Banc One Acceptance Corp. v. Hill

                                                       United States Court of Appeals
                                                                Fifth Circuit
                                                             F I L E D
                        REVISED MAY 4, 2004                   April 19, 2004
                  UNITED STATES COURT OF APPEALS
                       FOR THE FIFTH CIRCUIT             Charles R. Fulbruge III
                                                                 Clerk

                      _______________________

                            NO. 03-60356
                      _______________________



                    BANC ONE ACCEPTANCE CORP.,

                                                Plaintiff-Appellant,

                              versus

                    EDITH HILL; DEBORAH BRAND,

                                                Defendants-Appellees.


_________________________________________________________________

           Appeal from the United States District Court
             for the Northern District of Mississippi
                           4:02-CV-66-PB
________________________________________________________________


Before JONES, EMILIO M. GARZA and BENAVIDES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

           This appeal arises out of an automobile lease gone bad.

In the fall of 2000, Edith Hill leased a 2000 Ford Explorer from

the East Ford dealership located in Jackson, Mississippi.         About

one year later, Banc One Acceptance Corporation, the finance

company, repossessed the Explorer, even though Hill’s payments were

current.   Hill complained unsuccessfully and then filed suit in

state court against East Ford and Banc One.       Banc One responded
with an action in federal court seeking to enforce the arbitration

clause in the lease documents.         Hill, however, persuaded the

district court that according to a recent Mississippi Supreme Court

case interpreting identical contract language, the arbitration

clause was unconscionable and thus unenforceable under state law.

See East Ford, Inc. v. Taylor, 826 So. 2d 709, 717 (Miss. 2002).

The district court denied Banc One’s motion to compel arbitration

and granted Hill’s motion to dismiss.     Banc One now appeals.    We

affirm.

                            I.   BACKGROUND

            On August 14, 2000, Edith Hill signed an offer to lease

and a motor vehicle lease agreement for a 2000 Ford Explorer from

East Ford.    In the offer to lease, an arbitration clause provided

that

       any controversy, claim, action or inaction arising out
       of, or relating to, the transaction evidenced by the
       OFFER together with any resulting written agreements
       including . . . any . . . lease . . . shall be settled by
       arbitration administered by the American Arbitration
       Association.

Exempted from the arbitration clause are “claims by [East Ford]

. . . that one or more events of default . . . has occurred on the

part of [Hill] . . . [such claims] may be pursued in any court of

competent jurisdiction.”

            Hill leased the Explorer to provide a car for her niece,

Deborah Brand, but the parties dispute whether East Ford and its

employees knew this.    In any event, the lease agreement signed by


                                   2
Hill authorized only members of her “immediate family” to use the

automobile.    Hill’s alleged violation of the lease terms led Banc

One to repossess the Explorer despite Hill’s being current in the

payments.     This litigation followed.       Banc One now appeals the

district court’s denial of its motion to compel arbitration and the

dismissal of its action.

                           II.    DISCUSSION

            This court reviews de novo a grant or denial of a

petition to compel arbitration pursuant to § 4 of the Federal

Arbitration Act (FAA).   Primerica Life Ins. Co. v. Brown, 304 F.3d

469, 471 (5th Cir. 2002); 9 U.S.C. § 4 (2000).                 The de novo

standard of review applies when a motion to compel is denied as

part of a motion to dismiss.     Snap-On Tools Corp. v. Mason, 18 F.3d

1261, 1263-64 (5th Cir. 1994).

            Two principal questions arise in this appeal.        The first

is whether the district court had authority under the FAA to

determine the enforceability of Hill’s arbitration agreement with

East Ford.     We find that it did.          The second is whether the

enforceability issue is governed by state contract law or federal

law.   The answer, in this case, is that state law applied.

A.     District Court’s Authority       to   Review   Hill’s    Procedural
       Unconscionability Claim

            A two-step inquiry governs whether parties should be

compelled to arbitrate a dispute. “First, the court must determine

whether the parties agreed to arbitrate the dispute. Once the court

                                    3
finds that the parties agreed to arbitrate, it must consider

whether any federal statute or policy renders the claims non-

arbitrable.”      R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534,

538 (5th Cir. 1992).       In conducting this two-step inquiry, courts

must not consider the merits of the underlying action.                     Snap-On

Tools, 18 F.3d at 1267.

