In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 02-2649, 02-2650
SHEILA SMITH, et al.,
Plaintiffs-Appellees,
v.
JOHN STEINKAMP, et al.,
Defendants-Appellants.
____________
Appeals from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. IP01-1290-C-H/S—David F. Hamilton, Judge.
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ARGUED JANUARY 6, 2003—DECIDED FEBRUARY 10, 2003
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Before POSNER, DIANE P. WOOD, and WILLIAMS, Circuit
Judges.
POSNER, Circuit Judge. The defendants appeal from
the denial of their motion to submit the claims of two of
the plaintiffs to arbitration. 9 U.S.C. § 16(a)(1)(B). The
defendants are Instant Cash, Inc., a small-loan company
active in Indiana, and its lawyer, Steinkamp (also Stein-
kamp’s firm, but it can be ignored). Instant Cash made
“payday” loans to the four plaintiffs. A payday loan is a
loan of short duration, typically two weeks, at an astro-
nomical annual interest rate, here more than 500 percent. As
the name implies, it is a loan to poor or improvident
borrowers who have no savings or credit and run out
of money for their living expenses before they receive their
2 Nos. 02-2649, 02-2650
weekly or biweekly paycheck. The borrowers must be
desperate, since the annual percentage rate of the loans
is disclosed to them in clear and conspicuous type on the
loan instrument.
The plaintiffs defaulted and Steinkamp represented
Instant Cash in suits against them in small-claims court.
(The status of the small-claims litigation is unclear.) They
riposted with this federal suit, in which they charge the
defendants with RICO violations (Steinkamp they further
charge with violating the federal Fair Debt Collection
Practices Act) and also with violating Indiana usury law.
Indiana’s supreme court has held that payday loans at the
interest rates typically and here charged by the lenders
are usurious and therefore unenforceable. Livingston v.
Fast Cash USA, Inc., 753 N.E.2d 572, 574-77 (Ind. 2001). The
plaintiffs have other Indiana claims as well, but we can
ignore those.
The defendants moved for an order to arbitrate their
federal and state law disputes with the plaintiffs, invoking
an arbitration agreement that the plaintiffs had signed. It
might seem that the defendants would have little to gain
from arbitration, given Livingston. But they may think
that an arbitrator is more likely to ignore or mistake the
law than a judge would be; anyway there are other claims
in the case besides the usury claim and the defendants
may fear being dragged into class action suits if borrowers
can proceed against them in state or federal court. The
defendants’ desire to arbitrate is therefore understand-
able on multiple grounds.
All the plaintiffs had signed the arbitration agreement
but two of them had not signed it at the time they took out
the loans on which they base this suit. Sheila Smith had
borrowed $150 from Instant Cash on July 12, 2000, to be
repaid on the 26th. On the same day that she signed the
Nos. 02-2649, 02-2650 3
loan agreement she signed a separate agreement, en-
titled “Additional Terms and Conditions of This [Loan]
Agreement. Waiver of Jury Trial and Arbitration Agree-
ment” (we’ll call this the “waiver agreement”), which
provided that all disputes would be resolved by arbitra-
tion with the exception of disputes within the jurisdiction
of a small-claims court. “Disputes” are defined in the waiv-
er agreement to
include, without limitation (a) any federal or state law
claims, disputes or controversies, arising from or
relating directly or indirectly to the [loan-applica-
tion form], this Agreement [i.e., the loan agreement]
(including this arbitration provision and the fees
charged), or any prior agreement or agreements be-
tween you and us; (b) all counterclaims, cross-claims
and third-party claims; (c) all common law claims,
based upon contract, tort, fraud, and other intentional
torts; (d) any claims based upon a violation of any state
or federal constitution, statute or regulation; (e) all
claims asserted by us against you, including claims
for money damages to collect any sum we claim you
owe us; (f) all claims asserted by you individually, as
a private attorney general, as a representative and
or member of a class of persons, or in any other Rep-
resentative capacity, against us and/or any of our
employees, agents, [etc.].
The agreement thus (in clause (f)) also authorizes agents
of Instant Cash, such as Steinkamp, to demand arbitra-
tion of their disputes with the borrowers.
On August 15, Smith signed another loan agreement,
this one for $125, with repayment again due in two weeks.
But this time she didn’t sign a waiver agreement. Al-
though the back of the loan agreement contains a list of
additional terms and conditions (the same list had ap-
4 Nos. 02-2649, 02-2650
peared on the back of her July loan agreement) including
a waiver clause, this clause, unlike what we are calling
the waiver agreement, does not refer to arbitration or lit-
igation.
