Reply Brief — Burden v. Check Into Cash of Kentucky, LLC, 122 S. Ct. 1436 (2002) (No. 01-1078)

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a

Supreme Court, U.S.

‘TILED

@® MAR 2 one

No. 01-1078

IN THE

Supreme Court Of Che Hnited States

Beverly Burden, Chapter 13 Trustee for the Estates of Luther

Gilbert, Jr., Victoria Tevis, Santina Turner, and Frank Lewis

Bradshaw; and Francine Jackman, Elaine Steward Greene,

Luther Gilbert, Jr., Victoria Tevis, Santina Turner, and Frank

Lewis Bradshaw, Individually

Petitioners,

Vv .

Check Into Cash of Kentucky, LLC, W. Allan Jones, Jr. and

Unknown Entities and Individuals

Respondents,

V.

Commonwealth of Kentucky, Department of Financial

Institutions,

Third-Party Respondent

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

PETITIONERS’ REPLY TO BRIEF IN OPPOSITION

Jack L. Block Richard Fisher

ee of Record) Logan, Thompson, Miller,

achnoff & Weaver Ltd. Bilbo, Thompson & Fisher

30 S. Wacker Drive, 29” F1. 30 Second Street

oy, , IL 60606-7484 Cleveland, TN 37364-0191

312/207-1000 423/479-7009

\s0

John O. Morgan, Jr.

First National Building

167 West Main Street,

Suite 100

Lexington, KY 40507

859/253-6500

F. Paul Bland, Jr.

Michael J. Quirk

Trial Lawyers for Public

Justice, P.C.

1717 Massachusetts Avenue,

N.W., Suite 800

Washington, D.C. 20036

202/797-8600

TABLE OF CONTENTS

Page

FO Ee AF UUPIOEED oo pe icccvccecvccccececs ii

Sec eb ele eehsehick dee ekeeeussde eu 4ese |

I. The Decision Below Conflicts with Federal and

State Appellate Authority on whether Prima

Paint gene to Allegations that a Contract is

WR ce Vedienedadrese lect esenccesse ]

I. The Decision Below is in Tension with this

Court’s Delineations of Federal Policy under

SE oe wb CU Ue oles ee SUC 8 eee ew oe ccceees 6

Ill. The Petition Raises an Important Question of

Fee er ee ay apy eee OF OP ,

DEE Sees eee e eae vbevocsbonetacesveveesess

TABLE OF AUTHORITIES

Cases:

Alabama Catalog Sales v. Harris, 794

EE EE ss scdventabecee veces 3,4,5

American Bankers Ins. Co. v. Cr. rd,

ryp © Sir. Je’ ) See 4

ual loyment rtunity Comm'n

™ ra e Hi Howe tae a

. Ct. 754 (2002) > pea demvakesuseekesses 6-7

Fastfundin The Co., Inc. v. Betts, 758 So.2d

(Fla. Dist. Ct. App. 2000) .............. 6

Federal Power Comm'n v. Transcontinental

Gas Pipeline Corp., 423 U.S. 326

SL setkd ends dead medsetics ips eaien ee ke 9

McDougle v. Silvernell, 738 So.2d 806

CEE és cbekesdasteeed ch ohokebheers 4

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) ............ 7

Party Yards, Inc. v. Templeton, 751 So.2d

ESE Bes Gs OE 6. ob 0 Oerbeecaenes 5

Prima Paint Corp. v. Flood & Conklin

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

Robert Frank McAlpine Architecture, Inc.

v. Heilpern, 712 So.2d 738 (Ala. De 3s Gane ae 4

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

Sram A OE ckevekseawasbunsbecs 2-3, 7

Southern Energy Homes, Inc. v. Ard, 772

SAE GLE CO NE 0 i oa heave cuccdienencs 4

=

a oe ‘ by BOI oo, =

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

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

ee aa 57

we UR WO cin. ;

Statutes:

