Opposition Brief — Buckeye Check Cashing, Inc. v. Cardegna

No. 04-1264 pina

Supreme Court of the United States

Buckeye Check Cashing, Inc., et al.,

Peutioners,

John Cardegna, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

Supreme Court of the State of Florida

BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

F. Paul Bland, Jr.

Counsel of Record

TRIAL LAWYERS FOR

PUBLIC JUSTICE, P.C.

1717 Massachusetts Avenue,

NW, Suite 800

Washington, DC 20036

Telephone (202) 797-8600

E. Clayton Yates

YATES & MANCINI, LLC.

311 Second Street, Suite 102

Fort Pierce, Florida 34950

Telephone (772) 465-7990

SS,

Christopher C. Casper

JAMES, HOYER,

NEWCOMER &

SMILJANICH, P.A.

4830 West Kennedy Blvd.

Suite 550

Tampa, Florida 33609

Telephone: (813) 286-4100

Richard A. Fisher

RICHARD FISHER LAW

OFFICE

1510 Stuart Road, Suite 210

Cleveland, Tennessee 37312

Telephone (423) 479-7009

Table of Contents

: INTRODUCTION

STATEMENT OF THE CASE AND OF

THE FACTS

REASONS FOR DENYING THE PETITION

I. THE DECISION BELOW IS CONSISTENT

WITH THE DECISIONS OF THIS COURT. ......... 7

! Re RS ie a

a ES EN, MEL Ree, ey wey a oe

A. The Decision Below is Consistent With this

Court’s Guidance that Arbitration Clauses

Are Subject to State Laws Applicable to

All Contracts

1. This Court Has Directed That Arbitration

. Clauses Are Governed By Generally

> Applicable State Law

2. Florida Law Providing That Illegal Contracts

‘ Are Void Ab Initio Is Longstanding and

Generally Applicable Law

B. The Decision Below Is Consistent With the Prima Paint

Decision

1. Prima Paint Involves Contracts that Are

Voidable, And Not Contracts that Are

Velie GO RD oc idciincacstsseen eee 13

2. The Decision Below Is Consistent With this

Court’s Direction that Arbitration Clauses

Be Placed On the Same Footing as

Cihar COND oo oc cnctsevsceseseeeee 15

C. Petitioners’ Proposed Rule of Law Would Lead to

Anomalous and Absurd Results ................ 18

D. Petitioners’ Position Also Is Contrary to this

Court’s Direction in Howsam that Gateway

Questions Relating to the Existence of an

Arbitration Clause Are for the Court, Not the

rrr 23

Il. THIS CASE DOES NOT PRESENT AN ISSUE WORTHY

OF CERTBORARE noc ccsccesbevsesenee 24

CORCLUMIOI ww ccccccccceeseeese ee 25

ili

ed

Table of Authorities

Cases

Allied-Bruce Terminix Co.'s, Inc. v. Dobson,

re ere caeeeieceteece< 2,7, 16

Armendariz v. Foundation Health Psychcare

Services, Inc., 99 Cal. Rptr. 2d 745 (2000) ........... 9

Banc One Acceptance Corp. v. Hill, 367 F.3d 426

EEE )

Bess v. Check Express, 294 F.3d 1298 (11" Cir. 2002) 21-22

Buehler v. LTI Int'l, Inc., 762 So.2d 530

eds eke eecesecese 11

Camacho v. Holiday Homes, Inc., 167 F. Sup, ‘d

ee ea Be ine eeseuces 9

Carll v. Terminix Int'l Co., L.P., 793 A.2d 921

ie wieeee deed eet ededeceséceesce 9

Chandris, S.A. v. Yanakaksis, 668 So.2d 180

(Fla. 1995), reh'g denied (1996) ............0...4.. 12

Chastain v. Robinson Humphrey Co., Inc., 957

EE 20-21

Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681

Neen cebecceteees 16

iv

D.R. Horton, Inc. v. Green, 96 P.3d 1159 (Nev. 2004) .... 9

Dumais v. American Golf Corp., 299 F.3d 1216

SL PT scaudischebuceduansseusaneenwes 8

Edwards v. Trulis, 212 So.2d 893

Se SORE SED Sn cebenkesesoucenceseconees 1]

Equal Employment Opportunity Comm'n v.

Waffle House, Inc., 122 S. Ct. 754 (2002) ........... 16

First Options of Chicago, Inc. v. Kaplan, 514 U.S.

