Allstar Homes, Inc. v. Waters

• Decision Date: 21 November 1997
• Citation: 711 So.2d 924
• Parties: ALLSTAR HOMES, INC., d/b/a Best Value Mobile Homes, et al. v. Rex WATERS. 1951955.
• Court: Alabama Supreme Court

Page 924

711 So.2d 924

ALLSTAR HOMES, INC., d/b/a Best Value Mobile Homes, et al. v. Rex WATERS.

1951955.

Supreme Court of Alabama.

Nov. 21, 1997.

Rehearing Overruled March 20, 1998, with Dissenting Opinion.

A. Joe Peddy and David A. Hughes of Smith, Spires & Peddy, P.C., Birmingham, for appellants.

Scott A. Powell and Bruce J. McKee of Hare, Wynn, Newell & Newton, Birmingham, for appellee.

A. Joe Peddy, David A. Hughes, and Jacob C. Swygert of Smith, Spires & Peddy, P.C., Birmingham, for appellants (on application for rehearing).

Evan M. Tager and Harold S. Reeves of Mayer, Brown & Platt, Washington DC; and Phillip E. Stano, Washington, DC, for amicus curiae American Council of Life Insurance (on application for rehearing).

BUTTS, Justice.

Allstar Homes, Inc., doing business as Best Value Mobile Homes; and its agents Harold Dye and Phil Zuccala (hereinafter referred to collectively as "Allstar") appeal from the trial court's order denying their motion to compel arbitration of claims brought by the plaintiff, Rex Waters. We affirm.

In February 1995, Rex Waters entered into a contract with Allstar Homes for the purchase of a mobile home. The contract included an arbitration clause providing, in pertinent part:

"ARBITRATION. All disputes, claims or controversies arising from or relating to this Contract or the relationships which result from this Contract, or the validity of this arbitration clause or the entire Contract, shall be resolved by binding arbitration by one [arbitrator] selected by Assignee with consent of Buyer(s) ...."

(Emphasis added.)

In November 1995, Waters sued Allstar Homes, alleging misrepresentation, breach of contract, and breach of warranty. Waters also alleged that Allstar Homes had violated the Magnusson-Moss Federal Trade Commission Improvement Act, 15 U.S.C. §§ 2301-2312. Waters claimed that Allstar Homes, through its agent Harold Dye, misrepresented to him that, in return for a down payment of $6,000, he would receive an interest rate of 10.5% on his installment contract for the mobile home. He further claimed that, at the close of the sale of the home, Allstar Homes, through its agent Phil Zuccala, represented to him that if he did not agree to a 12% interest rate, he could not buy the mobile home and that he would lose his $6,000 down payment. Waters claimed that, to avoid losing his down payment, he agreed to the 12% interest rate for the purchase of the mobile home. He claimed that Allstar Homes did not deliver to him the new mobile home that it had purported to sell him, but, instead, delivered a used mobile home with extensive defects.

Allstar moved to compel arbitration of Waters's claims, arguing that the broad language of the arbitration clause in the purchase agreement encompassed all of Waters's claims. Waters opposed the motion, arguing that the purchase agreement was an adhesion contract and that he was fraudulently induced to agree to its provisions, including the arbitration clause. The trial court denied Allstar's motion to compel arbitration, holding that Waters was "entitled to a trial under general contract law principles to determine the validity of the arbitration clause " (emphasis added).

Allstar construes the trial court's order to be a final denial of arbitration of all the claims in Waters's complaint. Allstar points out that Waters's complaint challenged the validity of the contract as a whole, not merely the validity of the arbitration clause, and argues that federal law requires that his claims should thus be submitted to arbitration, pursuant to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). Allstar, relying on Prima Paint, argues that only claims of fraud in the making of an arbitration clause specifically, as opposed to claims of fraud in the making of the contract as a whole, are appropriate for judicial consideration and that the trial court should therefore have granted its motion to compel arbitration of Waters's claims.

