Burden v. Check into Cash of Kentucky

• Decision Date: 02 August 2001
• Docket Number: No. 00-5807,00-5807
• Citation: 267 F.3d 483
• Parties: (6th Cir. 2001) Beverly Burden, et al., Plaintiffs-Appellees, v. Check into Cash of Kentucky, LLC, et al., Defendants-Appellants. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 483

267 F.3d 483 (6th Cir. 2001)

Beverly Burden, et al., Plaintiffs-Appellees, v. Check into Cash of Kentucky, LLC, et al., Defendants-Appellants.

No. 00-5807

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: August 2, 2001

Decided and Filed: October 1, 2001

Appeal from the United States District Court for the Eastern District of Kentucky at Lexington. No. 98-00170; Karl S. Forester, Chief District Judge. [Copyrighted Material Omitted] Barbara B. Edelman, Frank T. Becker, DINSMORE & SHOHL, Lexington, Kentucky, for Appellants.

John O. Morgan, Jr., Lexington, Kentucky, Richard A. Fisher, LOGAN, THOMPSON, MILLER, BILBO, THOMPSON & FISHER, Cleveland, Tennessee, Jack L. Block, SACHNOFF & WEAVER, Chicago, Illinois, for Appellees.

Before: CLAY and GILMAN, Circuit Judges; WISEMAN, District Judge.^*

OPINION

CLAY, Circuit Judge.

Defendants, Check Into Cash of Kentucky, LLC, and W. Allan Jones, Jr., appeal from the district court's order denying Defendants' motion brought pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. §1 et seq., to compel arbitration of claims brought by Plaintiffs, Beverly Burden, Chapter 13 bankruptcy trustee for multiple estates, et al., alleging violations of federal and Kentucky law arising from high-interest loan agreements between Plaintiffs and Defendants. We VACATE the district court's order and REMAND for further consideration of Defendants' motion to compel arbitration in light of Plaintiffs' allegations that the arbitration agreements are unenforceable due to burdensome costs, denial of statutory rights, and uninformed waiver of jury trial rights.

BACKGROUND

Procedural History

Plaintiffs filed their original complaint in the district court on April 28, 1998, which was amended on May 5, 1998. On July6, 1998, Plaintiffs filed their second amended complaint, alleging violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §1601 et seq., the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1961 et seq., and several consumer protection statutes under Kentucky law. On June2, 1998, Defendants moved to certify a question of law to the Kentucky Supreme Court: whether fees charged by a licensed check cashing company constituted interest subject to Kentucky usury laws. On August 25, 1998, the district court ordered Plaintiffs' action to be held in abeyance pending resolution of the question by the Kentucky Supreme Court.

On June 17, 1999, the Kentucky Supreme Court answered the certified question, finding that a check cashing company licensed under Kentucky Revised Statutes § 368 et seq., which charges a "service fee" for accepting and deferring deposit on checks pursuant to agreements with the makers of the checks, thereby charges "interest" subject to the usury laws and disclosure provisions under § 360. See White v. Check Holders, Inc., 996 S.W.2d 496, 500 (Ky. 1999).

On December 1, 1999, Plaintiffs moved to proceed as a class action pursuant to Fed. R. Civ. P. 23(c)(1). Defendants thereafter moved for an extension of time to respond to Plaintiffs' motion. On January 6, 2000, Defendants filed a motion under the FAA to compel arbitration of claims brought by Plaintiffs, and to stay litigation pending arbitration. The district court denied Defendants' motion on May 12, 2000, and it is from this order that Defendants now appeal.

Facts

Plaintiff Burden is trustee for four bankruptcy estates in this case. The individual Plaintiffs are residents of Lexington, Kentucky. Defendant Check Into Cash, creditor of the bankruptcy estates and individual Plaintiffs in this case, is incorporated and does business in Kentucky. Defendant W. Allan Jones, Jr., is a majority owner and managing officer of Check Into Cash.

Plaintiffs allege that Defendants have loaned money at usurious interest rates to hundreds of Kentucky consumers. The consumers entered into "check cashing agreements" with Defendants (the "loan agreements"). Under the loan agreements, Defendants would provide a borrower with, for example, $200 in cash in exchange for a check in the amount of $238. The loan agreement would refer to the $38 difference as a "finance charge," which, the agreement stated, "is deemed a service fee by Kentucky law and not interest. K.R.S. 368.100 (2)." (J.A. at 458.)