SEE Scneeenéadecbobeusatedbntbecencesnss 7

The Florida Bar-In re Amendment to the

Code of Professional Responsibility

Contingent Fees, 349 So.2d 630

DE éeckdecendcedianvedsscstdnecedouacenes 12

Freightliner Corp. v. Myrick, 514 U.S. 280 (1995) ...... 17

Gourley v. Yellow Transp., LLC, 178 F. Supp. 2d

SE MED odndcnovctnntactisededoussus 9

Green Tree Fin. Corp. v. Bazzle, 123 S. Ct. 2402

PEED needs descossascunensddasasdessieeweseds 8

Howsam v. Dean Witter, 537 U.S. 79 (2002) .......... 23

LS. Joseph Co., Inc. v. Michigan Sugar Co.,

SED PAS SIS EP’ Gis. WIERD nc cccccccccccccceccss 21

v

}

Iwen v. S. West Direct, 977 P.2d 989 (Mont. 1999)....... 9

Jenkins v. First Am. Cash Advance of Ga., LLC,

a 23

Kaiser Steel Corp. v. Mullins, 455 U.S. 72 (1982) ...... 11

Mazzoni Farms, Inc. v. El. DuPont DeNemours

& Co., 761 So.2d 306 (Fla. 2000) ..............4.. 14

McMullen v. Hoffman, 174 U.S. 639 (1899) ........... 11

McMullen v. Meijer, 355 F.3d 485 (6" Cir. 2004) ........ 9

Murray v. United Food & Comm. Workers Int'l

Union, 289 F.3d 297 (4th Cir. 2002) ................ 9

Popovich v. McDonald's Corp., 189 F. Supp.2d 772

De. coccndeudebeneseedessédteveneses 9

Prima Paint Corp. v. Flood & Conklin

Manufacturing Co., 388 U.S. 395 (1967) ........ passim

Quigley v. KPMG Peat Marwick, LLP, 749 A.2d

405 (N.J. Super. Ct. App. Div. 2000) .............. 8-9

Sandvik AB v. Advent Int'l Corp., 220 F.3d 99

SLED Gaus octadcudseddsuebobescioesc ce 19

Sosa v. Paulos, 924 P.2d 357 (Utah 1996) ............. 9

Sperry v. Florida ex rel. Florida Bar, 140 So.2d

587 (Fla. 1962), revld on other grounds,

S73 UD. FIPS ccc ccccvesccccccscccceces

Sphere Drake Ins. Ltd. v. All American Ins. Co.,

256 F.3d 587 (7th Cir. 2001) .... 2.6.6... eee eee

State ex rel. Dunlap v. Berger, 567 S.E.2d 265

‘LA, Y BRP TPT CLIT ee

Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004),

cert. denied, 125 §.Ct. 1304 (2005) ............

Thomas v. Ratiner, 462 So.2d 1157

(Pla. 3a DCA 19686)... . ccc ccccccccccccsves:

Three Valleys Municipal Water Dist. v. E.F.

Hutton & Co., Inc., 925 F.2d 1136

PP IE icdcncansencscncesevasccedduas

Transit Casualty Co. in Receivership v.

Certain Underwriters at Lloyd's of London,

963 S.W.2d 392 (Mo. Ct. App. 1998) ..........

In re Turner Bros. Trucking Co., Inc., 8 S.W.3d

370 (Tex. Ct. App. 1999) .........20- eee eeees

Umbel v. Foodtrader.Com, Inc., 820 So.2d 372

ie. Bab BCA BEER) nn cc ccccccccsccscccccces

Victoria v. Superior Court, 222 Cal. Rptr. 1 (1985),

reh'g denied (1986) ....... 6.6620 e cece eeeees

vii

Volt Info. Sciences, Inc. v. Board of Trustees of

Leland Stanford Junior Univ., 489 U.S. 468

DE Su bdeuebSCéGKhebEeberteedeccuecese 7, 16, 17

Williams v. Aetna Finance Co., 700 N.E.2d 859

SE tdddeseatededvaseuats deus vascuceec 9

Worldwide Inc. Group v. Klopp, 603 A.2d 788

Se CE SanGaukcdeasddskeHeccevbsadeveoéeess 9

Statutes and Legislative Materials

Federal Arbitration Act, 9 U.S.C. 1, et seq. ........ passim

Florida’s Lending Practices Act, Chapter 687,

PS weC Wadd Cee Sccass bb oUk'sevieekucs 5,6

Florida’s Consumer Finance Act, Chapter 516,

PEE ch dbréudiencdet Retatdde keensens 5, 6

Florida’s Deceptive and Unfair Trade Practices Act,

Chapter 501, Part II, Florida Statutes .............. 5,6

Florida’s Civil Remedies for Criminal Practices Act,

Chapter 772, Florida Statutes .................... 5, 6

Other Authorities

Blacks Law Dictionary (6" ed. 1991) ................ 10

Restatement 2d Contracts §7 .................0c0c, 10

Vili

INTRODUCTION

In Prima Paint Corp. v. Flood & Conklin Manufacturing

Co., 388 U.S. 395 (1967), this Court held that when two parties

have agreed to arbitrate disputes arising out of a contract, and

one party raises a defense against the enforceability of the entire

contract (as opposed to the arbitration clause in particular), that

the arbitrator — not the court — should resolve the challenge to

the enforceability of the entire contract. Petitioners Buckeye

Check Cashing, Inc. et a/ (“Petitioners” or “Buckeye’’) claim

that the decision of the court below contradicts the holding of

Prima Paint. Petitioners claim that the plaintiffs’ argument in

this case that the contract between the parties was illegal —

indeed, that it was criminal ~ under Florida law, is a contract

defense to a contract that has already been legally formed, and

that since the defense relates to the entire contract (and not just

the arbitration clause), that this defense should have been

decided by an arbitrator, and not by the court.

Petitioner’s argument is wrong for several reasons. First,

Buckeye conveniently overlooks a central premise that underlay

this Court’s holding in Prima Paint: “the purpose of Congress

[in enacting the Federal Arbitration Act (“FAA”)] in 1925 was

to make arbitration agreements as enforceable as other

contracts, but not more so.” 388 U.S. at 404n. 12. While

Buckeye tends to suggest that this Court was establishing a new

federal law of contract enforcement that should find that it is

easier for parties to create an agreement to arbitrate than it is to

form other types of contracts, this is not correct. In Prima

Paint, there was no dispute that the parties had formed an

agreement to arbitrate. There only question in Prima Paint was

whether one party might be able to assert a defense against that

agreement. As this Opposition will explain, the situation in this

case is entirely different. Plaintiffs’ arguments in this case go

to the creation of the contract in the first instance, and thus are

very different from the contract defense at issue in Prima Paint.

Second, Petitioners ignore another subsequent line of

decisions from this Court, that inform the way that Prima Paint

must be understood. In these cases, this Court has repeatedly

stated that agreements to arbitrate are subject to generally

applicable principles of contract law. See, e.g., Allied-Bruce

Terminix Co.'s, Inc. v. Dobson, 513 U.S. 265, 281 (1995).

Petitioners ignore generally applicable principles of state

contract law, and rely upon the hope that this Court will create

a new doctrine of contract law that applies only to agreements

to arbitrate.

