Stewart v. Favors

• Decision Date: 14 November 2003
• Docket Number: No. A03A1561., No. A03A1560
• Citation: 590 S.E.2d 186,264 Ga. App. 156
• Parties: STEWART et al. v. FAVORS et al. Favors et al. v. Stewart et al.
• Court: Georgia Court of Appeals

590 S.E.2d 186

264 Ga. App. 156

STEWART et al. v. FAVORS et al.

Favors et al. v. Stewart et al.

Nos. A03A1560, A03A1561.

Court of Appeals of Georgia.

November 14, 2003.

Troutman Sanders, Norman L. Underwood, Alan W. Loeffler, Atlanta, Fortson, Bentley & Griffin, Roy E. Manoll III, Athens, Michael T. Thornton, Atlanta, for appellants.

Bondurant, Mixson & Elmore, Jeffrey O. Bramlett, David G. Brackett, Adrienne P. Ashby, Ashley Carraway, Stacy E. Reynolds, Dennis Goldstein, Atlanta, Roy E. Barnes, Stacy Canan, Deborah Zuckerman, for appellees.

SMITH, Chief Judge.

We granted an interlocutory appeal to decide whether the trial court correctly denied the defendants' motion to compel arbitration in this action in which ten plaintiffs challenge several consumer finance and other related contracts. We conclude that the trial court correctly refused to compel arbitration, albeit for reasons different from those stated in the trial court's order.

Plaintiff¹ Arthur Favors and nine other named plaintiffs (collectively "Favors") brought suit against John Ben Stewart, Jr., Stewart Finance Company,² Stewart Finance Company Holdings, Inc., Preferred Choice Auto Club, Inc., and Stewart & Lawrence Insurance Agency of Georgia, Inc. (collectively "Stewart") alleging that the defendants had engaged in fraudulent and illegal practices that form a predatory lending scheme. The plaintiffs alleged that defendants targeted aged and disabled citizens receiving Social Security and Supplemental Security Income benefits by locating their offices near Social Security offices and by direct consumer advertising soliciting applications for small cash loans.

Plaintiffs alleged that as a prerequisite to obtaining such loans, defendants required plaintiffs to have their benefit checks directly deposited into accounts in a bank chosen by defendants and under defendants' control. According to plaintiffs, defendants then debited these accounts for loan payments and charged plaintiffs for other withdrawals. In conjunction with the small cash loans, for which defendants charged a high rate of interest, defendants also required plaintiffs to purchase various financial products that were useless to the plaintiffs, such as auto club memberships, "non-recording insurance" to cover the loss of personal property pledged as collateral, and other unnecessary insurance, the fees for which were added into the loans. Defendants also required plaintiffs to execute, either separately or as provisions in other documents, arbitration agreements. In their complaint, plaintiffs specifically sought a declaration that these arbitration provisions were unenforceable.

Defendants answered and moved to compel arbitration. The trial court denied the motion, concluding that "defendants did not make a prima facie case that plaintiffs agreed to arbitrate and that plaintiffs' claims are covered by the arbitration agreement." Relying upon Phillips Constr. Co. v. Cowart Iron Works, 250 Ga. 488, 299 S.E.2d 538 (1983), the trial court certified its order for immediate review,³ and we granted the interlocutory appeal.

1. The arbitration provisions in issue recite that they are to be governed by the rules of the American Arbitration Association and that the parties anticipate application of the United States Arbitration Act ("the Act"). The Act

is a powerful statute that governs enforceability of the majority of commercial arbitration agreements throughout the nation and preempts any additional requirements for arbitration agreements imposed by states. [It] mandates that federal courts enforce an arbitration provision ... if the provision satisfies three conditions. First, it must be in writing. Second, the arbitration provision must relate to a maritime transaction or a transaction involving interstate commerce. Third, the arbitration agreement must be valid and able to withstand any legal or equitable grounds for the revocation of any contract.