Allstar's argument is based upon a flawed reading of the trial court's order; the trial court has not denied arbitration of the claims in Waters's complaint. Rather, the trial court has merely ordered further proceedings upon the narrow threshold issue of whether there is a valid agreement to arbitrate those claims. As we will discuss below, the trial court's order does not conflict with the Federal Arbitration Act, 9 U.S.C. §§ 1--16, or the United States Supreme Court's interpretation of the FAA in Prima Paint.

The FAA clearly provides that, in ruling upon a motion to compel arbitration, a court shall make an order directing the parties to proceed with arbitration, "upon [the court's] being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue." 9 U.S.C. § 4. However, "[if] the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof." Id.

In Prima Paint, a contract between the parties included an arbitration clause providing that "[a]ny controversy or claim arising out of or relating to" the contract would be submitted to arbitration. 388 U.S. at 398, 87 S.Ct. at 1803. The plaintiff brought an action in a federal court to rescind the contract on the basis of alleged fraudulent inducement. At the same time, the plaintiff moved to enjoin the defendant from seeking arbitration of the matter, arguing that, because the right of arbitration arose solely under the contract, the defendant had no right of arbitration until the trial court first determined whether the contract as a whole was a product of fraudulent inducement. The defendant cross-moved to stay the court action pending arbitration, arguing that it was not necessary to determine the validity of the contract as a whole before invoking the arbitration clause, if the plaintiff did not specifically allege that the arbitration clause itself was invalid. The federal district court and the court of appeals agreed with the defendant, holding that, "except where the parties otherwise intend[,] arbitration clauses as a matter of federal law are 'separable' from the contracts in which they are embedded, and that where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud." 388 U.S. at 402, 87 S.Ct. at 1805.

In affirming, the United States Supreme Court sought to further the "congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts." 388 U.S. at 404, 87 S.Ct. at 1806. In an effort to promote the enforcement of arbitration clauses with as little impediment as possible, the United States Supreme Court created a "rule of severability," which would allow arbitration clauses to be enforced even where the contract as a whole may be voidable. Section 4 of the FAA directs a trial court to order arbitration once it is satisfied that an agreement for arbitration has been made and has not been honored; thus, the Court reasoned, if the arbitration agreement itself was not specifically attacked and found to be flawed, then it must be enforced and all disputes within its scope submitted to the arbitrator. The Court held, in pertinent part:

"[The] answer is to be found in § 4 of the Act, which provides a remedy to a party seeking to compel compliance with an arbitration agreement. ... [I]f the claim is fraud in the inducement of the arbitration clause itself--an issue which goes to the 'making' of the agreement to arbitrate--the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. ... We hold, therefore, that in passing upon a § 3 application for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate."

388 U.S. at 403-04, 87 S.Ct. at 1806 (footnotes omitted).

The Supreme Court did not address the incongruity of enforcing one provision of a contract before it is determined that the contract itself is valid, nor did it recognize that the purpose of the FAA is to place arbitration agreements on the same footing as other contracts, not to elevate them. However, even in its efforts to promote arbitration as a means of dispute resolution, the Prima Paint Court plainly recognized that, under the FAA, "issues relating to the making and performance of the agreement to arbitrate" are to be determined by the trial court, and that claims of fraud in the inducement of the contract as a whole may be submitted to arbitration only after the court is satisfied that the making of the arbitration agreement itself is not at issue.

Although some jurisdictions have construed Prima Paint to require arbitration of any claim in the complaint unless there has been "an independent challenge [in the complaint] to the making of the arbitration clause itself," Unionmutual Stock Life Ins. Co. of America v. Beneficial Life Ins. Co., 774 F.2d 524, 529 (1st Cir.1985), this Court has agreed with the "majority of courts [that have], on better reasoning, read Prima Paint more narrowly." Shearson Lehman Bros., Inc. v. Crisp, 646 So.2d 613, 616 (Ala.1994). In Crisp, this Court quoted with approval the following reasoning from the Court of Appeals for the Ninth Circuit:

" '[W]e 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 that a party claims never to have agreed to. ...

" 'Under this view, Prima Paint applies to "voidable contracts"--those "where one party was an infant, or where the contract was induced by fraud, mistake, or duress, or where breach...