In the decision below, the Florida Supreme Court followed

this Court’s guidance in both Prima Paint and the subsequent

cases. Under generally applicable principles of Florida law that

date back more than 100 years and that have been repeatedly

applied in cases that have nothing to do with arbitration, no

contract is ever formed, and no contract ever comes into

existence, from an agreement to perform a criminal act. App.

at 7a-8a. Accordingly, as the Court below correctly

recognized, App. at 5a-6a, Prima Paint does not speak to this

situation. Petitioners repeatedly state that the doctrine barring

the enforcement of illegal agreements is a contract defense,

rather than a doctrine of contract formation. £.g., Pet. at 11. In

making this assertion, Petitioners simply misunderstand core

principles of contract law. The doctrine that criminal contracts

are void ab initio is thus fundamentally different from the law

relating to voidable contracts. The latter body of law relates to

a defense to a contract that has been formed, not whether a

contract has ever come into existence in the first place.

In this case, plaintiffs allege a colorable claim that

Petitioners are loan sharks that charge outrageous interest rates

that violate Florida’s criminal laws. Indeed, one of the

consumer plaintiffs in this case was charged interest of over

1.300%. Accordingly, the court below faithfully applied this

Court’s guidance and held that where, as here, there is an issue

under generally applicable principles of state contract law as to

whether a contract was formed in the first instance, this gateway

question must be resolved by a court.

As the Petition reflects, Petitioners do not like the normal

principles of state law relating to contract formation. Instead,

Petitioners would like this Court to declare that federal law

overrides normal state laws relating to illegal contracts that are

void ab initio. In demanding this result, Petitioners would have

this Court re-write the principles applicable to the formation of

all contracts, so that documents that would not form a contract

in any other circumstance would form an enforceable contract

if they contained an arbitration clause. Petitioners would have

this Court delve into (and re-write) normal state law principles

governing contract formation.

As the Court below noted, App. at 8a, Petitioners’ position

would lead to absurd results. Under Petitioners’ logic, courts

would be required to find that legally cognizable contracts

existed (if they contained arbitration clauses) even if they

provided for murder-for-hire, the sale of child pornography or

the sale of illegal drugs. Under Petitioners’ approach,

documents establishing such relationships that contained

agreements to arbitrate would have to be enforced to the extent

of the arbitration clause, notwithstanding generally applicable

state contract law to the contrary.

Petitioners’ position also would lead to incoherence in

contract law. Even Petitioners acknowledge that no arbitration

contract comes into existence if there is no assent to that

contract. Pet. at 11. To make this admission concrete, imagine

a case where there is an allegation that Party A has forged Party

B’s name on a document that contains an arbitration clause.

Petitioners would concede that a court, not an arbitrator, should

and would decide whether the allegation of forgery was true.

Nonetheless, Petitioners insist that questions of assent are the

only type of contract formation question that a court, as opposed

to an arbitrator may decide. According to Petitioners, all other

questions that states might consider to be ones of contract

formation under their generally applicable law of contracts —

questions that go to whether a contract has come into existence

in the first place — are reserved for the arbitrator. Pet. at 11-12.

Petitioners’ argument not only contradicts the FAA as

interpreted by this Court, but leads to anomalous results. The

FAA simply does not preempt some parts of normal state law

relating to contract formation (those parts relating to assent),

while nonetheless preempting other portions of state law

relating to contract formation (those portions that are not

consistent with Petitioners’ interests, as loan sharks).

This case also does not merit this Court’s intervention

because the nature of the issue raised will affect very few

disputes, in very few junsdictions.

STATEMENT OF THE CASE AND OF THE FACTS

This action vvas brought by respondents Cardegna and

Reuter (“Plaintiffs”) on behalf of a class of Florida consumers

against Petitioners Buckeye Check Cashing, Inc. and Buckeye

4

Check Cashing of Florida Inc. and unknown entities and

individuals (collectively “Petitioners”or “Buckeye”). The

Plaintiffs allege an unlawful scheme in which Buckeye, under

the guise of what it falsely portrayed as a check cashing service,

in reality charged and collected unconscionably usurious

interest from thousands of customers for consumer loans

through systematically repeated violations of Florida’s Lending

Practices Act, Chapter 687, Florida Statutes; Florida’s

Consumer Finance Act, Chapter 516, Florida Statutes; Florida’s

Deceptive and Unfair Trade Practices Act, Chapter 501, Part II,

Florida Statutes; and Florida’s Civil Remedies for Criminal

Practices Act, Chapter 772, Florida Statutes.

Buckeye loaned money to its customers in exchange for a

written document in the form of a personal check, and a form

agreement to repay money in an amount larger than the

borrower received within a short period of time, usually two to

four weeks. These loans were then continued through loan

extensions or roll-over transactions. In each transaction, the

Plaintiffs gave Buckeye a personal check and agreed that the

face value of the check would be paid within a short time

period, usually two weeks. In exchange, Buckeye gave the

Plaintiffs cash in an amount less than the face value of the

check. In each transaction, Buckeye agreed to hold the check

until the next payday or until the customer received her or his

next social security or other government check.

Customers unable to repay these loans when due were

permitted to extend their debt or roll-over their loans with

Buckeye by paying “service fees” when they became due,

usually every two weeks. In each transaction, once the

Plaintiffs paid the “fee” to Buckeye, then Buckeye would again

forbear collection of the debt. The “fee” on each extension was

interest for allowing Plain iffs and members of the class to defer

payment on the original extension of credit. The rate of interest

charged by Buckeye on each initial transaction and on each

rollover ranged from approximately 137% to 1,317% A.P.R.,

and the rate was usually over 300% A.P.R.

The plaintiffs here allege that the essence of the transaction

is loaning money at highly usurious rates of interest and that the

contracts were criminal on their face. In another case currently

pending, the Florida Supreme Court is considering whether

these transactions are loans. McKenzie Check Advance of FI. v.

Betts, No. SC04-1825. If that Court rejects the claims of

McKenzie plaintiffs, that will render the instant case moot.

