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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0081%3A06

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2006
- **Citation:** 546 U.S. 440

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0081%3A06. Public record. Not legal advice.