Federal

Federal Arbitration Act, 9 U.S.C. §§ 1-16

Da cb wake 0 adh eabeadeas eucthiee passim

ic tee bina vines oa as aa cate ne ae 3,7

Se Ua. BTR ON oo ke TR 9

State

ALA. Code § 8-1-41(3) (2001) ............ 0... cece 4

eee

Ky. REV. STAT. ANN. § 288.991 (Banks-

NOE 85s 6 PERNT 55s SRR ERS 4-5

Rules:

Sup. CT. R. 13(1) ... : Cavers Pane ecases es koareecEwn 10

ili

ARGUMENT

As explained in our petition for certiorari, this case

presents the question of whether the Federal Arbitration Act, 9

U.S.C. §§ 1-16, requires parties to arbitrate an allegation that

the entire contract containing an arbitration clause is void ab

initio and therefore never came into existence and never had

legal effect. Check Into Cash’s primary argument in response

is that this question is answered by the holding in Prima Paint

Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), that

an allegation of fraud in the inducement of a contract (which

would render the contract voidable, but not void) is subject to

arbitration. See Opp. at 7-9. This response only begs the

question, however, because the scope of Prima Paint and

whether it extends to allegations that a contract is void ab initio

is precisely the issue over which federal and state appellate

courts are deeply divided. Check Into Cash’s attempt to

harmonize the disparate appellate decisions interpreting the

scope of Prima Paint, much like the attempt made by the Sixth

Circuit below, only highlights the need for this Court’s review.

I. The Decision Below Conflicts with Federal and State

Appellate Authority on whether Prima Paint Applies

to Allegations that a Contract is Void Ab Initio.

Check Into Cash attempts to reconcile the split among

courts of appeals on whether Prima Paint extends to allegations

that a contract is void ab initio by distinguishing between

voidness allegations based on lack of signatory authority and

those based on illegal contract terms. Opp. at 14-16. This

proposed distinction does not reconcile the split, however,

because the ruling below applies Prima Paint to both types of

voidness allegations, while other courts have reasoned that

Prima Paint does not apply to any allegation that a contract is

void. There is thus a significant split between the ruling below

and those federal and state court decisions cited in both parties’

briefs holding that Prima Paint does not apply to allegations

that a contract is void ab initio based either on a party’s lack of

signatory authority or on its illegal terms.

Contrary to Check Into Cash’s assertion, Opp. at 15-16,

Petitioners are challenging a party’s signatory authority in this

case and the court below held that these allegations must be

submitted to arbitration. See Cert. App. 12. Petitioners argued

in the proceedings below that there was never a valid contract

between the parties in part because Check Into Cash was not

licensed to enter into the transactions at issue under the |

Kentucky Business Code, Ky. REV. STAT. ANN. § 288.420

(Banks-Baldwin 2001). The Sixth Circuit recognized that this

is a challenge to a party’s signatory power, noted that the Ninth

Circuit in Three Valleys Mun. Water Dist. v. E.F. Hutton & Co.,

Inc., 925 F.2d 1136 (9th Cir. 1991), held that a court must

resolve such challenges before it can enforce an arbitration

clause, but nonetheless ordered Petitioners to submit this claim

to arbitration. Cert. App. 12. Any distinction between

challenges to signatory authority and challenges to a contract’s

facial legality thus does not erase the split of authority over the

scope of Prima Paint that the decision below implicates.

Furthermore, Check Into Cash’s distinction among the

different bases for finding a contract void ab initio ignores the

reasoning of the various courts that, contrary to the Sixth

Circuit below, have limited Prima Paint to allegations that a

contract is voidable. In Sandvik AB v. Advent Int'l Corp., 220

F.3d 99 (3d Cir. 2000), for example, the Third Circuit held that:

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

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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 an arbitration agreement is in

dispute.