In any case, the plaintiffs here case allege that the policy of

the State of Florida to protect its needy citizens from predatory

lenders is set out in Chapter 687 of the Florida Statutes, which

provides felony sanctions for such lending practices. The

threshold for criminal usury is 25% per annum at which point

violations constitute a first degree misdemeanor, § 687.071(2),

Fla. Stat.(2001). Loaning money at an interest rate in excess of

45% per annum. is a third degree felony. § 687.071(3), Fla.

Stat.(2001). Lending money at either the misdemeanor or

felony levels of usury is defined as “loan sharking.”

§ 687.071(1)(f), Fla. Stat(2001). The instant agreements

provide for interest rates as high as twenty-nine times the felony

threshold!

REASONS FOR DENYING THE PETITION

I. THE DECISION BELOW IS CONSISTENT WITH

THE DECISIONS OF THIS COURT.

A. The Decision Below is Consistent With this Court’s

Guidance that Arbitration Clauses Are Subject to

State Laws Applicable to All Contracts.

1. This Court Has Directed That Arbitration

Clauses Are Governed By Generally Applicable

State Law.

The FAA contains a savings clause that subjects arbitration

clauses to the same state contract laws that apply to other types

of contracts. This Court repeatedly has stressed that arbitration

clauses are governed by state, not federal, contract law except

in those instances where state contract laws target arbitration

clauses for treatment that is inferior to other types of contracts.

Indeed, this Court has noted that the rules of state contract law

provide the primary source of protection for consumers against

corporate over-reaching in cases governed by the FAA. '

' See, e.g., Allied-Bruce Terminix Co's, Inc. v. Dobson, 513 U.S.

265, 281 (1995) (“In any event, § 2 gives States a method for protecting

consumers against unfair pressure to agree to a contract with an unwanted

arbitration provision. States may regulate contracts, including arbitration

clauses, under general contract law principles and they may invalidate an

arbitration clause ‘upon such grounds as exist at law or in equity for the

revocation of any contract.””). Cf, First Options of Chicago, Inc. v. Kaplan,

514 U.S. 938 (1995) (courts “should apply ordinary state-law principles that

govern the formation of contracts”); Volt /nfo. Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 474 (1989) (“the

interpretation of private contracts is ordinarily a question of state law’’).

7

This Court has recently reiterated the importance of state

contract law under the FAA’s scheme. In Green Tree Fin.

Corp. v. Bazzle, 123 §. Ct. 2402 (2003), the bank argued that

the FAA preempted South Carolina’s state contract laws as they

applied to the question of whether an arbitration could proceed

as aclass action. The decision rejected the federal preemption

argument and stated that the question of contract interpretation

is “a matter of state law. . . .” 123 S. Ct. at 2405.’

The Court below held that Florida’s generally applicable

law relating to illegal and void ab initio contracts applies to

arbitration clauses. This is hardly an unusual position. There

are numerous illustrations of courts applying generally

applicable state contract law to arbitration clauses, even when

the application of those laws will bar the enforcement of a given

arbitration clause. For example, the generally applicable rule of

contract law that ambiguities in contracts will be interpreted

against the drafter will be applied to arbitration clauses, even

where it results in not requiring a party to arbitrate her or his

claims. See, e.g., Victoria v. Superior Court, 222 Cal. Rptr. |

(1985), reh'g denied (1986); Dumais v. American Golf Corp.,

299 F.3d 1216, 1219-20 (10th Cir. 2002); Quigley v. KPMG

_

? This Court also held that the contract interpretation question was

a matter for the arbitrator to decide. This is not surprising, given that there

was an agreement by both parties that the arbitration contract was legal and

binding. The Court stated that “The question here . . . (does not) concern...

the validity of the arbitration clause... .” 123 S. Ct. at 2407. “Rather the

relevant question here is what kind of arbitration proceeding the parties

agreed to. That question does not concern a state statute or judicial

procedures, . . . [iJt concerns contract interpretation and arbitration

procedures. Arbitrators are well situated to answer that question.” /d. This

case, by contrast, involves both the validity of the arbitration clause and a

state statute.

Peat Marwick, LLP, 749 A.2d 405,416 (N.J. Super. Ct. App.

Div. 2000). Similarly, the generally applicable rule of contract

law that specific contract provisions will govern over general

provisions applies to disputes over the construction of

arbitration clauses, for example, even when it has the effect that

a party will not be required to arbitrate her or his claims. See,

e.g.. Transit Casualty Co. in Receivership v. Certain

Underwriters at Lloyd's of London, 963 S.W.2d 392, 399 (Mo.

Ct. App. 1998). Finally, the generally applicable rule of

contract law that unconscionable contracts will not be enforced

applies to arbitration clauses, and while the vast majority of

arbitration clauses are enforced by courts, courts have refused

to enforce part or all of particularly abusive arbitration clauses

that were grossly one sided and that explicitly or effectively

stripped individuals of important rights.’

* See, e.g., Murray v. United Food & Comm. Workers Int'l Union,

289 F.3d 297 (4th Cir. 2002); Banc One Acceptance Corp. v. Hill, 367 F 3d

426 (S* Cir. 2004); McMullen v. Meijer, 355 F.3d 485 (6" Cir. 2004);

Popovich v. McDonald's Corp., 189 F. Supp.2d 772 (N.D. Ill. 2002);

Gourley v. Yellow Transp., LLC, 178 F. Supp. 2d 1196 (D. Colo. 2001);

Camacho v. Holiday Homes, Inc., 167 F. Supp. 24 892 (W.D. Va. 2001);

Armendariz v. Foundation Health Psychcare Services, inc., 99 Cal. Rptr. 2d

745 (2000); Worldwide Inc. Group v. Klopp, 603 A.2d 788 (Del. 1992);

lwen v. S. West Direct, 977 P.2d 989 (Mont. 1999); D.R. Horton, Inc. v.

