Washington Mut. Finance Group, LLC v. Bailey

• Decision Date: 19 March 2004
• Docket Number: No. 02-60794.,02-60794.
• Citation: 364 F.3d 260
• Parties: WASHINGTON MUTUAL FINANCE GROUP, LLC, Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. John BAILEY; Helen J. Spellman, Defendants-Appellees. Washington Mutual Finance Group, LLC, Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. Violet Smith, Defendant-Appellee. Washington Mutual Finance Group, LLC; et al., Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. Beulah Tate; et al., Defendants, Beulah Tate; John Phinizee; Miriah Phinizee, Defendants-Appellees. Washington Mutual Finance Group, LLC, Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. Willie Nmi Curry; et al., Defendants, Willie Nmi Curry, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 260

364 F.3d 260

WASHINGTON MUTUAL FINANCE GROUP, LLC, Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. John BAILEY; Helen J. Spellman, Defendants-Appellees.

Washington Mutual Finance Group, LLC, Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. Violet Smith, Defendant-Appellee.

Washington Mutual Finance Group, LLC; et al., Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. Beulah Tate; et al., Defendants, Beulah Tate; John Phinizee; Miriah Phinizee, Defendants-Appellees.

Washington Mutual Finance Group, LLC, Plaintiff-Appellant, American Bankers Life Assurance Company of Florida; American Security Insurance Company; Union Security Life Insurance Co.; American Bankers Insurance Company of Florida, Intervenor Plaintiffs-Appellants, v. Willie Nmi Curry; et al., Defendants, Willie Nmi Curry, Defendant-Appellee.

No. 02-60794.

United States Court of Appeals, Fifth Circuit.

March 19, 2004.

COPYRIGHT MATERIAL OMITTED

Walter D. Willson (argued), Kenna L. Mansfield, Jr., Wells, Marble & Hurst, Charles E. Griffin, Griffin & Associates, Jackson, MS, for Intervenor Plaintiffs-Appellants.

Roman Ashley Shaul (argued), Beasley, Allen, Crow, Methvin, Portis & Miles, Montgomery, AL, for Defendants-Appellees.

Katharine M. Samson, Watkins, Ludlam, Winter & Stennis, Jess Hays Dickinson (argued), Dickinson, Ros, Samson & Nelms, Gulfport, MS, Jan Timothy Chilton, Severson & Werson, Memphis, TN, for Plaintiff-Appellant.

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

Before GARWOOD, JOLLY and CLEMENT, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

This case requires us to determine the effect of an individual's illiteracy on the enforcement of an arbitration agreement, which the individual admits he signed, but because of his illiteracy, denies he understood. The district court held that the individual's illiteracy, coupled with a lack of oral disclosure, rendered the agreement procedurally unconscionable. We conclude the district court erred and REVERSE.

I

Washington Mutual Finance Group ("WM Finance") is a financial institution providing, among other things, consumer credit services. John Phinizee, Willie Curry ("Curry"), Beulah Tate ("Tate"), Violet Smith ("Smith"), John Bailey ("Bailey") and Helen Spellman ("Spellman") (collectively "the Illiterate Appellees") obtained loans from WM Finance or its predecessors. As part of the same transaction, the Illiterate Appellees also purchased credit, life, disability, and property insurance from American Bankers Life Assurance Company of Florida, American Security Insurance Company, Union Security Life Insurance Company and American Bankers Insurance Company of Florida (collectively "the Insurer Appellants"). Each of the Illiterate Appellees signed an agreement to arbitrate any disputes they might have with WM Finance.

Sometime thereafter, a dispute did arise. The Illiterate Appellees and Miriah Phinizee, wife of Illiterate Appellee John Phinizee,¹ sued WM Finance and the Insurer Appellants in Mississippi state court, alleging primarily that they were sold and charged for insurance that they did not need or want. In response, WM Finance brought separate federal actions under the Federal Arbitration Act (FAA)² against the Illiterate Appellees and Miriah Phinizee, seeking an order staying the state actions and compelling the appellees to arbitrate their disputes. The Insurer Appellants, who were also defendants in the state court suit, intervened. The district court consolidated the cases into the instant one.

