Banc One Acceptance Corp. v. Hill

• Decision Date: 19 April 2004
• Docket Number: No. 03-60356.,03-60356.
• Citation: 367 F.3d 426
• Parties: BANC ONE ACCEPTANCE CORP., Plaintiff-Appellant, v. Edith HILL; Deborah Brand, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

367 F.3d 426

BANC ONE ACCEPTANCE CORP., Plaintiff-Appellant, v. Edith HILL; Deborah Brand, Defendants-Appellees.

No. 03-60356.

United States Court of Appeals, Fifth Circuit.

April 19, 2004.

COPYRIGHT MATERIAL OMITTED

Mark Herndon Tyson, McGlinchey Stafford, Jackson, MS, Leonard A. Gail (argued), Barbara A. Wald, Bank One Law Dept., Chicago, IL, for Plaintiff-Appellant.

William Liston, III (argued), Liston & Lancaster, Jackson, MS, William H. Liston, Liston & Lancaster, Winona, MS, William Dean Belk, Jr., Clark, Davis & Belk, Indianola, MS, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Mississippi.

Before JONES, EMILIO M. GARZA and BENAVIDES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This appeal arises out of an automobile lease gone bad. In the fall of 2000, Edith Hill leased a 2000 Ford Explorer from the East Ford dealership located in Jackson, Mississippi. About one year later, Banc One Acceptance Corporation, the finance company, repossessed the Explorer, even though Hill's payments were current. Hill complained unsuccessfully and then filed suit in state court against East Ford and Banc One. Banc One responded with an action in federal court seeking to enforce the arbitration clause in the lease documents. Hill, however, persuaded the district court that according to a recent Mississippi Supreme Court case interpreting identical contract language, the arbitration clause was unconscionable and thus unenforceable under state law. See East Ford, Inc. v. Taylor, 826 So.2d 709, 717 (Miss.2002). The district court denied Banc One's motion to compel arbitration and granted Hill's motion to dismiss. Banc One now appeals. We affirm.

I. BACKGROUND

On August 14, 2000, Edith Hill signed an offer to lease and a motor vehicle lease agreement for a 2000 Ford Explorer from East Ford. In the offer to lease, an arbitration clause provided that

any controversy, claim, action or inaction arising out of, or relating to, the transaction evidenced by the OFFER together with any resulting written agreements including ... any ... lease ... shall be settled by arbitration administered by the American Arbitration Association.

Exempted from the arbitration clause are "claims by [East Ford] ... that one or more events of default ... has occurred on the part of [Hill] ... [such claims] may be pursued in any court of competent jurisdiction."

Hill leased the Explorer to provide a car for her niece, Deborah Brand, but the parties dispute whether East Ford and its employees knew this. In any event, the lease agreement signed by Hill authorized only members of her "immediate family" to use the automobile. Hill's alleged violation of the lease terms led Banc One to repossess the Explorer despite Hill's being current in the payments. This litigation followed. Banc One now appeals the district court's denial of its motion to compel arbitration and the dismissal of its action.

II. DISCUSSION

This court reviews de novo a grant or denial of a petition to compel arbitration pursuant to § 4 of the Federal Arbitration Act (FAA). Primerica Life Ins. Co. v. Brown, 304 F.3d 469, 471 (5th Cir.2002); 9 U.S.C. § 4 (2000). The de novo standard of review applies when a motion to compel is denied as part of a motion to dismiss. Snap-On Tools Corp. v. Mason, 18 F.3d 1261, 1263-64 (5th Cir.1994).

Two principal questions arise in this appeal. The first is whether the district court had authority under the FAA to determine the enforceability of Hill's arbitration agreement with East Ford. We find that it did. The second is whether the enforceability issue is governed by state contract law or federal law. The answer, in this case, is that state law applied.

A. District Court's Authority to Review Hill's Procedural Unconscionability Claim

A two-step inquiry governs whether parties should be compelled to arbitrate a dispute. "First, the court must determine whether the parties agreed to arbitrate the dispute. Once the court finds that the parties agreed to arbitrate, it must consider whether any federal statute or policy renders the claims non-arbitrable." R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534, 538 (5th Cir.1992). In conducting this two-step inquiry, courts must not consider the merits of the underlying action. Snap-On Tools, 18 F.3d at 1267.

