Alabama Catalog Sales v. Harris

• Decision Date: 15 September 2000
• Citation: 794 So.2d 312
• Parties: ALABAMA CATALOG SALES v. Gloria HARRIS. M.Q., Inc., d/b/a Montgomery Catalog Sales v. Gloria Harris.
• Court: Alabama Supreme Court

794 So.2d 312

ALABAMA CATALOG SALES v. Gloria HARRIS.

M.Q., Inc., d/b/a Montgomery Catalog Sales v. Gloria Harris.

1912.

Supreme Court of Alabama.

September 15, 2000.

Rehearing Denied April 6, 2001.

Peter S. Fruin of Maynard, Cooper & Gale, P.C., Montgomery; and David G. Crockett, Atlanta, Georgia, for appellant Alabama Catalog Sales.

Joseph R. Kemp, Pell City, for appellant M.Q., Inc.

Jere L. Beasley, Thomas J. Methvin, Andy D. Birchfield, Jr., and Mark Englehart of Beasley, Allen, Crow, Methvin, Portis & Miles, P.C., Montgomery, for appellee.

J. Michael Rediker, Thomas L. Krebs, Michael C. Skotnicki, and Peyton D. Bibb, Jr., of Ritchie & Rediker, L.L.C., Birmingham; Joseph C. Espy III of Melton, Espy, Williams, & Hayes, Montgomery; Lange Clark, Birmingham; Daniel B. Banks, Jr., of Morris, Conchin, Banks & Cooper, Huntsville; and Steven P. Gregory, Tuscaloosa, for amicus curiae Alabama Small Loan Borrowers.

COOK, Justice.

Alabama Catalog Sales and M.Q., Inc., d/b/a Montgomery Catalog Sales are defendants in an action pending in the Montgomery Circuit Court. They appeal from the trial court's order denying their motions to compel arbitration of the claims filed against them by Gloria Harris on behalf of herself and all other persons similarly situated.

In her complaint, Harris alleges that the defendants violated the Alabama Small Loan Act¹ by making illegal "payday loans" in amounts of $749.00 or less, charging usurious interest in excess of the rates allowed by the Act, and collecting on the loans without a license from the Bureau of Loans of the State of Alabama, citing Ala.Code 1975, § 5-18-2(a)(4), (5), and (6), and § 5-18-15(a). Harris contends that her contracts with the defendants are void because of illegality and, thus, that the arbitration agreements contained in those contracts are also void.

The defendants contend that Harris executed valid arbitration agreements as part of her transactions, thereby subjecting all claims to arbitration. The defendants also argue that any question regarding illegality of the contracts is a question for the arbitrator, not the trial court, relying primarily on Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967).² The defendants moved to compel arbitration pursuant to arbitration agreements executed as part of the contracts. The trial court denied their motions. The defendants appeal. We affirm.

An appeal is the proper method of challenging a trial court's order refusing to compel arbitration. A.G. Edwards & Sons, Inc. v. Clark, 558 So.2d 358, 360 (Ala.1990). A motion to compel arbitration is analogous to a motion for a summary judgment. Allstar Homes, Inc. v. Waters, 711 So.2d 924 (Ala.1997); Allied-Bruce Terminix Cos. v. Dobson, 684 So.2d 102 (Ala.1995). This case presents a question of law. Therefore, our review is "de novo." See Green Tree Fin. Corp. v. Vintson, 753 So.2d 497 (Ala.1999); Jim Burke Automotive, Inc. v. Murphy, 739 So.2d 1084 (Ala.1999); Patrick Home Ctr., Inc. v. Karr, 730 So.2d 1171 (Ala.1999).

The ultimate issue in this case is whether the trial court, or an arbitrator, determines the validity of a contract that contains a provision requiring that all claims arising therefrom be arbitrated.³

We addressed a similar issue in Camaro Trading Co. v. Nissei Sangyo America, Ltd., 577 So.2d 1274 (Ala.1991). In Camaro Trading, we affirmed the trial court's denial of a foreign corporation's motion to compel arbitration, holding that the foreign corporation could not compel arbitration pursuant to an arbitration clause in a contract because the entire contract was unenforceable and invalid as a result of the foreign corporation's failure to qualify to do business in Alabama. Id. at 1274-75. In Camaro Trading, we adopted the reasoning of the United States District Court for the Northern District of Georgia in A.J. Taft Coal Co. v. S & H Contractors, Inc. [Ms. 1-88-CV-436-MHS, October 4, 1988] (N.D.Ga.1988) (not reported in F.Supp.), aff'd. on other grounds, 906 F.2d 1507 (11th Cir.1990), cert. denied, 498 U.S. 1026, 111 S.Ct. 677, 112 L.Ed.2d 669 (1991). The district court wrote:

