Citizens Bank v. Alafabco, Inc.
| Decision Date | 02 June 2003 |
| Docket Number | No. 02-1295.,02-1295. |
| Citation | 539 U.S. 52 |
| Parties | THE CITIZENS BANK <I>v.</I> ALAFABCO, INC., ET AL. |
| Court | U.S. Supreme Court |
Respondents Alafabco, Inc., and its officers filed suit in Alabama Circuit Court, alleging that Alafabco had incurred massive debt because petitioner bank had unlawfully reneged on an agreement to provide capital sufficient to complete a specific building project. The bank moved to compel arbitration as provided in the parties' debt-restructuring agreements. The court ordered respondents to submit to arbitration, but the State Supreme Court reversed, finding that, because the agreements had no substantial effect on interstate commerce, there was an insufficient nexus with such commerce to establish Federal Arbitration Act (FAA) coverage of the parties' dispute.
Held: There is sufficient nexus with interstate commerce to make the arbitration provision enforceable under the FAA. By applying to a contract "evidencing a transaction involving commerce," 9 U. S. C. § 2, the FAA provides for "the enforcement of arbitration agreements within the full reach of the Commerce Clause," Perry v. Thomas, 482 U. S. 483, 490. It is thus perfectly clear that the FAA encompasses a wider range of transactions than those actually "in commerce." Although the debt-restructuring agreements were executed in Alabama by Alabama residents, they nonetheless satisfy the FAA's "involving commerce" test. First, Alafabco engaged in business throughout the southeastern United States, using substantial loans from the bank that were renegotiated and redocumented in the debt-restructuring agreements. Second, the restructured debt was secured by all of Alafabco's business assets, including its inventory of goods assembled from out-of-state parts and raw materials. Third, commercial lending has a broad impact on the national economy. The Alabama Supreme Court's cramped view of Congress' Commerce Clause power appears to rest on a misreading of United States v. Lopez, 514 U. S. 549, which does not suggest that limits on the power to regulate commerce are breached by applying the FAA to disputes arising out of commercial loan transactions such as these.
Certiorari granted; reversed and remanded.
ON PETITION FOR WRIT OF CERTIORARI TO THE SUPREME COURT OF ALABAMA
The question presented is whether the parties' debt-restructuring agreement is "a contract evidencing a transaction involving commerce" within the meaning of the Federal Arbitration Act (FAA). 9 U. S. C. § 2. As we concluded in Allied-Bruce Terminix Cos. v. Dobson, 513 U. S. 265 (1995), there is a sufficient nexus with interstate commerce to make enforceable, pursuant to the FAA, an arbitration provision included in that agreement.
Petitioner The Citizens Bank—an Alabama lending institution—seeks to compel arbitration of a financial dispute with respondents Alafabco, Inc.—an Alabama fabrication and construction company—and its officers. According to a complaint filed by respondents in Alabama state court, the dispute among the parties arose out of a series of commercial loan transactions made over a decade-long course of business dealings. In 1986, the complaint alleges, the parties entered into a quasi-contractual relationship in which the bank agreed to provide operating capital necessary for Alafabco to secure and complete construction contracts. That relationship began to sour in 1998, when the bank allegedly encouraged Alafabco to bid on a large construction contract in Courtland, Alabama, but refused to provide the capital necessary to complete the project. In order to compensate for the bank's alleged breach of the parties' implied agreement, Alafabco completed the Courtland project with funds that would otherwise have been dedicated to repaying existing obligations to the bank. Alafabco in turn became delinquent in repaying those existing obligations.
On two occasions, the parties attempted to resolve the outstanding debts. On May 3, 1999, Alafabco and the bank executed "`renewal notes'" in which all previous loans were restructured and redocumented. 872 So. 2d 798 (Ala. 2002). The debt-restructuring arrangement included an arbitration agreement covering "`all disputes, claims, or controversies.'" That agreement provided that the FAA "`shall apply to [its] construction, interpretation, and enforcement.'" Id., at 799. Alafabco defaulted on its obligations under the renewal notes and sought bankruptcy protection in federal court in September 1999.
In return for the dismissal of Alafabco's bankruptcy petition, the bank agreed to renegotiate the outstanding loans in a second debt-restructuring agreement. On December 10, 1999, the parties executed new loan documents encompassing Alafabco's entire outstanding debt, approximately $430,000, which was secured by a mortgage on commercial real estate owned by the individual respondents, by Alafabco's accounts receivable, inventory, supplies, fixtures, machinery, and equipment, and by a mortgage on the house of one of the individual respondents. Id., at 800. As part of the second debt-restructuring agreement, the parties executed an arbitration agreement functionally identical to that of May 3, 1999.
Within a year of the December 1999 debt restructuring, Alafabco brought suit in the Circuit Court of Lawrence County, Alabama, against the bank and its officers. Alafabco alleged, among other causes of action, breach of contract, fraud, breach of fiduciary duties, intentional infliction of emotional distress, and interference with a contractual or business relationship. Essentially, the suit alleged that Alafabco detrimentally "`incur[red] massive debt'" because the bank had unlawfully reneged on its agreement to provide capital sufficient to complete the Courtland project. Id., at 799. Invoking the arbitration agreements, the bank moved to compel arbitration of the parties' dispute. The Circuit Court ordered respondents to submit to arbitration in accordance with the arbitration agreements.
The Supreme Court of Alabama reversed over Justice See's dissent. Applying a test it first adopted in Sisters of the Visitation v. Cochran Plastering Co., 775 So. 2d 759 (2000), the court held that the debt-restructuring agreements were the relevant transactions and proceeded to determine whether those transactions, by themselves, had a "substantial effect on interstate commerce." 872 So. 2d, at 801, 803. Because there was no showing "that any portion of the restructured debt was actually attributable to interstate transactions; that the funds comprising that debt originated out-of-state; or that the restructured debt was inseparable from any out-of-state projects," id., at 805, the court found an insufficient nexus with interstate commerce to establish FAA coverage of the parties' dispute.
Justice See in dissent explained why, in his view, the court had erred by using the test formulated in Sisters of the Visitation, in which the Supreme Court of Alabama read this Court's opinion in United States v. Lopez, 514 U. S. 549 (1995), to require that "a particular contract, in order to be enforceable under the Federal Arbitration Act must, by itself, have a substantial effect on interstate commerce." 872 So. 2d, at 808. Rejecting that stringent test and assessing the evidence with a more generous view of the necessary effect on interstate commerce, Justice See would have found that the bank's loans to Alafabco satisfied the FAA's "involving commerce" requirement.
The FAA provides that a
"written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U. S. C. § 2 (emphasis added).
The statute further defines "commerce" to include "commerce among the several States." § 1. Echoing Justice See's dissenting opinion, petiti...
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