The first step of the process entails determining "whether there is a valid agreement to arbitrate between the parties; and... whether the dispute in question falls within the scope of that arbitration agreement." Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir.1996). These questions are decided according to state law. Id. While there is a strong federal policy favoring arbitration, the policy does not apply to the initial determination whether there is a valid agreement to arbitrate. Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir.2003). Nonetheless, once a court determines that an agreement to arbitrate exists, the court must pay careful attention to the strong federal policy favoring arbitration and must resolve all ambiguities in favor of arbitration. Primerica Life, 304 F.3d at 471 (citing Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984)).

The Supreme Court has held that under the FAA, the federal courts may only consider "issues relating to the making and performance of the agreement to arbitrate." See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). In Prima Paint, the Court held that the "making" of an agreement to arbitrate was not called into question by a general allegation that the entire contract was void because of fraudulent inducement. See id. Because the defense asserted in Prima Paint did not attack the "making" of the agreement to arbitrate itself, the Court ordered arbitration and noted that the FAA reflects an "unmistakably clear 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." Id. at 404, 87 S.Ct. 1801.

This court recently addressed the scope and application of the Prima Paint rule and held that where the "very existence of a contract" containing the relevant arbitration agreement is called into question, the federal courts have authority and responsibility to decide the matter. See Will-Drill, 352 F.3d at 218. In that case, the party resisting arbitration attacked the essential validity of the contract by arguing that the contract was not signed by all of the necessary parties. Id. at 215. This contention, if accurate, would mean that no contract ever existed, and by proxy, that no agreement to arbitrate was ever concluded. The arbitrator consequently would have no authority to decide anything. Id.

Will-Drill distinguished the far more common argument made by a party who does not challenge the existence of a contract, but rather attacks the enforceability of the agreement alleging that the contract is void ab initio or voidable. Id. at 218. Such a scenario calls for application of the severability doctrine contained in Prima Paint. Under this approach, "[o]nly if the arbitration clause is attacked on an independent basis can the court decide the dispute; otherwise, general attacks on the agreement are for the arbitrator." Id. (emphasis added); accord Primerica Life, 304 F.3d at 472 (holding that "unless a defense relates specifically to the arbitration agreement, it must be submitted to the arbitrator as part of the underlying dispute"). In other words, where the existence of the contract is not in question, the court must examine whether the allegations made by the party resisting arbitration challenge the "making of the agreement to arbitrate itself" as opposed to "allegations regarding the contract as a whole." Dillard v. Merrill Lynch, 961 F.2d 1148, 1154 n. 9 (5th Cir.1992) (citing Prima Paint, 388 U.S. at 403-04, 87 S.Ct. 1801) (internal quotation marks omitted). Only if the allegations concern solely the arbitration term and are not generally applicable to the agreement as a whole may the district court properly adjudicate the enforceability of the arbitration clause. See id. (holding that by "focus[ing] specifically on the arbitration provision as an adhesive term," the party resisting arbitration had met the threshold requirement to challenge the making of the arbitration agreement). Where a defense does not specifically relate to the arbitration agreement, however, it must be submitted to the arbitrator as part of the underlying dispute. See Primerica Life, 304 F.3d at 472 (holding that a claim that one of the parties lacked the capacity to contract must be submitted to the arbitrator); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002) (noting that "the presumption is that the arbitrator should decide allegations of waiver, delay, or a like defense to arbitrability") (internal quotation marks and citations omitted).

Hill does not challenge the "very existence" of the contract. Indeed, her underlying state court action seeks to obtain damages for breach of contract, and she admits in her affidavit before the district court that she signed the offer to lease containing the arbitration clause. Instead, Hill asserts that the arbitration clause is "procedurally unconscionable," a claim fundamentally different from the position asserted by the party resisting arbitration in Will-Drill. Hill's argument falls within the Prima Paint separability doctrine, and the court must examine whether Hill's allegations attack the arbitration clause on an "independent basis," or constitute a "general attack" on the contract. Will-Drill, 352 F.3d at 218.

In her affidavit, which recites the circumstances under which she signed the offer to lease and lease agreement, and thus undergirds her procedural unconscionability claim, Hill states that she ...