"The unenforceability of the contract extends to the contract's arbitration clause, so there exists no enforceable agreement between the parties to arbitrate disputes. `[T]he question of arbitrability is an issue for judicial determination....' Roadway Express, Inc. v. Teamsters Local 515, 642 F.Supp. 116, 118 (N.D.Ga.1986) (citations omitted). In any case, `arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.' United Steelworkers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582[, 80 S.Ct. 1347, 4 L.Ed.2d 1409] (1960). Clearly, if a party cannot be forced to arbitrate if the contract does not contain a valid arbitration clause, then a party cannot be forced to arbitrate if the contract containing the arbitration clause, which gives the arbitration clause viability, is found to be void."

Id. at 1275; see Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (Justice Breyer stated that a state retains the power to regulate contracts, including arbitration clauses, under general contract-law principles, and may invalidate an arbitration clause upon such grounds as exist at law or in equity for the revocation of any contract); see also 6 C.J.S. Arbitration § 14 (1975); 5 Am.Jur.2d Arbitration and Award § 15 (1962).

In Shearson Lehman Bros., Inc. v. Crisp, 646 So.2d 613, 616 (Ala.1994), this Court held that the question whether a valid contract exists must be judicially determined. In Shearson Lehman Bros., we relied on Three Valleys Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir.1991), from which we quoted extensively. Three Valleys involved an arbitration agreement between a governmental entity and a securities corporation. Id. at 1136. The United States Court of Appeals for 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. Id. at 1138. Therefore, the question in Three Valleys was whether there ever existed an agreement to arbitrate in the first place. The Three Valleys court stated: "[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. Only a court can make that decision." Id. at 1140-41. In other words, a trial court must determine the question whether a contract containing an arbitration agreement is void.

Similarly, in this case, Harris challenges the very existence of the contracts. Harris contends that the contracts are illegal, and, therefore, void and unenforceable.

The defendants argue that Harris failed to present substantial evidence of illegality. "Substantial evidence" is "evidence of such weight and quality that fair-minded persons in the exercise of impartial judgment can reasonably infer the existence of the fact sought to be proved." West v. Founders Life Assurance Co. of Florida, 547 So.2d 870, 871 (Ala.1989). We conclude that Harris presented sufficient evidence indicating that the contracts in question are illegal, and, therefore, are void and unenforceable.⁴ Likewise, Harris argues, the unenforceability of the contracts extends to the agreements to arbitrate. We agree. Thus, if the contracts are void and unenforceable, no claims arising out of or relating to the contracts are subject to arbitration. See Shearson Lehman Bros., supra; see also Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir. 1972) (issue regarding the "very existence" of a contract is justiciable); cf. Camaro Trading, supra (question of the validity of a contract involving a corporation not qualified to transact business in Alabama is to be judicially determined).

The record contains substantial evidence indicating that the underlying contracts violate the Alabama Small Loan Act. As this Court recently stated:

"[W]e have adopted the reasoning that `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,' and that `[o]nly a court can make that decision.'"

NationsBanc Invs., Inc. v. Paramore, 736 So.2d 589, 593 (Ala.1999), quoting Shearson Lehman Bros., Inc. v. Crisp, 646 So.2d 613, 616-17 (Ala.1994) (emphasis in Shearson Lehman Bros.).

Therefore, the trial court, as opposed to the arbitrator, must decide the ultimate question relating to the legality and enforceability of the contracts. Thus, the trial court properly denied the defendants' motions to compel arbitration. The order denying those motions is affirmed.

AFFIRMED.

MADDOX, HOUSTON, BROWN, JOHNSTONE, and ENGLAND, JJ., concur.

HOOPER, C.J., and SEE and LYONS JJ., dissent.

SEE, Justice (dissenting).

I dissent from the affirmance of the order denying the defendants' motion to compel arbitration. We cannot know whether Harris's contracts with the defendants are void under the Alabama Small Loan Act until it has been determined that, as a fact, the defendants, in connection with those contracts, charged her more interest than is allowed by law. Harris alleges that the defendants charged her excessive interest; the defendants deny that they did. As the parties agreed, it is for the arbitrator, and not the court, to resolve this dispute.

This case is not analogous to Shearson Lehman Bros. v. Crisp, 646 So.2d 613 (Ala. 1994), in which this Court stated:

"In a class of cases involving the issue of a signatory's authority, and, consequently, the existence vel non of a contract that encompasses the disputed subject matter, a number of well-reasoned authorities have held

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