(Footnotes omitted.) Egle, Notes & Comment, Back to Prima Paint Corp. v. Flood & Conklin Manufacturing Co.: To Challenge an Arbitration Agreement You Must Challenge the Arbitration Agreement, 78 Wash. L.Rev. 199, 200 (2003).

The agreement in issue is in writing, and neither party challenges its relation to interstate commerce. Significant disputes exist regarding the merits of Favors's underlying claims regarding the contracts, but the sole issue presented on appeal is the validity and enforceability of the arbitration provisions. In two enumerations, Stewart contends the trial court erred in determining that it had not made a prima facie case that Favors agreed to arbitrate or that Favors's claims are covered by the arbitration agreement. We need not decide whether the basis for the trial court's ruling was correct, because we conclude for other reasons that the trial court correctly denied Stewart's motion to compel arbitration. It is well established that a trial court's ruling that is right for any reason must be affirmed. Corbin v. Regions Bank, 258 Ga.App. 490, 497, 574 S.E.2d 616 (2002).

The seminal case regarding who is to decide whether an arbitration clause is enforceable is Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). In Prima Paint, the entire contract was attacked on the ground that it was fraudulently induced.⁴ The contract included a broad arbitration provision, which Flood & Conklin sought to enforce. The Supreme Court held that a court "may consider only issues relating to the making and performance of the agreement to arbitrate"; it may not consider issues going to the making and performance of the contract generally. Id. at 404, 87 S.Ct. 1801. No claim was made by Prima Paint that it had been fraudulently induced to enter into the agreement to arbitrate, id. at 406, 87 S.Ct. 1801, and the Supreme Court affirmed the decision denying a stay. Id. at 407, 87 S.Ct. 1801.

Stewart contends that "most of plaintiffs' defenses [sic] are directed to the loan transaction documents as a whole, not just the arbitration agreement that is a part of those documents," and an arbitrator therefore must decide whether the arbitration provisions are enforceable. To the extent Stewart argues that whenever the entire contract is challenged, issues regarding the enforceability of an arbitration clause must be decided by arbitrators, Stewart misconstrues the holding of Prima Paint. In Prima Paint, the Supreme Court did not reach the issue of who has authority to rule on a party's claim that the entire contract containing an arbitration clause is void ab initio, because it was not necessary given the specific facts of that case. Since the decision in Prima Paint, courts have reached conflicting decisions regarding this issue: whether a court or an arbitrator should resolve claims that the entire contract, and therefore an arbitration clause contained in such a contract, is unenforceable.⁵ Egle, supra at 201. But in this case, the trial court under either view was correct in denying Stewart's motion to compel arbitration because in Count 1 of the complaint, Favors raised a clear and specific challenge to the enforceability of the arbitration provisions in both the loan contract and the agreement accompanying the auto club contract. Under these circumstances, the lower courts construing Prima Paint are in agreement that it is the court that has authority to decide whether the arbitration provision is enforceable.

Stewart argues that Results Oriented v. Crawford, 245 Ga.App. 432, 538 S.E.2d 73 (2000), controls this case adversely to Favors. But Results Oriented actually supports our conclusion that the trial court's ruling in this case was correct. In Results Oriented, no specific challenge was made to the making of the arbitration clause in the contract. This court held that because the contract also contained a severability provision, "it would have been proper for the trial court to determine that Crawford had not agreed to `arbitrate arbitrability' had Crawford presented evidence that he was aware of the arbitration clause and shown that it was unconscionable or induced by fraud." Id. at 440(1)(c), 538 S.E.2d 73. Crawford did not do so, and this court reversed the trial court's determination that the arbitration clause was unconscionable. "[A]bsent Crawford's proof of unconscionability under Georgia or Alabama law, the only claim presented to the trial court was that of fraud in the inducement of the entire contract, which must be arbitrated." Id. at 438(1)(b), 538 S.E.2d...