Green, 96 P.3d 1159 (Nev. 2004); Williams v. Aetna Finance Co., 700

N.E.2d 859 (Ohio 1998); Carll v. Terminix Int'l Co., L.P., 793 A.2d 921

(Pa. Super. Ct. 2002); Taylor v. Butler, 142 S.W 3d 277 (Tenn. 2004), cert.

denied, 125 S.Ct. 1304 (2005); in re Turner Bros. Trucking Co., Inc., 8

S.W.3d 370 (Tex. Ct. App. 1999); Sosa v. Paulos, 924 P.2d 357, 262 (Utah

1996); State ex rel. Dunlap v. Berger, 567 S.E.2d 265 (W.Va. 2002).

9

2. Florida Law Providing That Illegal Contracts

Are Void Ab Initio Is Longstanding and

Generally Applicable Law.

As the Court below held, “Florida’s law has long held that

contracts which are determined to be against public policy and

void should not be enforced.” App. at 7a. This statement of

law is entirely consistent with generally applicable principles of

Florida contract law. Contracts which violate Florida criminal

laws and public policy are illegal and void ad initio and cannot

be enforced:

The right to contract is subject to the general rule that the

agreement must be legal and if either its formation or its

performance is criminal, tortious or otherwise opposed to

public policy, the contract or bargain is illegal. See 11 Fla.

Jur.2d, Contracts 81, Restatement of the Law, Contracts

512. ... Where a statute imposes a penalty for an act, a

contract founded upon said act is considered void in

Florida. ;

Thomas v. Ratiner, 462 So.2d 1157, 1159 (Fla. 3rd DCA 1984),

reh'g denied (1985) (emphasis in original).

Notwithstanding Petitioners’ amplified rhetoric, Pet. at 16,

this is hardly a new body of law that arises from a hostility to

arbitration. Indeed, all standard texts acknowledge the general

principle that an agreement that is void ab initio is one that “has

at no time had any legal validity.” Blacks Law Dictionary (6"

ed. 1991). See also Restatement 2d Contracts § 7 (“A promise

for breach of which the law neither gives a remedy nor

otherwise recognizes a duty of performance by the promissory

10

—

\)

is often called a void contract. Under § |, however, such a

promise is not a contract at all; it is the ‘promise’ or

‘agreement’ that is void of legal effect.”). On a number of

occasions, moreover, this Court has reached the same

conclusions on this basic question of contract law. It is

particularly incongruous for Buckeye to claim that federal law

preempts Florida contract law providing that courts may enforce

no part of void ab initio contracts, because Florida law is

entirely consistent with this Court’s own jurisprudence on the

subject. This Court has held, for example, that no court will

lead its assistance in any way towards carrying out the terms of

an illegal contract. McMullen v. Hoffman, 174 U.S. 639 (1899).

This Court has also held that illegal promises will not be

enforced in cases controlled by federal law. Kaiser Steel Corp.

v. Mullins, 455 U.S. 72, 102 S. Ct. 851, 70 L.Ed.2d 833 (1982).

There is no indication that the FAA was intended to disrupt this

fundamental principle.

Under general principles of Florida contract law (like the

law elsewhere), the rule against the enforcement of void

contracts is not a partial one that selectively invalidates parts of

contracts. Instead, it is an absolute rule that invalidates void

contracts in their entirety. “[I}t must be held that as a matter of

law any contract made in violation of [the Act’s] terms,

provisions or requirements is void and confers no enforceable

rights on the contracting parties.” Umbel v. Foodtrader.Com,

Inc., 820 So.2d 372, 374 (Fla. 3rd DCA 2002) (emphasis

added) (citing Edwards v. Trulis, 212 So.2d 893, 895 (Fla. Ist

DCA 1968) and Buehler v. LT] Int'l, Inc., 762 So.2d 530 (Fla.

2d DCA 2000)).

In cases arising in entirely different contexts, the Florida

Supreme Court has explained in some detail the corrosive effect

upon the entire legal system of treating an illegal contract as

merely voidable, rather than void:

If we were to hold a Florida contingent fee contract

entered into by a person or attorney who is not a

member of The Florida Bar to be voidable rather than

void, we would be recognizing the validity of a

contract entered into by an attorney not subject to our

regulations. This would afford viability to an

unregulated contract of the very kind that we have

determined to be in the public interest to regulate.

The Florida Bar-In re Amendment to the Code of

Professional Responsibility Contingent Fees, 349

So.2d 630, 632 (Fla. 1977). Additionally, recognizing

such an agreement would be directly contrary to the

reasons we have expressed for prohibiting the

unauthorized practice of law. Sperry v. Florida ex rel.

Florida Bar, 140 So.2d 587, 595 (Fla. 1962), rev on

other grounds, 373 U.S. 379 (1963).

Chandris, S.A. v. Yanakaksis, 668 So.2d 180, 185 (Fla. 1995),

reh'g denied (1996).

Under generally applicable Florida contract law, therefore,

an agreement which itself violates Florida’s public policy and

criminal law and is illegal is void ab initio; no valid agreement

ever comes into existence in the first place.

12

B. The Decision Below Is Consistent With the Prima

Paint Decision.

1. Prima Paint Involves Contracts that Are

Voidable, And Not Contracts that Are Void Ab

Initio.

Buckeye does not present any authority denying that

generally applicable Florida contract law renders criminal

contracts void ab initio. Instead, Buckeye effectively argues

that an exception to this rule exists for arbitration clauses,

suggesting that arbitration clauses are subject to a special and

separate set of rules from other types of contract terms.

Buckeye derives this proposition from the FAA and this Court’s

decision in Prima Paint, 388 U.S. 395. According to Buckeye,

under Prima Paint no Court may consider whether Buckeye’s

contract is illegal and void ab initio, because that is a decision

for the arbitrator. Pet. at 2. Buckeye’s position is flatly wrong.

