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Buckeye Check Cashing, Inc. v. Cardegna - 546 U.S. 440, 126 S. Ct. 1204 (2006)

Rule:

As a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance. This arbitration law applies in state as well as federal courts.

Facts:

Respondents John Cardegna and Donna Reuter entered into various deferred-payment transactions with petitioner Buckeye Check Cashing, Inc. ("Buckeye") in which they received cash in exchange for a personal check in the amount of the cash plus a finance charge. For each separate transaction they signed a "Deferred Deposit and Disclosure Agreement" ("Agreement"), which included an arbitration provision. Respondents filed a class action lawsuit against Buckeye in Florida state court alleging that Buckeye made illegal usurious loans disguised as check cashing transactions in violation of various Florida Statutes, rendering the contract void. In response, Buckeye filed a motion to compel arbitration and to stay proceedings, pursuant to the arbitration provision. The trial court denied Buckeye's motion to compel arbitration, holding that a court rather than an arbitrator should resolve a claim that a contract was illegal and void ab initio. On Buckeye's appeal, the appellate court reversed, holding that respondents' challenge to the validity of the contract had to be resolved by an arbitrator, not a trial court. The matter came up for review in the state supreme court, which reversed the appellate court, holding that enforcing an arbitration agreement in a contract challenged as unlawful would violate state public policy and contract law. Buckeye was granted a writ of certiorari.

Issue:

Can a party such as Cardegna or Reuter, under the Federal Arbitration Act, avoid arbitration by arguing that the contract containing arbitration clause was illegal?

Answer:

No.

Conclusion:

The Supreme Court of the United States reversed the state supreme court's judgment and remanded the case for further proceedings. The Court observed that the crux of the complaint was that the parties' contract as a whole, including the arbitration provision, was rendered invalid by the usurious finance charge. By prior precedent, the Court had previously rejected the view that state law could bar enforcement of 9 U.S.C.S. § 2, even in the context of state-law claims brought in state court. As a matter of substantive federal arbitration law, an arbitration provision was severable from the remainder of the contract. Unless the challenge was to the arbitration clause itself, the issue of the contract's validity was considered by the arbitrator in the first instance. The rule applied in state and federal courts. Because Cardegna and Reuter challenged the agreement, but not specifically its arbitration provisions, those provisions were enforceable apart from the remainder of the contract. The challenge had to be considered by an arbitrator, not a court. Enforceability of the arbitration agreement did not turn on Florida public policy and contract law. The rule of severability arose out of 9 U.S.C.S. § 2. "Contract," as used in § 2, included contracts that later proved to be void.

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