The district court was persuaded by the Illiterate Appellees' arguments. It found that they were illiterate and that WM Finance never specifically informed them that they were signing arbitration agreements. The district court went on to conclude that these circumstances rendered the arbitration agreements procedurally unconscionable and therefore unenforceable. The district court also found that Miriah Phinizee did not sign an arbitration agreement and therefore could not be compelled to arbitrate. Accordingly, the district court denied WM Finance's motion to compel arbitration, denied the Insurer Appellants' motion for summary judgment, and granted the Illiterate Appellees' motion to dismiss.

On appeal, WM Finance and the Insurer Appellants argue that the district court erred in three ways. First, they contend that the district court failed to correctly apply Mississippi state law. Second, they assert that the district court procedurally erred because it relied on facts outside the pleadings, yet failed to convert the motion to dismiss into a motion for summary judgment. Furthermore, in this respect, it did not allow for adequate discovery.³ Finally, they argue that the district court erred in refusing to compel Miriah Phinizee to arbitrate her claims.

II

We review a grant or denial of a petition to compel arbitration pursuant to § 4 of the FAA de novo. Will-Drill Resources, Inc. v. Samson Resources Co., 352 F.3d 211, 214 (5th Cir.2003). "The FAA expresses a strong national policy favoring arbitration of disputes, and all doubts concerning the arbitrability of claims should be resolved in favor of arbitration." Primerica Life Ins. Co. v. Brown, 304 F.3d 469, 471 (5th Cir.2002). Courts conduct a bifurcated inquiry to determine whether parties should be compelled to arbitrate a dispute. Id. 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 nonarbitrable. Id. In this case, the district court based its refusal to compel arbitration on a finding that there was no valid or enforceable arbitration agreement between the parties. It did not find, nor do the Illiterate Appellees now argue, that the arbitration clause here is rendered unenforceable by any contrary federal statute or policy. Accordingly, the sole question presented by this appeal is whether the arbitration agreement admittedly signed by the Illiterate Appellees is valid.

The purpose of the FAA is to give arbitration agreements the same force and effect as other contracts — no more and no less. 9 U.S.C. § 2. See Pennzoil Exploration and Production Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1064 (5th Cir.1998) ("Arbitration is a matter of contract between the parties"). Accordingly, in determining whether the parties agreed to arbitrate a certain matter, courts apply the contract law of the particular state that governs the agreement. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Both parties acknowledge that this means Mississippi state law applies here.

Under Mississippi law, a contract can be unconscionable in one of two ways: procedurally and/or substantively. Russell v. Performance Toyota, Inc., 826 So.2d 719, 725 (Miss.2002). As the district court correctly recognized, because the Illiterate Appellees' argument attacks the formation of the agreement to arbitrate and not the substance of the agreement itself, the issue here is of the procedural variety. Procedural unconscionability is proved by showing "a lack of knowledge, lack of voluntariness, inconspicuous print, the use of complex legalistic language, disparity in sophistication or bargaining power of the parties and/or a lack of opportunity to study the contract and inquire about the contract terms." Id. (citations omitted). There are no allegations here that the Illiterate Appellees were coerced into signing the arbitration agreements in question, nor is the complexity of the legal language, conspicuousness of the print or the relative bargaining power of the two parties in dispute here today. Evidently recognizing the absence of these more customary grounds, the district court based its finding of procedural unconscionability on its conclusion that the Illiterate Appellees' professed illiteracy rendered them unable to comprehend the arbitration agreement and that they therefore lacked any form of knowledge about the agreement when they signed it. The district court also appeared to rest its finding of unconscionability on the fact that WM Finance failed specifically to inform the Illiterate Appellees that they were signing an arbitration agreement after the Illiterate Appellees had informed WM Finance of their inability to read.

We find both bases of the district court's unconscionability conclusion unsupported by Mississippi law. First, the district court erred in concluding that the Illiterate Appellees' inability to read rendered them incapable of possessing adequate knowledge of the arbitration agreement they signed. The Mississippi Supreme Court has held that, as a matter of law, an individual's inability to understand a contract because of his or her illiteracy is not a sufficient basis for concluding that a contract is unenforceable. See Mixon v. Sovereign Camp, W.O.W., 155 Miss. 841, 125 So. 413, 415 (1930) (noting that "the suggestion of illiteracy cannot prevail, for the manifest reason that there cannot be two separate departments in the law of contracts, one for the educated and another for those who are not"). This case is an old one, but its holding has never been contested and accords with subsequent Mississippi Supreme Court cases presenting similar issues. For example, Mississippi courts have consistently held that parties to an insurance...