Buckeye’s reading of Prima Paint ignores the crucial

distinction between a void and voidable contract. Buckeye

keeps insisting, without providing any basic contract law

authority for the proposition, that the doctrine refusing to

recognize illegal contracts is not a doctrine relating to contract

formation. Pet. at 11-12. Buckeye further insists that the

distinction between voidable contracts and void ab initio

contracts is one without a difference. Pet. at 1. These

arguments can only be advanced if one disregards core

principles of contract law.

A voidable contract, unlike a void ab initio contract, is

“one where one or more parties have the power, by a

13

manifestation of election to do so, to avoid the legal relations

created by the contract, or by ratification of the contract to

extinguish the power of avoidance.” Restatement 2d Contracts

§ 7. With a voidable contract, a valid contract has come into

legal existence, although it is possible that one party might

successfully defend against its enforcement. For example,

under Florida law, “[i]t is axiomatic that fraudulent inducement

renders a contract voidable, not void.” Mazzoni Farms, Inc. v.

E.L DuPont DeNemours & Co., 761 So.2d 306, 312 (Fla.

2000).

As set forth above, under Florida contract law (like the law

in most if not all other states), a contract that is fraudulently

induced is merely voidable; a valid contract exists, but is

potentially subject to a defense from one party. In such a

setting, enforcing the arbitration clause so that the arbitrator

may decide this defense is entirely consistent with generally

applicable contract law. Contracts that are void ab initio pose

an entirely different situation. A void ab initio contract never

comes into existence, and no part of such a contract may ever

be enforced by a court, and thus no arbitration clause ever

comes into existence. There is nothing to arbitrate. Petitioner

misreads the Prima Paint rule to sanction the extreme result of

requiring a court to enforce an arbitration clause that is

embedded in and part of a contract with a singularly illegal

purpose and which is, in and of itself, illegal and void.

Judge Easterbrook of the U.S. Court of Appeals for the

Seventh Circuit has stressed the importance of this factor:

“Fraud in the inducement does not negate the fact that the

parties actually reached an agreement. That's what was critical

in Prima Paint. But whether there was any agreement is a

14

distinct question.” Sphere Drake Ins. Ltd. y. All American Ins.

Co., 256 F.3d 587 (7th Cir. 2001) (first emphasis added, second

in original). Because Buckeye ignores this fact, properly

described by Judge Easterbrook as “critical,” Buckeye’s

proposed extension of Prima Paint misunderstands that case,

misunderstands federal arbitration law, and is simply wrong.

2. The Decision Below Is Consistent With this

Court’s Direction that Arbitration Clauses Be

Placed On the Same Footing as Other

Contracts.

Petitioner effectively insists that Prima Paint requires

courts to treat arbitration clauses are different than any other

terms to any contract. As set forth above, Florida’s generally

applicable rules of state contract law provide that illegal

contracts are void ab initio, meaning that they never come into

existence in the first place. Buckeye argues that among all

types of contracts, arbitration clauses alone are exempt from

this longstanding body of Florida law, because the FAA

supposedly preempts Florida’s contract law.

This Court has repeatedly rejected such an approach,

however. In interpreting the FAA, this Court has repeatedly

given meaning to the language of the Savings Clause and

instructed that federal policy regarding arbitration is simply one

of enforcing contracts and that the FAA does no more or less

than place arbitration agreements on the same footing as other

agreements. For all of its discussion of Prima Paint, Buckeye

never addresses the crucial part of that opinion which

undermines all of Buckeye’s arguments here. See page 1,

supra, citing 388 U.S. at 404 n. 12.

15

In Equal Employment Opportunity Comm'n v. Waffle

House, Inc., 122 S. Ct. 754 (2002), similarly, the Court refused

to enforce an arbitration provision in an employment contract

in a case where claims were asserted by a federal agency that

was not a party to that contract. In the Waffle House case, the

lower court had effective y treated arbitration clauses as some

sort of super contract especially favored under federal law. This

Court rejected the notion that the FAA embodied a policy goal

that would form arbitration agreements in circumstances where

no other type of contract could be formed. 122 S. Ct. at 764.

Instead, this Court directed, the FAA requires courts to place

arbitration agreements on equal footing with other contracts, but

it does not require parties to arbitrate when they have not agreed

to do so.’ Id. at 764 (quoting Volt Info. Sciences, Inc. v. Bd. of

Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478

(1989)).

This Court also stressed that arbitration clauses are . be

treated the same as other contracts in Doctor's Associates, Inc.

v. Casarotto, 517 U.S. 681 (1996). In Casarotto, the Court held

that the FAA preempted a state statute that imposed specific

disclosure requirements applicable only to arbitration

ts. The Court echoed its earlier decisions in

explaining that, through the FAA, Congress precluded states

from singling out arbitration provisions for suspect treatment,

requiring instead that such provisions be placed upon the same

footing as other contracts. /d. at 687 (internal quotation

omitted). See also Allied-Bruce Terminix Co., Inc. v. Dobson,

513 U.S. 265, 281 (1995):

States may regulate contracts, including

arbitration clauses, under general contract law

16

principles and they may invalidate an arbitration

clause upon such grounds as exist at law or in

equity for the revocation of any contract.0 9

U.S.C. 2 (emphasis added). What states may

not do is decide that a contract is fair enough to

enforce all its basic terms (price, service, credit),

but not fair enough to enforce its arbitration

clause. The Act makes any such state policy

unlawful, for that kind of policy would place

arbitration clauses on an unequal footing,0

directly contrary to the Act's language and

Congress’ intent.