The facts pertaining to plaintiff Hicks are the same. But
the other two plaintiffs signed the waiver agreement
every time they borrowed from Instant Cash, and the
district judge held that they were bound by the agreement
and so had to arbitrate their RICO and other claims. These
other two plaintiffs do not appeal from this ruling,
and could not if they wanted to because the grant of a
motion to compel arbitration is not appealable unless the
judge dismisses the case. 9 U.S.C. § 16(b); McCaskill v. SCI
Management Corp., 298 F.3d 677, 678 (7th Cir. 2002). But
the judge held that Smith and Hicks did not have to ar-
bitrate, because, he ruled, the waiver agreement that
they had signed when taking out the earlier loans was
inapplicable to the later ones. It is this ruling that the
appeals challenge.
The defendants pin their contention that Smith and
Hicks must arbitrate on clause (d) of the waiver agree-
ment (“any claims based upon a violation of any state or
federal constitution, statute or regulation”). But it is ap-
parent that clauses (b) through (f), including therefore
(d), relate back to (a), which limits the duty to arbitrate
to disputes arising under “this Agreement,” that is, the
loan agreement, and to disputes arising under “prior . . .
agreements.” The function of clauses (b) through (f) is to
make clear that neither the legal theory nor the proce-
dural vehicle for a claim arising out of an agreement as
defined in clause (a) is relevant to arbitrability; all that
matters is that the claim arise from either the current
loan agreement or a prior loan agreement.
Nos. 02-2649, 02-2650 5
Thus the waiver agreement that Smith signed on July 12
related to the loan agreement that she signed the same
day plus any prior agreements between her and Instant
Cash. But the dispute on which she bases her claim in
this lawsuit (likewise Hicks, mutatis mutandis) arose out
of the loan agreement that she signed on August 15. If (b)
through (f) are read as standing free from any loan agree-
ment, absurd results ensue, for example that if Instant
Cash murdered Smith in order to discourage defaults
and her survivors brought a wrongful death suit against
Instant Cash (a “common law” suit, thus encompassed by
(c)), Cash could insist that the wrongful death claim be
submitted to arbitration. For that matter, if an employee
of Instant Cash picked Smith’s pocket when she came in
to pay back the loan, and Smith sued the employee for
conversion, he would be entitled to arbitration of her claim.
It would make no difference that the conversion had
occurred in Smith’s home 20 years after her last transac-
tion with Instant Cash.
The defendants’ lawyer blanched when confronted
with such hypothetical cases at oral argument but was
unable to suggest a limiting principle. Or to explain why, if
the agreement applies to subsequent as well as prior loan
agreements, clause (a) refers explicitly to prior agree-
ments but contains no reference to subsequent ones. We
do not put too much weight on this point, however, lest
it seem that if the word “prior” had not appeared in the
waiver agreement the defendants would prevail. Con-
sidering who the borrowers are, an agreement requiring
them to arbitrate disputes arising out of future agree-
ments (unless perhaps they were merely rollovers, that
is, renewals or extensions of previous loan agreements)
might be thought unconscionable. See, e.g., Weaver v.
American Oil Co., 276 N.E.2d 144, 145-48 (Ind. 1971); Ferguson
v. Countrywide Credit Industries, Inc., 298 F.3d 778, 782-85
6 Nos. 02-2649, 02-2650
(9th Cir. 2002). (The applicability of the doctrine of un-
conscionability to arbitration clauses governed by the
Federal Arbitration Act was confirmed in Doctor’s Asso-
ciates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996).) Or might
not (we needn’t decide), since the borrowers knew what
they were getting into when they took out payday loans
and must have thought themselves better off as a result
despite the stratospheric interest rates. Those interest
rates, moreover, may be as high as they are simply because
of administrative costs, which are a higher percentage
of the cost of making a loan the smaller the loan is—and
these loans are tiny—plus the risk of default, which may
be very high, the borrowers obviously being people
who have difficulty living within their income. The payday-
loan business is competitive, and we are given no reason
to suppose that the loans of which the plaintiffs are
complaining are in fact extortionate. And it is not uncom-
mon for borrowers to contract with reference to future
events, as in clauses entitling the lender to the benefit of
after-acquired collateral, though remember that the de-
fendants do not confine their submission to future loans,
contending rather that the duty to arbitrate imposed by
the waiver agreement applies to all future legal disputes
that Instant Cash or Steinkamp may have with the sig-
natories.
All that is certain is that the waiver agreement, read
sensibly and as a whole, with careful attention to the
relation among the clauses, does not apply to future dis-
putes, including disputes over future loan agreements.
But that is enough to defeat the appeals.
A cynic might argue that, given the desperation of peo-
ple who take out payday loans, these plaintiffs would have
signed anything, so that relieving them from the duty to
arbitrate gives them a windfall based on an oversight by
Nos. 02-2649, 02-2650 7
Instant Cash. The defendants do not make this argu-
ment, however, perhaps fearing that it would invite a
conclusion that payday loans are unconscionable and
therefore unenforceable even in states that do not deem
them usurious.
AFFIRMED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-10-03