Defendants would then hold the check until the payment due date, which was normally two weeks after the date of the loan agreement. These terms resulted in annual percentage rates of over 500%, which was stated in the loan agreement. If, as of the payment due date, the borrower lacked sufficient funds to cover the check, Defendants would permit the borrower to roll-over the debt by paying the "service fee," executing a replacement check in the same amount as the original check, and establishing a new payment due date two weeks from the roll-over date. Plaintiffs allege that Defendants coerced borrowers into rolling over their debt by threatening otherwise to prosecute under the Kentucky "bad check" law. See Ky. Rev. Stat. Ann. § 514.040 (Banks-Baldwin 1994).

The loan agreements at issue contained an arbitration clause, on the reverse side of the loan agreement, which read as follows:

ARBITRATION: To pursue any claim, demand, dispute or cause of action (a "claim") arising under this Agreement or the transaction in connection with which this Agreement has been executed, the claimant must submit to the other party in writing an explanation of the claim and a demand that the claim be resolved by arbitration. If the other party does not respond to the submittal in writing within ten (10) days of its receipt, the claimant may pursue the claim either through arbitration or court action. If the other party responds to the submittal in writing within ten (10) days of its receipt, the claim must be submitted to binding arbitration in accordance with and pursuant to the Uniform Arbitration Act as enacted in the Commonwealth of Kentucky, KRS 417.045, et seq., as amended from time to time (the "Act"). The arbitration shall be conducted by one or more arbitrators selected by agreement between you and Check Into Cash but, if no agreement on the arbitrator[s] can be reached, by the Kentucky District Court for claims involving $4000 or less or the Kentucky Circuit Court, in either case, in the county where this Agreement was signed. The expenses of the arbitration, including attorney's fees, will be paid in accordance with the award issued by the arbitrator[s]. The finality and binding effect of the arbitration award shall be as set forth in the Act.

(J.A. at 451, 558.)

Kentucky's Uniform Arbitration Act provides that "[a] written agreement to submit any existing controversy to arbitration or a provision in written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract." Ky. Rev. Stat. Ann. § 417.050 (Banks-Baldwin 1994).

Plaintiffs contend that prior to December of 1997, the loan agreements did not include an arbitration clause on the reverse side of the loan agreement form. Plaintiffs further contend that Defendants never informed them of the addition of the arbitration clause, and that Plaintiffs only became aware of the clause when Defendants attached it to their motion to compel arbitration.

DISCUSSION

This Court reviews de novo a district court's ruling on whether to compel arbitration pursuant to the FAA. Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000). Under the FAA, a district court's consideration of a motion to compel arbitration is limited to determining whether the parties entered into a valid agreement to arbitrate, and does not reach the merits of the parties' claims. Great W. Mortgage Corp. v. Peacock, 110 F.3d 222, 228 (3d Cir. 1997).

The district court concluded, primarily under Three Valleys Municipal Water District v. E.F. Hutton & Co, 925 F.2d 1136, 1139 (9th Cir. 1991), that Plaintiffs' allegations that the loan agreements containing the arbitration clause were voidab initio, must be determined by a court, not an arbitrator. Defendants contend that under Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), Plaintiffs' allegations of void loan agreements are to be determined by an arbitrator.

Under section 3 of the FAA, when an action is brought in federal court "upon any issue referable to arbitration under agreement in writing for such arbitration," the court must "stay the . . . action pending arbitration once it is satisfied that the issue is arbitrable under the agreement." Prima Paint Corp., 388 U.S. at 400. "[A]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Wilson Elec. Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167, 169 (6th Cir. 1989) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)).

Under Prima Paint, a court, rather than an arbitrator, may adjudicate a claim of fraud in the inducement only if the claim of fraud concerns the inducement of the arbitration clause itself, not the inducement of the contract generally. Prima Paint, 388 U.S. at 403-04. The Court in Prima Paint found that arbitration clauses were "separable" from the contracts in which they were included, and that "a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced from fraud." Prima Paint, 388 U.S. at 402. "If the arbitration clause is not at issue, then the arbitrator will decide challenges to the contract containing the arbitration clause." C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin & Jenrette Sec. Corp., 912 F.2d 1563, 1567 (6th Cir. 1990).

Several of our sister circuits have found that Prima Paint does not apply to allegations of nonexistent contracts. See Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587, 590-91 (7th Cir. 2001); ...