Petitioner’s arguments rely upon the implicit and faulty

notion that the FAA preempts generally applicable state

contract laws, as they apply to arbitration. Indeed, Petitioners

re-write Prima Paint into a federal preemption case. This

suggestion conflicts with the remainder of this Court's

preemption jurisprudence. As this Court has recognized,

however, “[t}he FAA contains no express pre-emptive

provision, nor does it reflect a congressional intent to occupy

the entire field of arbitration.” Volt Info. Sciences, 489 U.S. at

477. Therefore, the FAA can only displace state law through

the doctrine of implied conflict preemption. /d. at 477-78. In

order to establish that the FAA impliedly preempts Florida’s

contract law relating to void ab initio contracts, Buckeye must

demonstrate that there is an “actual conflict” between federal

and state law, either because it is “impossible for a private party

to comply with both . . . requirements” or because the state laws

“stand[{] as an obstacle to the accomplishment and execution of

full purposes” of Congress. Freightliner Corp. v. Myrick, 514

U.S. 280, 287 (1995) (citations omitted). Implied conflict

17

preemption cannot lie here because the FAA contains no

independent rules of federal law for governing these questions

of contract law.

C. Petitioners’ Proposed Rule of Law Would Lead to

Anomalous and Absurd Results.

Generally applicable principles of Florida contract law -

like the law in other states — define and give meaning to the

phrase void ab initio. As set forth above, any contract that is

void ab initio is not even a contract, and never comes into

existence in the first place. This section will discuss a number

of cases that support the logic of the decision below, and that

even Petitioners acknowledge are correctly decided. In their

unprincipled effort to distinguish these cases, Petitioner argues

that the FAA requires that states contort their law of contracts

in an illogical way. According to Petitioners, the FAA provides

that certain types of void ab initio contracts (such as those with

an unauthorized signature) may be treated as all void ab initio

contracts have been treated for more than 100 years, but that for

no principled reason, parts of other types of void ab initio

contracts (such as illegal contracts) must be recognized by

courts and forced (at least to the extent of any arbitration

clause).

As the Court below noted, App. at 6a, and as even

Petitioner has acknowledged, Pet. at 11, a host of courts have

refused to extend Prima Paint’s holding to cases involving

allegations that no contract ever came into existence in the first

place. These courts have held that this latter type of allegation

by definition implicates the making of the agreement for

arbitration and therefore must be decided by a court as a

precondition to any arbitration order under the FAA. A

particularly important precedent is Sandvik AB v. Advent Int'l

Corp., 220 F.3d 99 (3rd Cir. 2000) (Becker, J.). While Sandvik

did not involve an illegal contract, the court’s analysis of the

importance of the distinction between void and voidable

contracts closely tracks the logic employed by the Florida

Supreme Court in this case. In Sandvik, the Third Circuit held

that a party cannot enforce an arbitration clause while denying

that it is bound by the contract containing that clause because,

“[e}ven under the severability doctrine [of Prima Paint], there

may be no arbitration if the agreement to arbitrate is non-

existent.” /d. at 101. The Third Circuit construed Prima Paint

as applying only to allegations that would render a contract

voidable, and held that courts must resolve all allegations that

would render an entire contract (and therefore its arbitration

clause) void:

Mindful of the doctrine announced in Prima Paint,

which did not consider a situation in which the

existence of the underlying contract was at issue, we

draw a distinction between contracts that are asserted

to be void or non-existent, as is contended here, and

those that are merely voidable, as was the contract at

issue in Prima Paint, for purposes of evaluating

whether the making of the arbitration agreement is in

dispute.

Id. at 107.

Several other courts have followed the same analysis as

Sandvik in holding that courts, not arbitrators, must evaluate

challenges that an entire contract never came into valid

19

existence in the first place. In Sphere Drake, for example, the

Seventh Circuit faced the question of whether an arbitrator or

a court should resolve allegations that the person who signed a

contract on behalf of one party had the authority to make that

commitment. The party attempting to enforce the arbitration

clause invoked Prima Paint, and claimed that this was a

generalized challenge to the entire contract that the arbitrator

should resolve. Focusing on the difference between void and

voidable contracts, the Seventh Circuit rejected this claim, and

held that the question was one for the court:

This is not a defense to enforcement, as in Prima

Paint, it is a situation in which no contract came into

being; and as arbitration depends on a valid contract

an argument that the contract does not exist can’t

magically be resolved by the arbitrator (unless the

parties agree to arbitrate this issue after the dispute

arises).

Sphere Drake, 256 F.3d at 591.

in Chastain v. Robinson Humphrey Co., Inc., 957 F.24 851

(11th Cir. 1992), similarly, the court held that a court, not an

arbitrator must decide allegations that a signature to a contract

was forged. The Eleventh Circuit focused on the difference

between arguments that are contract defenses and arguments

that go to the existence of a contract:

The calculus changes when it is undisputable that the

party seeking to avoid arbitration has not signed any

contract requiring arbitration. In such a case, that

party is challenging the very existence of any

20

agreement, including the existence of an agreement to

arbitrate. Under these circumstances, there is no

presumptively valid general contract which would

trigger the district court’s duty to compel arbitration

pursuant to the Act.

Chastain, 957 F.2d at 854. See also Three Valleys Municipal

Water Dist. v. E.F. Hutton & Co., Inc., 925 F.2d 1136, 1140(9"

Cir. 1991) (court decides whether signatory to contract had

authority to bind party, we read Prima Paint as limited to

challenges seeking to avoid or rescind a contract not to

challenges going to the very existence of a contract) (emphasis

in original); 1.5. Joseph Co., Inc. v. Mick gan Sugar Co., 803

F.2d 396 (8" Cir. 1986) (court decides whether assignee can

enforce contract).

The cases relied upon by Buckeye, by contrast, fragment

state contract law in indefensible ways. This is illustrated by

one of Buckeye’s leading cases. In Bess v. Check Express, 294

F.3d 1298 (11 Cir. 2002), the Court acknowledged that

arbitration clauses are not to be enforced when they are

embedded in contracts that are void ab initio because one party

did not have the authority to sign the contract. The Court then

implicitly created a new rule of federal law (in an area plainly

to be governed by state law), that illegal contracts are subject to

a different rule because the issue of illegality only goes to “the

content of the contracts, not their existence.” Bess, 294 F.3d at

1305 (emphasis in original). The Bess opinion never explains

the rationale or cites any authority for this conclusory statement.