Id. at 107 (emphasis added). Likewise, the Ninth Circuit in

Three Valleys held that “Prima Paint applies to ‘voidable’

contracts,” while “a party who contests the making of a contract

containing an arbitration provision cannot be compelled to

arbitrate the threshold issue of the existence of an agreement to

arbitrate.” Three Valleys, 925 F.2d at 1140-41 (emphasis in

original). Sandvik and Three Valleys both hold that allegations

that an underlying contract is void or non-existent bring into

question the “making of the agreement for arbitration,” 9

U.S.C. § 4, and therefore must be decided by a court.' Under

these holdings, Petitioners’ allegations that Check Into Cash

lacked authority to enter into the payday loan contracts at issue

and that these contracts are illegal and void on their face would

be resolved by a court, and not through arbitration as the Sixth

Circuit ordered. This Court should grant review to resolve this

split among the circuit courts over the scope of Prima Paint.

Check Into Cash’s attempt to explain away the conflict

between the ruling below and the state court opinions applying

the FAA that are discussed in the parties’ briefs is likewise

unavailing. Check Into Cash speculates, for example, that the

' decision in Alabama Catalog Sales v. Harris, 794 So.2d 312

(Ala. 2000), does not involve an application of the FAA even

; Thus, it is not “undisputed” that Petitioners never put the making

of the arbitration clause into issue. Opp. at 11. The allegation that the entire

contract is void ab initio puts the making of the arbitration clause into issue.

3

though “the contract in that case referenced the Federal

Arbitration Act and the court referenced several federal

decisions under the FAA.” Opp. at 16-17. It is a virtual

certainty that Harris applied the FAA because, as Check Into

Cash acknowledges, applicable state law in that case would

have prohibited enforcement of any arbitration agreement

without regard to the question presented. See Opp. at 17, citing

Ala. Code § 8-1-41(3). Harris therefore must have applied the

FAA in order even to reach the arbitrability question at issue in

that case and in the instant case.’

Asan application of the FAA, Harris undermines Check

Into Cash’s distinction between voidness allegations based on

signatory authority and those based on illegal contract terms as

a basis to resolve the split of authority. The Harris plaintiffs -

argued that the defendant’s entire payday loan contract was void

ab initio because it wus illegal under Alabama’s Small Loan

Act. Harris, 794 So.2d at 313-14. This is nearly identical to

Petitioners’ claim that Check Into Cash’s payday loan contracts

are void because they are illegal under Kentucky’s consumer

loan statute, which provides that “[a]ny loan contract made in

? ‘Since Harris applied the FAA, the conflict with the instant case

cannot be explained by an allegedly “unique hostility to arbitration

generally” on the part of the Harris court. See Opp. at 17. In fact, the

Alabama Supreme Court has repeatedly been willing to apply the FAA and

enforce arbitration contracts despite the existence of countervailing state law.

See, e.g., Southern Energy Homes, Inc. v. Ard, 772 So.2d 1131 (Ala. 2000)

(requiring arbitration of claims under federal Magnuson-Moss Warranty

Act); American Bankers Ins. Co. v. Crawford, 757 So.2d 1125 (Ala. 1999)

(enforcing arbitration clause in insurance contract); McDougle v. Silvernell,

738 So.2d 806 (Ala. 1999) (enforcing arbitration clause in insurance contract

as invoked by non-signatory defendant as third party beneficiary of

contract); Robert Frank McAlpine Architecture, Inc. v. Heilpern, 712 So.2d

738 (Ala. 1998) (enforcing arbitration clause in employment contract).

4

violation of this chapter shall be void and the lender shall have

no right to collect any principal, charges or recompense

whatsoever.” KY.REV. STAT. ANN. § 288.991 (Banks-Baldwin

2001) (emphasis added).’ The court in Harris applied the Ninth

Circuit’s Three Valleys holding, reasoning that:

the Ninth Circuit addressed the question

whether the individual that signed the contract

containing the arbitration agreement was

actually authorized to sign such a document for

the governmental entity. Therefore, the

question in Three Valleys was whether there

ever existed an agreement to arbitrate in the first

place. ...

Similarly, in this case, Harris challenges the

very existence of the contracts. Harris contends

that the contracts are illegal, and, therefore, void

and unenforceable.