            The   first   step     of    the    process     entails    determining

“whether there is a valid agreement to arbitrate between the

parties; and . . . whether the dispute in question falls within the

scope of that arbitration agreement.”             Webb v. Investacorp, Inc.,

89 F.3d 252, 258 (5th Cir. 1996).               These questions are decided

according to state law.           Id.    While there is a strong federal

policy favoring arbitration, the policy does not apply to the

initial    determination       whether   there    is    a    valid    agreement   to

arbitrate. Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211,

214 (5th Cir. 2003).      Nonetheless, once a court determines that an

agreement to arbitrate exists, the court must pay careful attention

to the strong federal policy favoring arbitration and must resolve

all ambiguities in favor of arbitration.               Primerica Life, 304 F.3d

at 471 (citing Southland Corp. v. Keating, 465 U.S. 1, 10 (1984)).

            The Supreme Court has held that under the FAA, the

federal courts may only consider “issues relating to the making and

performance of the agreement to arbitrate.”                 See Prima Paint Corp.

v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967).                 In Prima

Paint,    the   Court   held    that    the    “making”     of   an   agreement   to

                                         4
arbitrate was not called into question by a general allegation that

the entire contract was void because of fraudulent inducement. See

id. Because the defense asserted in Prima Paint did not attack the

“making” of the agreement to arbitrate itself, the Court ordered

arbitration and noted that the FAA reflects an “unmistakably clear

congressional purpose that the arbitration procedure, when selected

by the parties to a contract, be speedy and not subject to delay

and obstruction in the courts.”           Id. at 404.

              This court recently addressed the scope and application

of the Prima Paint rule and held that where the “very existence of

a contract” containing the relevant arbitration agreement is called

into question, the federal courts have authority and responsibility

to decide the matter.       See Will-Drill, 352 F.3d at 218.        In that

case,   the    party   resisting   arbitration    attacked   the   essential

validity of the contract by arguing that the contract was not

signed by all of the necessary parties.                 Id. at 215.     This

contention, if accurate, would mean that no contract ever existed,

and by proxy, that no agreement to arbitrate was ever concluded.

The arbitrator consequently would have no authority to decide

anything.     Id.

              Will-Drill distinguished the far more common argument

made by a party who does not challenge the existence of a contract,

but rather attacks the enforceability of the agreement alleging

that the contract is void ab initio or voidable.          Id. at 218.   Such

a scenario calls for application of the severability doctrine

                                      5
contained in Prima Paint.                Under this approach, “[o]nly if the

arbitration clause is attacked on an independent basis can the

court    decide    the    dispute;       otherwise,    general     attacks   on   the

agreement are for the arbitrator.”               Id. (emphasis added); accord

Primerica Life, 304 F.3d at 472 (holding that “unless a defense

relates specifically to the arbitration agreement, it must be

submitted to the arbitrator as part of the underlying dispute”).

In other words, where the existence of the contract is not in

question, the court must examine whether the allegations made by

the party resisting arbitration challenge the “making of the

agreement to arbitrate itself” as opposed to “allegations regarding

the contract as a whole.”           Dillard v. Merrill Lynch, 961 F.2d 1148,

1154 n.9 (5th Cir. 1992) (citing Prima Paint, 388 U.S. at 403-04)

(internal quotation marks omitted).                    Only if the allegations

concern       solely   the    arbitration       term   and   are    not   generally

applicable to the agreement as a whole may the district court

properly adjudicate the enforceability of the arbitration clause.

See     id.    (holding      that   by    “focus[ing]     specifically       on   the

arbitration provision as an adhesive term,” the party resisting

arbitration had met the threshold requirement to challenge the

making of the arbitration agreement).                  Where a defense does not

specifically relate to the arbitration agreement, however, it must

be submitted to the arbitrator as part of the underlying dispute.

See Primerica Life, 304 F.3d at 472 (holding that a claim that one

of the parties lacked the capacity to contract must be submitted to

                                            6
the arbitrator); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79,

84 (2002) (noting that “the presumption is that the arbitrator

should decide allegations of waiver, delay, or a like defense to

arbitrability”) (internal quotation marks and citations omitted).

            Hill does not challenge the “very existence” of the

contract.     Indeed, her underlying state court action seeks to

obtain damages for breach of contract, and she admits in her

affidavit before the district court that she signed the offer to

lease containing the arbitration clause.     Instead, Hill asserts

that the arbitration clause is “procedurally unconscionable,” a

claim fundamentally different from the position asserted by the

party resisting arbitration in Will-Drill.    Hill’s argument falls

within the Prima Paint separability doctrine, and the court must

examine whether Hill’s allegations attack the arbitration clause on

an “independent basis,” or constitute a “general attack” on the

contract.   Will-Drill, 352 F.3d at 218.

