SC02-2161 – John A. Cardegna, Et Al. v. Buckeye Check Cashing, Inc., Etc.

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State: Florida

Court: Supreme Court

Docket No: SC02-2161

Case Date: 01/20/2005

Preview:Supreme Court of Florida
____________ No. SC02-2161 ____________ JOHN CARDEGNA, et al., Petitioners, vs. BUCKEYE CHECK CASHING, INC., Respondent. [January 20, 2005] ANSTEAD, J. We have for review Buckeye Check Cashing, Inc. v. Cardegna, 824 So. 2d 228 (Fla. 4th DCA 2002), which expressly and directly conflicts with the decision in FastFunding the Company, Inc. v. Betts, 758 So. 2d 1143 (Fla. 5th DCA 2000). We have jurisdiction. See art. V, ' 3(b)(3), Fla. Const. For the reasons expressed below, we quash the decision of the Fourth District Court of Appeal in Buckeye, and approve the decision of the Fifth District Court of Appeal in FastFunding. We hold 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. 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, 824 So. 2d at 229. The district court continued: The trial court denied Appellant's motion to compel arbitration, relying on Party Yards, Inc. v. Templeton, 751 So. 2d 121 (Fla. 5th
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DCA 2000), and FastFunding v. Betts, 758 So. 2d 1143 (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, 824 So. 2d at 229-30. The Fourth District reversed the trial court's decision and held that Cardegna's challenge to the underlying contract's validity must be resolved by an arbitrator, not a trial court. 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, 758 So. 2d at 1143. The complaint asserted that "under the guise of a payment instrument sale," FastFunding compelled the payment of unconscionable, usurious interest rates on check cashing loans, in violation of various Florida statutes. Id. at 1144. Pursuant to the arbitration clause of the contract, FastFunding moved to compel arbitration. Id. FastFunding's motion was denied by the trial court. Id.
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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, 758 So. 2d at 1144. In the earlier decision, Party Yards, Inc. v. Templeton, 751 So. 2d 121 (Fla. 5th DCA 2000), the district court held that "[w]here the facts alleged by the plaintiff are sufficient to put the making of a lawful agreement at issue, the trial court must determine the validity of the agreement before compelling a party to submit to arbitration." Id. at 124. Judge Sharp, writing for the district court, reasoned: 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
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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. Prima Paint Buckeye asserts that the U.S. Supreme Court's decision in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967), supports the Fourth District's decision and requires that an arbitrator resolve Cardegna's illegality claim, because the parties agreed in the contract to be governed by the Federal Arbitration Act and the cases applying the Act. 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. Having acknowledged that various courts have differed in their approach to resolving this question, the Court agreed with the approach of the Second Circuit Court of Appeals that the arbitration clause contained in a contract may be severable from the contract itself, and that "where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud." Id. at 402. In so holding, the Court looked to the express language of the United States
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Arbitration Act (now known as the Federal Arbitration Act (FAA)), which required a federal court to order arbitration to proceed if it determined that the making of the arbitration agreement itself or failure to comply with the arbitration agreement was not in issue. See Prima Paint, 388 U.S. at 402. The Court reasoned that this requirement reflected the intent of Congress to provide a speedy remedy for parties who elected to resolve disputes via arbitration. Id. at 404. 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., 926 P.2d 1061, 1074 (Cal. 1996) (stating that contracts that render an agreement void ab initio are not arbitrable); R.P.T. of Aspen, Inc. v. Innovative Communications, Inc., 917 P.2d
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340, 342 (Col. Ct. App. 1996) (stating that "if a party asserts that the entire contract is illegal, the court must determine this threshold issue"). A number of federal courts have likewise distinguished Prima Paint and declined to extend its holding to instances where a party claims that a contract was void from its inception. See Spahr v. Secco, 330 F.3d 1266, 1272 (10th Cir. 2003) (holding "that the rule announced in Prima Paint does not extend to a case where a party challenges a contract on the basis that the party lacked the mental capacity to enter into a contract"); Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587, 591 (7th Cir. 2001) (concluding that "as arbitration depends on a valid contract an argument that the contract does not exist can't logically be resolved by the arbitrator"); Sandvik AB v. Advent Int'l Corp., 220 F.3d 99, 110 n.9 (3d Cir. 2000) (stating that Prima Paint's "holding dealt strictly with fraud in the inducement of the larger contract and made no broader pronouncements regarding 'void' agreements"); Chastain v. Robinson-Humphrey Co., 957 F.2d 851, 855 (11th Cir. 1992) (stating that "Prima Paint has never been extended to require arbitrators to adjudicate a party's contention, supported by substantial evidence, that a contract never existed at all"); Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir. 1991) (limiting Prima Paint to voidable contracts and holding that a challenge to a signatory's authority to bind plaintiffs to an agreement must be resolved by a trial court). We agree with the reasoning of these cases
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distinguishing Prima Paint. 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, 294 F.3d 1298 (11th Cir. 2002). In that case, the plaintiffs also challenged the legality of a check cashing contract's arbitration clause. The Eleventh Circuit held that because there was no dispute about the plaintiffs' assent to the contract itself, the contract was presumptively valid, and any disputes, including those about the validity of the contract, were to be determined by an arbitrator. Id. at 1305. However, the case presently before us is distinguishable because Bess was expressly resolved under federal law, not state law principles. The court said: "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 9 U.S.C. ' 4, a question of federal law." Bess, 294 F.3d at 1306 n.3 (emphasis supplied). 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, 789 So. 2d 405, 409 (Fla. 4th DCA
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2001). This Court itself long ago declared: 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, 26 So. 2d 884, 887 (Fla. 1946). As others have also noted, "Contracts in violation of statutory prohibitions are void, and issues arising under such contracts are therefore not arbitrable." R.P.T., 917 P.2d at 342 (citing 2 Martin Domke, Commercial Arbitration ' 8.06 (rev. ed. 1995)). 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. 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
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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. NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION, AND IF FILED, DETERMINED.

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
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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 checkcashing 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, 824 So. 2d 228, 229 (Fla. 4th DCA 2002).
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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 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

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