Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), is a United States Supreme Court case concerning contract law and arbitration. The case arose from a class action filed in Florida against a payday lender alleging the loan agreements the plaintiffs had signed were unenforceable because they essentially charged a higher interest rate than that permitted under Florida law.
The lending agreements called for all disputes between the borrower and lender to be settled in arbitration. The original plaintiffs argued that the entire contract, including the arbitration clause, was invalid because it violated the law. When it was appealed to the High Court, Justice Antonin Scalia wrote for a majority of seven that the Federal Arbitration Act, as previously interpreted by the Court, settled a question that had long been debated by legal scholars and lower-court judges. The opinion distinguished void and voidable contracts, requiring that in the latter an arbitrator rule on all issues including the legality of the contract unless the arbitration clause was itself challenged. The only dissenter was Clarence Thomas, who restated his belief that the Arbitration Act does not supersede state law.
Background of the case
In 1978, the court's Marquette Bank decision, which held that under the National Banking Act of 1863 states could not enforce their anti-usury laws against nationally chartered banks based in other states, opened the door to increased credit card spending by Americans. Other forms of consumer credit, such as title and payday loans, became available for those who could not get even the most restrictive credit cards available. Social activists criticized the banks and companies that engaged in those practices, calling them predatory lenders who targeted the poor with promises of no credit check and easy money that only came at extremely high interest rates, profiting when the loans were extended long beyond the original short term.
Most such lenders had their customers sign credit agreements that included arbitration clauses specifying that all disputes were to be resolved through that process rather than litigation. Arbitration in turn was criticized as a business-friendly forum which furthered the exploitation of consumers most in need of money. Lawsuits over these contracts, however, were increasingly dismissed by lower courts that followed the Supreme Court's Prima Paint Corp. v. Flood & Conklin Mfg. Co. case, which created the separability doctrine, under which all issues in contracts with arbitration clauses, save the clause itself, were to be decided by the arbitrator and not a court, under the 1925 Federal Arbitration Act. In Southland Corp. v. Keating, the Court held the FAA, and thus the separability doctrine, applicable to contracts executed under state law as well.
Litigation history
In 1999, John Cardegna, a Palm Beach County 9-1-1 operator, took out a $337.50 payday loan from a local branch of The Check Cashing Store, a subsidiary of Buckeye Check Cashing, Inc., a Dublin, Ohio-based company (now Checksmart). Later he took out another loan, for $150. Unable to repay either from his paychecks, he kept rolling over his loan by paying the fee to do so. Eventually these came to over $1,000, and with the help of an activist lawyers' group, Trial Lawyers for Public Justice (TLPJ), he filed a class action alleging that the fees he was charged were effectively interest payments at a 1,300% annual rate, well over Florida's legal limit of 45%. The class would eventually be certified to include all the store's customers prior to September 30, 2001, reflecting a change in Florida law which allowed the fees.
The company moved to have the case dismissed and compel arbitration. When that was denied, it petitioned the Florida Fourth District Court of Appeal which ruled that arbitration was required because the entire contract had been challenged, not the severable arbitration clause. But then that decision was appealed to the Florida Supreme Court, which reversed on the grounds that the contract was illegal ab initio and thus the arbitration clause was unenforceable. It read Prima Paint to distinguish between void contracts that could never have legal standing, such as the one at issue, and voidable contracts where that result could come to pass later as a result of dispute resolution but where the contract was legal on its face. One justice of that court, Raoul Cantero, dissented, saying that the majority was ignoring the actual language of the FAA.