrator rather than by court). Because Colburn's void ab initio argument is an issue for the arbitrator, it does not furnish an adequate basis for denying PayDay's motion to compel arbitration. 3