            In her affidavit, which recites the circumstances under

which she signed the offer to lease and lease agreement, and thus

undergirds her procedural unconscionability claim,     Hill states

that she “never agreed nor intended to agree to arbitration” for

two reasons.    First, Hill “did not read the documents” that the

salesman asked her to sign because the salesman did not ask her to

read them, nor did he “tell [her] that [she] needed to read the

documents.”    Hill further says she did not read the documents she

signed because she trusted the salesman.     Second, “no one asso-

                                  7
ciated with East Ford ever told [her] that [she] was signing an

arbitration agreement,” or that she could object to the agreement,

and no one explained the term “arbitration” to her.                          As this court

has   held,     the    general    assertions              that   she   did   not   read    or

understand the contractual documents or that East Ford did not

explain the documents do not suffice to allege fraud in the making

of the arbitration clause, but rather address the formation of the

entire contract.        R.M. Perez, 960 F.2d at 538-39. Hill’s affidavit

fails to undercut the arbitration clause.

              Hill’s    pleadings,         on       the    other   hand,     informed     the

district court that the validity of an “identical arbitration

clause” was being considered by the Mississippi Supreme Court. The

impetus for Hill’s amended motion to dismiss was the court’s ruling

in    Taylor,    which    found       this          “identical     arbitration     clause”

procedurally unconscionable under Mississippi law. Taylor, 826 So.

2d at 717.      In Dillard, we held that where a party alleges that an

arbitration agreement is adhesive, “focus[ing] specifically on the

arbitration      provision       as   an    adhesive         term”     allows   the   party

resisting arbitration to meet the threshold requirements necessary

to challenge the making of the arbitration agreement itself.

Dillard, 961 F.2d at 1154. Similarly, Hill’s line of attack, aimed

at the arbitration clause alone and based on the Mississippi

Supreme Court’s analysis of an identical clause, is sufficiently

independent of her general disagreement with the contract. On this

basis, the district court had the authority and the responsibility

                                                8
to adjudicate whether the arbitration agreement between Hill and

Banc One was procedurally unconscionable.

B.    District Court’s Application of Mississippi Law

            Banc One contends that the district court erred in

applying Taylor because the Mississippi Supreme Court’s decision

impermissibly discriminates against arbitration under the FAA.1

But the validity of an arbitration provision is a question of state

law, see Webb, 89 F.3d at 258, and this court recently reviewed

under state law whether an arbitration clause was unconscionable.

Carter v. Countrywide Credit Indus., Inc., ___ F.3d ___, No.

03-10484, 2004 WL 414072 at *5 (5th Cir. March 5, 2004).                  In this

action,   the    district      court    correctly     applied   the   Mississippi

Supreme Court’s ruling in Taylor, which held that an identical

arbitration       clause      was      procedurally     unconscionable      under

Mississippi law for a variety of reasons, including the relative

position of the parties, the nature of the contract at issue, and

the appearance and placement of the arbitration clause relative to

the rest of the contract.           Taylor, 826 So. 2d at 716-17.

            Although Carter suffices to justify using state law here,

we note that the purpose of the FAA is to ensure that arbitration

agreements      are     not   treated    differently     from   other    contract

provisions      under    state   law.      See   Doctor’s   Assocs.,     Inc.   v.



      1
            As noted above, this court reviews de novo the denial of a motion to
compel in the context of a motion to dismiss. See, e.g., Snap-On Tools, 18 F.3d
at 1263-64.

                                          9
Casarotto, 517 U.S. 681, 687 (1996).           The Supreme Court has

consistently held that “generally applicable contract defenses,

such as . . . unconscionability, may be applied to invalidate

arbitration agreements without contravening [the FAA].”         Id.; see

also Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987).          At the same

time, however, the Supreme Court has indicated that state courts

cannot “rely on the uniqueness of an agreement to arbitrate as a

basis   for   a   state-law   holding   that   enforcement    would   be

unconscionable, for this would enable the court to effect what we

hold today the state legislature cannot.”      Perry, 482 U.S. at 492.

As such, while state courts may strike down arbitration clauses

based upon generally applicable contract principles, they “may not

. . . decide a contract is fair enough to enforce all its basic

terms (price, service, credit), but not fair enough to enforce its

arbitration clauses.”   Allied-Bruce Terminix Cos., Inc. v. Dobson,

513 U.S. 265, 281 (1995).        That is to say, state courts may

properly strike down arbitration clauses, but they may not treat

arbitration clauses differently than other contract terms, because

to do so would be to put arbitration clauses on “an unequal

footing” in violation of the FAA.        See id. (internal quotation

marks and citation omitted).

          Banc One argues that Taylor impermissibly discriminates

against arbitration agreements because the Mississippi Supreme

Court set out its particular approach to unconscionability in the

context of an arbitration dispute.      Casarotto, however, held that

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state     unconscionability      law    may,    on   occasion,     invalidate

arbitration clauses so long as the state’s approach is not directed

specifically at arbitration agreements but instead applies to

contract provisions generally.         Casarotto, 517 U.S. at 687.       If we

were to accept Banc One’s argument,            a state court would find it

extremely difficult to craft a decision holding an arbitration

provision unconscionable under state law because, by setting out a

particular approach to unconscionability in the context of an

arbitration     case,    the   state    court    would    be   impermissibly

discriminating against arbitration under the FAA. Such a result is

too broad and does not comport with Perry, Casarotto, and Allied-

Bruce.

