Buckeye and Progeny

In Buckeye Check Cashing, Inc. v. Cardegna (Buckeye), this week’s reading addressed whether “the doctrine of Prima Paint extend[s] to a scenario where a contract is allegedly void because it is illegal --- even criminal --- under state law.”  For purposes of recap, Prima Paint's doctrine is that an arbitrator must decide a challenge to the enforceability of a contract when the contract has an arbitration clause, unless the challenge is to the arbitration clause itself.

In Buckeye, John Cardegna signed a contract for a loan from Buckeye Check Cashing.  The contract contained a clause in which Cardegna agreed to resolve any controversies concerning the loan through arbitration.  Sometime later, Cardegna sued Buckeye, claiming that the conditions for the loan stipulated by the contract were illegal; specifically, that the loan rates involved in the contract were usurious.  Buckeye filed a motion to compel to have the case resolved by arbitration, as required by the contract.  Cardegna countered that the contract as a whole was illegal and that the arbitration clause was therefore not enforceable.  The court agreed and ruled for Cardegna.

On appeal, the state appeals court reversed, holding that the FAA, as interpreted by the Supreme Court, allows arbitration clauses to be enforced even if they are part of otherwise invalid contracts.  The appeals court relied on the U.S. Supreme Court's decision in Prima Paint.  The Florida Supreme Court disagreed with the appeals court's use of Prima Paint, however, because the contract in that case had been merely voidable, while the contract in Cardegna's case was actually illegal, or void.  The Florida Supreme Court therefore reversed, ruling in favor of Cardegna.

The Supreme Court granted certiorari.  On appeal, the Court decided whether, under the FAA, a party may avoid arbitration by arguing that the contract in which the arbitration clause is contained is illegal?

The Court ruled that challenges to the legality of a contract as a whole must be argued before the arbitrator rather than a court.  The opinion explained "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance."  The Court held that the Florida Supreme Court had been wrong to rely on a distinction between void and merely voidable contracts, because the word "contract" in the FAA includes contracts later found to be void.

In the notes and questions section following the Buckeye opinion, this week’s reading provides the following background information and asks the following question:

A contract between Ferrer, who appears on television as “Judge Alex,” and Preston, an entertainment lawyer, required arbitration of “any dispute . . . relating to the [contract] terms . . . of the breach, validity, or legality thereof . . . in accordance with the [AAA] Rules.”  When Preston demanded arbitration, seeking fees allegedly due under the contract, Ferrer petitioned the California Labor Commissioner for a determination that the contract was invalid and unenforceable under the California Talent Agencies Act because Preston had failed to acquire a license as a talent agent.  Should a court enforce the arbitration agreement or direct the parties to proceed before the Labor Commissioner?

Before addressing the foregoing question, it is interesting to note that “Judge Alex” is not actually a judge, but is rather an arbitrator.  In 1995, he became an Associate Administrative Judge in the Criminal Division of the Eleventh Judicial Circuit, where he spent ten years presiding over criminal cases.  He also presided as an appellate judge over appeals from the Miami-Dade County Court, County Commission, and numerous other governmental bodies.  In 1999, he was elected to serve as District Representative to the Executive Committee of the Conference of Circuit Court Judges, a position he held until 2001.  He is a member of the Florida Bar and the District of Columbia Bar Association.  He has been an adjunct professor at Florida International University, and teaches media relations to other judges at The New Judges College and The College of Advanced Judicial Studies, as well as at various national conferences.

With Buckeye’s holding in mind, before reading the case, I surmise that the answer to the above question is that a court should enforce the arbitration agreement.  After all, in Buckeye, the court stated:  "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance."  The foregoing excerpt does not appear to provide a loophole for the fact pattern presented above; rather, it very broad.

As expected, the court ruled that the answer to the above question is that a court should enforce the arbitration agreement.

It is interesting to note that Buckeye was decided while Preston's appeal was pending.  Therefore, not surprisingly, Preston argued that under Buckeye the trial court had erred in enjoining the arbitration, because the arbitrator, not the Labor Commissioner, should decide the validity of the contract.  The state appellate court disagreed, distinguishing Buckeye on the ground that it did not apply to decisions of administrative agencies.

The Supreme Court granted certiorari and reversed.  The Court said that the key question was “who decides whether Preston acted as personal manager” (in which case the contract would be valid) “or as talent agent” (in which case the contract would be void).  Preston argued that, under Buckeye, that was a question for the arbitrator; Ferrer insisted that the Labor Commissioner should get first crack at it.  The Supreme Court agreed with Preston.

Do you buy the holding of Buckeye and its progeny?  Should voidable and void contracts be treated differently?  Reflect on a phrase from the reading:  “to enforce an agreement to arbitrate in a contract challenged as unlawful[, or void,] ‘could breathe life into a contract that not only violate state law, but also is criminal in nature . . . .’”

Sources:

The Book;

http://en.wikipedia.org/wiki/Alex_Ferrer

Buckeye

Preston