Harris, 794 So.2d at 316 (citations omitted). Harris therefore

held that a court must resolve the question of whether a contract

containing an arbitration clause is void and non-existent before

it can enforce the clause under the FAA. By contrast, the court

below referred an identical allegation to arbitration and held

that Three Valleys is inapplicable. Cert. App. 11. Check Into

Cash has not drawn any meaningful distinction that would erase

the conflict among these decisions.‘

The statute’s plain language should put to rest Check Into Cash’s

concern, Opp. at 18-19, that it does anything but render a contract “void.”

* Check Into Cash does not even attempt to distinguish Party

Yards, Inc. v. Templeton, 751 So.2d 121 (Fla. Dist. Ct. App. 2000) and

— 5

This Court should grant review to resolve this conflict

of federal and state appellate authority over whether Prima

Paint should be extended to reach allegations that a contract

containing an arbitration clause is void ab initio and therefore

never came into existence and never had any legal effect.

Il. The Decision Below is in Tension with this Court’s

Delineations of Federal Policy under the FAA.

Check Into Cash mis-characterizes the arguments in the

petition as an “assault on the efficacy of the FAA and the strong

federal policy promoting arbitration” and an “attempt{] to argue

sub silentio that Prima Paint itself was incorrectly decided . . .”

Opp. at 7, 10. While this would necessarily implicate the

federal and state courts that have embraced our arguments as

part of this “assault” on the FAA and Prima Paint, ane

assertions are sabia without merit in a any event. < |

This Court recently held. in Equal Employment

Opportunity Comm'n v. Waffle House, Inc., U.S.__, 122S.

Ct. 754 (2002), that an arbitration agreement between an

employer and employee did not prohibit the EEOC from suing

the employer in court to obtain victim-specific relief for the

employee. In recognizing that the arbitration agreement had no

effect because the EEOC was not a signatory to the agreement,

the Court reaffirmed its recognition that “the FAA is ‘at bottom

a policy guaranteeing the enforcement of private contractual

Fastfunding The Co., Inc. v. Betts, 758 So.2d 1143 (Fla. Dist. Ct. App.

2000), both of which required courts to resolve allegations that a contract is

void based on its illegal terms before ordering arbitration under the FAA.

At the very least, these cases further illustrate the confusion among state and

federal courts over the scope of Prima Paint and whether the FAA requires

arbitration of allegations like those at issue in this case.

6

arrangements,” and that the Act “directs courts to place

arbitration agreements on equal footing with other contracts.”

Id. at 764 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 625 (1985). Check Into Cash’s

contention that parties must arbitrate a dispute over the very

existence of a contract between them cannot be sustained solely

by reference to the FAA’s policies when those policies are

grounded in the general rules of contract enforcement. A

requirement that courts assume the validity of and enforce part

of a document that never came into existence as a legal contract

runs exactly contrary to the normal approach of contract law.

Nor is Check Into Cash correct in opposing certiorari by

claiming that the arguments herein would undermine Prima

Paint. First, Prima Paint held that an arbitration clause could

be enforced where a party alleged that the contract containing

the clause was induced by fraud. The Sixth Circuit below

recognized that this fraudulent inducement claim would have

rendered a contract “merely voidable,” allowing a party to

rescind, but would not have voided the contract so that it never

had a legal existence in the first place. Cert. App. 8. The

difference between a claim that a contract is voidable or

revokable and a claim that a contract is void and never came

into existence was critical to the findings of the Third and Ninth

Circuits that only the latter implicates the making of the

arbitration agreement under Section 4 of the FAA and therefore

must be resolved by a court before it can order arbitration. See

Sandvik, 220 F.3d at 107; Three Valleys, 925 F.2d at 1140.

Second, to the extent Check Into Cash is concerned that this

argument does undermine Prima Paint, the fact that numerous

federal and state appellate courts have already embraced the

argument would only provide further justification for this Court

‘to grant review on the question presented.

Ill. The Petition Raises an Important Question of

Federal Law that is Properly Presented to the Court.

Check Into Cash raises a number of additional

arguments attempting to show that this case presents an

inappropriate vehicle for this Court’s review. None of these

arguments should prevent the Court from granting review on

the question presented in this case.