            In Taylor, the Mississippi Supreme Court used standard

tools of unconscionability doctrine and applied a prior Mississippi

decision outlining its general approach to procedural unconsciona-

bility under Mississippi contract law.               826 So. 2d at 715-17

(applying the framework set out in Entergy Miss., Inc. v. Burdette

Gin Co., 726 So. 2d 1202, 1207-08 (Miss. 1998)).            As a result, its

approach does not appear to be aimed specifically at arbitration

clauses, but is simply a case-specific application of general

Mississippi unconscionability law.2            See Russell v. Performance

      2
            Banc One identifies only a single Mississippi case for the
proposition that the Mississippi courts apply a different rule of law to
arbitration provisions than to other contractual provisions. In Newton County
Bank v. Jones, 299 So. 2d 215 (Miss. 1974), the Mississippi Supreme Court upheld
a contractual provision that was characterized by the dissent as being “in small
print.”   See Jones, 299 So. 2d at 218, 220.      Such authority, relying on a
characterization made in dissent and decided nearly thirty years before Taylor,

                                       11
Toyota, Inc., 826 So. 2d 719, 725-27 (Miss. 2000) (holding an

arbitration clause in an automobile purchase agreement to be

neither    procedurally      nor    substantially      unconscionable       and

distinguishing Taylor).         Under these circumstances, we cannot

presume that the Mississippi Supreme Court was attempting to

discriminate against arbitration in Taylor.3

            Banc One points to a Third Circuit case which appears to

indicate that the federal law construing the FAA is authoritative

in determining claims of procedural unconscionability.             See Harris

v. Green Tree Financial Corp., 183 F.3d 173, 182 (3rd Cir. 1999)

(indicating that “the FAA and federal law construing the Act govern

the result in this case, and this authority does not support the

. . . claim of unconscionability”).         However, in Harris, the Third

Circuit only cites federal court decisions that apply state law in

support of its holding regarding the procedural unconscionability

argument. See id. In addition, this court regularly applies state

law to determine whether arbitration clauses are procedurally


can hardly carry much weight in determining whether the Taylor court crafted a
legal doctrine aimed specifically at discriminating against arbitration in
violation of the FAA. In addition, Banc One’s argument presumes that the Taylor
court held the arbitration clause at issue in that case unconscionable solely
based on the font size of the clause.     However, a close reading of Taylor
indicates that the court examined a variety of other factors in reaching its
holding, including the relative position of the parties and their knowledge or
lack thereof. See Taylor, 826 So. 2d at 715-16.
      3
            It is important to note here that if the Mississippi courts were to
limit the applicability of the procedural unconscionability approach outlined in
Taylor to arbitration agreements only, or were repeatedly to apply a different
approach to other contractual provisions, the issue of discrimination against
arbitration under the FAA may come into play. However, absent any compelling
evidence of such an approach, and given that Taylor was decided relatively
recently, we decline to find improper discrimination here.

                                      12
unconscionable. See, e.g., Fleetwood Enters., Inc. v. Gaskamp, 280

F.3d 1069, 1077 (5th Cir. 2002) (citing four Texas cases in ruling

on a procedural unconscionability claim); accord Webb, 89 F.3d at

259.   We see no reason why Mississippi law should not apply here.

            Under Mississippi law, authoritatively construed by the

state supreme court, an arbitration agreement of exactly the type

that was at issue in Taylor is procedurally unconscionable.               While

Banc One cites a panoply of federal cases that appear to dictate a

different result on a wide range of issues, because the arbitration

provision at issue here is identical to the one examined by the

Taylor court, these federal cases cannot help Banc One avoid

controlling Mississippi law.           As a result, the district court

correctly held that the arbitration provision was procedurally

unconscionable and thus unenforceable under Mississippi law.4

                              III.    CONCLUSION

            For the reasons discussed above, the judgment of the

district court is AFFIRMED.




      4
            Hill also argues that this court should consider the substantive
unconscionability of the arbitration clause. Both Hill and Banc One agree that
neither the district court nor the Taylor court clearly ruled on the question of
substantive unconscionability. In addition, Hill cites no controlling authority
for the proposition that the contract is substantively unconscionable under
Mississippi law. Because we find the arbitration clause at issue here to be
procedurally unconscionable under Mississippi law, we need not reach the question
of substantive unconscionability.

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