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Buckeye Check Cashing, Inc. v. Cardegna

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Sylvia Kaminsky

Date Promulgated: February 21, 2006

Issue Addressed: Challenge to Validity of Contract containing an Arbitration Clause is to be decided by the Arbitrator

The United States Supreme Court recently held that a challenge to the validity of a contract containing an arbitration clause is to be decided by the arbitrator. Only where the challenge is made specifically with respect to the validity of the arbitration clause itself is the issue is to be determined by a court.

Buckeye arises out of a class action lawsuit commenced in Florida State Court in which the class plaintiffs alleged that Buckeye made illegal (usurious) loans disguised as check cashing transactions wherein checks were cashed for a fee. The transactions were governed by an agreement containing an arbitration clause providing that “any claim, dispute or controversy…arising from or relating to this agreement…or the validity, enforceability or scope of this Arbitration Provision or the entire agreement…shall be resolved…by binding arbitration….” After being sued in the Florida state court, Buckeye moved to compel arbitration. Plaintiffs opposed the motion on the grounds that the contracts were invalid under various Florida civil and criminal laws, rendering them illegal and void ab initio – – issues which should properly be decided by the court. The trial court refused to refer the issue to arbitration on the grounds that it was for the court to decide whether an agreement was void. On appeal the Florida Court of Appeals reversed, holding that a challenge to the contract as a whole (not simply to the Arbitration Provision) is a matter for arbitration. The Supreme Court of Florida reversed and reinstated the decision of the trial judge. The Florida Supreme Court expressed concern that an agreement to arbitrate in a contract challenged as unlawful “could breathe life into a contract that not only violates states’ law, but also is criminal in nature….” The United States Supreme Court reversed and referred the matter to arbitration.

In finding that the issue of the validity of a contract as a whole is to be decided by arbitration, the Supreme Court’s decision begins with a recapitulation of the fundamental objectives of the Federal Arbitration Act, which provides in Section 2 that it “embodies the national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts. That Section further provides that, “[c]hallenges to the validity of arbitration agreements upon such grounds as exist at law or in equity for the revocation of any contract can be divided into two types. One type challenges specifically the validity of the agreement to arbitrate…. The other challenges the contract as a whole….”

The Court reviewed two of its prior decisions in this area, Southland Corp. v. Keating, 465 U.S. 1 (1984) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), in which the Court found the answers to the issues before it in Buckeye. In Prima, the court found the FAA was clearly applicable to the contract in issue (which evidenced a transaction in interstate commerce) and held that the proper forum for a claim of fraud in the inducement of an arbitration clause is the court. In Southland, where the question of whether claims under a state statute were exempt from an otherwise enforceable arbitration clause subject to the FAA, the Court held that the FAA applies in both federal and state court, and voids any state statute which purports to remove from arbitration a claim otherwise covered by the FAA.

In Buckeye, the Supreme Court found that Prima Paint and Southland establish three propositions: 1) an arbitration provision is severable from the remainder of the contract; 2) unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator; and 3) the first two points apply in state and federal courts. Accordingly, the Supreme Court ruled in Buckeye that the arbitrator must determine the issue of whether the contract was in violation of various Florida statutes because the attack was not addressed specifically to the arbitration clause but to the contract as a whole. The Court rejected the Florida Supreme Court’s ruling that an arbitration clause cannot be separated from a contract otherwise illegal or unenforceable under state law. It further rejected the argument that Prima Paint’s rule of severance only applies in federal court. The Supreme Court reiterated its determination that Congress did not intend to limit the FAA only to disputes in federal courts.

*Sylvia Kaminsky is currently an ARIAS certified umpire and arbitrator as well as a consultant to the insurance/reinsurance industry. She is a lawyer licensed in New York. She was formerly General Counsel, Sr. V.P. and Corporate Secretary of Constitution Reinsurance Corporation; Deputy General Counsel of Gerling Global and Sr. V. P. of Claims; and was in private legal practice for 15 years serving the industry.