First, the fact that this case “implicates substantive

questions of Kentucky State law([,]” Opp. at 18, is irrelevant

because the question presented to this Court is purely one of

federal law under the FAA. Check Into Cash confuses the state

law issue of whether its contract is void with the federal law

issue of who decides whether it is void under the FAA. The

petition for certiorari presents only the latter question for the

Court’s review. Indeed, if the state law underpinnings of the

former issue did “militate against certiorari review,” id., then

this Court should never have heard Prima Paint because that

case would have implicated the state law question of whether

a contract was induced by fraud. This is not an argument

against this Court’s exercise of certiorari review to decide

whether the Federal Arbitration Act requires parties to arbitrate

a dispute over the existence of a contract between them.’

* Similarly, Check Into Cash’s contentions as to the unsettled state

of Kentucky law are irrelevant to the issue of who applies that law under the

FAA. Even if this discussion were relevant, Respondents’ concerns that

future legislation may apply to this case while past judicial decisions may

not, Opp. at 19, reverses the general principle that “statutes operate only

prospectively, while judicial decisions operate retrospectively.” United

States v. Security Industry Bank, 459 U.S. 70, 79 (1982).

Check Into Cash’s standing and mootness arguments are

also of no avail. Check Into Cash disavows the effect of its

arbitration clause on many of the Petitioners, but insists that the

clause was signed by and is binding on Petitioner Francine

Jackman. Opp. at 2. Ms. Jackson is proceeding individually

and as a putative class representative. Since Ms. Jackman

disputes the legality of the contract containing this arbitration

clause, Check Into Cash should not be heard to argue that she

lacks standing to raise the question presented to this Court on

behalf of herself and similarly situated putative class members.°

Likewise, the fact that the Sixth Circuit remanded other

of Petitioners’ arguments against arbitration should not prevent

this Court from granting review on the issue presented, which

the Sixth Circuit most definitely did decide. First, this Court’s

jurisdiction to review circuit court decisions by writ of

certiorari is not predicated on a final judgment requirement.

See, e.g., Federal Power Comm'n v. Transcon. Gas Pipeline

Corp., 423 U.S. 326, 330-31 (1976) (granting review of

interlocutory order under 28 U.S.C. § 1254(1)). Second, the

fact that other arbitration issues are now before the district court

should not deter this Court from granting review because the

district court proceedings could be stayed while the case is

pending in this Court. Indeed, if the “current posture of the

case” is a basis for denying review, see Opp. at 20, then

Petitioners may never be able to raise the question presented in

this Court because any later petition for certiorari on this issue

® Check Into Cash’s assertion that “this case does not involve a

group of individuals with a unity of interest and legal standing to present and

argue the claim at issue,” Opp. at 21, is neither supported by any legal

authority nor does it undermine Ms. Jackman’s standing as an individual

plaintiff and as a putative class representative to present and argue her claim

against Check Into Cash that is indisputably at issue in this case.

9

would likely be time-barred. See Sup. CT. R. 13(1) (petition for

writ of certiorari must be filed within 90 days of judgment).

Since the question presented is one over which federal

and state courts of appeals are sharply divided and the question

is properly raised and presented in the petition for certiorari,

Petitioners respectfully request that the petition be granted.

CONCLUSION

This petition for a writ of certiorari should be granted.

Respectfully submitted,

Jack L. Block Richard Fisher

(Counsel of Record). Logan, Thompson, Miller,

Sachnoff & Weaver Ltd. Bilbo, Thompson & Fisher

30 S. Wacker Drive, 29" Floor 30 Second Street

Chicago, IL 60606-7484 Cleveland, TN 37364-0191

312/207-1000 423/479-7009

John O. Morgan, Jr. F. Paul Bland, Jr.

First National Building Michael J. Quirk

167 West Main Street, Trial Lawyers for Public

Suite 100 Justice, P.C.

Lexington, KY 40507 1717 Massachusetts Avenue,

859/253-6500 NW, Suite 800

Washington, D.C. 20036

202/797-8600

Counsel for Petitioners

Date: March 7, 2002

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