Florida’s generally applicable contract law is to the contrary.

Buckeye never challenges this conclusion as to Florida law.

Given that Bess’s characterization of illegality as unrelated to

21

the existence of a contract is simply wrong as a matter of

contract law, Bess’s holding relies upon the mistaken

conclusion that federal law preempts and overrides a state's

generally applicable and longstanding rules of contract law.

Buckeye gives no convincing explanation for why the

Congress, when it passed the FAA in 1925, could have possibly

intended to honor generally applicable state law as to contracts

that are void ab initio in some settings but to sweep it aside in

others.

Petitioners’ insistence that arbitration clauses are somehow

above or exempt from this well-established body of law could

readily lead to absurd results. Imagine hypothetical contracts

for the sale of cocaine, or the making of child pornography, or

a murder-for-hire, that included (a) a liquidated damage

provision; and (b) an arbitration agreement. Obviously such

contracts would violate any number of criminal laws and be

void ab initio. No legal agreement has ever come into being

and no court or arbitrator could order or otherwise authorize

performance - any performance - under the contract. Similarly,

it is obvious that no court would, could or should ever enforce

the liquidated damages provision. Under the position

advocated by Buckeye, however, the arbitration clause is

somehow different from and better than all other provisions in

this wholly illegal contract, and the arbitration clause would be

enforced. Indeed, under Petitioner’s position, any question

concerning the illegality of the entire contract would be one that

only the arbitrator could adjudicate. These hypotheticals

demonstrate the extreme and unjustified nature of Buckeye’s

position.

22

D. Petitioners’ Position Also Is Contrary to this

Court’s Direction in Howsam that Gateway

Questions = to the Existence of an

Arbitration Clause Are for the Court, Not

Arbitrator. 7

| Petitioners’ position also conflicts with this Court's

decision in Howsam v. Dean Witter, 537 U.S. 79, 123 S. Ct

588 (2002). In Howsam, this Court unsurprisingly held that =

arbitrator, not a court, should determine whether a party

violated an arbitration rule. After all, as the Court noted, “the

NASD arbitrators, comparatively more expert about the

meaning of their own rule, are comparatively better able to

interpret and to apply it.” Howsam, 123 S. Ct. at 593. There

was no question that the parties were bound by a legally valid

arbitration agreement, however, and this Court explained that

disputes on that question are for the court. “[A] gateway

dispute about whether the parties are bound by a given

arbitration clause raises a ‘question of arbitrability’ for a court

to decide.” 123 S. Ct. at 592. This case involves precisely the

type of “gateway question” that this Court has said is for the

court, not the arbitrator.

Petitioner asserts repeatedly that there are six federal courts

of appeal that support its position and conflict with the decision

below. E-g., Pet. at 2. It is notable, however, that only one of

those decisions came after this Court handed down Howsam.

The only exception is Jenkins v. First Am. Cash Advance of

Ga., LLC, 400 F.3d 868 (11" Cir. 2005), and that case offers no

convincing explanation of how its ruling could be consistent

with Howsam.

23

ll. THIS CASE DOES NOT PRESENT AN ISSUE

WORTHY OF CERTIORARI.

Buckeye employs a great deal of high octane rhetoric about

how the entire structure of the FAA will come undone if courts

rather than arbitrators decide the question of whether a contract

is illegal. See Pet. at 15. This argument ignores the unique

nature of the allegations in this case. The rather unusual

allegations in this case argue that Buckeye’s contracts violated

Florida’s criminal laws, and that Buckeye was engaged in

felonious loansharking.

This sort of issue rarely arises in civil cases. Civil

plaintiffs regularly argue that some particular conduct of a

defendant breaks a contract or gives rise to a remedy under

some remedial statute, but it is quite rare to encounter a civil

plaintiff arguing that an entire line of business operated contrary

to the rule of law and is per se illegal. It is particularly rare to

see a case, such as this, where there are substantive arguments

that the entire enterprise is criminal. A ruling for the plaintiffs

here will have no effect upon traditional banks, or any other

legitimate business enterprise. A ruling for the plaintiffs here

will only impact upon businesses whose contracts are wholly

illegal, such as the loanshark defendants here, or the cocaine

sellers or child pornographers hypothesized above. The ruling

of the court below is highly unlikely, as a practical matter, to be

applicable in many cases. It is hard to perceive how the

decision could apply to the activities of credit card issuers, for

example: their operations are not generally even arguably

criminal(as normal lenders never charge interest rates of 300%

to 1.300%). In short, the ruling below is likely to largely only

relate to the payday lending industry.

24

In short, the issue posed by this case is unlikely to recur

often. Petitioners ask this Court to find that an arbitration

clause embedded in a criminally illegal contract is not subject

to generally applicable state contract law providing that illegal

contracts are void ab initio and thus never come into existence

in the first place. The self-evident fact is that Buckeye’s

rhetoric about the grave nature of the assault on the architecture

of the FAA is greatly exaggerated.

CONCLUSION

For all the reasons set forth above, this Court should deny

the Petition for certiorari.

Respectfully submitted,

F. Paul Bland, Jr.

Counsel of Record

Trial Lawyers for Public Justice, P.C.

1717 Massachusetts Avenue, NW

Suite 800

Washington, DC 20036

Telephone (202) 797-8600

E. Clayton Yates

Yates & Mancini, LLC.

311 Second Street, Suite 102

Fort Pierce, Florida 34950

Telephone (772) 465-7990

25

Christopher C. Casper

James, Hoyer, Newcomer &

Smiljanich, P.A.

4830 West Kennedy Boulevard

Suite 550

Tampa, Flonda 33609

Telephone: (813) 286-4100

Richard A. Fisher

Richard Fisher Law Office

1510 Stuart Road, Suite 210

Cleveland, Tennessee 37312

Telephone (423) 479-7009

Counsel for Respondents

Date: May 23, 2005

26