Primerica Life Insurance v. Brown

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 01-60852

PRIMERICA LIFE INSURANCE CO.; ET AL,

Plaintiffs,

PRIMERICA LIFE INSURANCE CO.;
PRIMERICA FINANCIAL SERVICES, INC.;
CITIGROUP, INC.; SANFORD L. WEILL; and
CITIFINANCIAL, INC.,

Plaintiffs-Appellants,

v.

CATHERINE E. BROWN,
individually and in her
representative capacity
for John E. Brown;
JOHN E. BROWN,

Defendants-Appellees.

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

August 28, 2002

Before JONES, WIENER and DENNIS, Circuit Judges.

Edith H. Jones, Circuit Judge:

John Brown sued CitiFinancial, Inc., and its affiliates

(“Appellants”), in state court alleging breach of contract and

related claims. Brown’s contract with CitiFinancial contains an

arbitration clause requiring arbitration of his claims.
CitiFinancial filed a petition to compel arbitration of Brown’s

claims in federal district court, pursuant to § 4 of the Federal

Arbitration Act (“FAA”), 9 U.S.C. § 4. The district court

determined that Brown lacked the mental capacity to execute a

contract under Mississippi law, and that Brown’s entire contract

with CitiFinancial was void. On this basis, the district court

refused to compel arbitration of Brown’s claims.

CitiFinancial now appeals and contends that the district

court erred by reaching the merits of Brown’s capacity defense.

Appellants contend that Prima Paint Corp. v. Flood & Conklin Mfg.

Co., 388 U.S. 395, 87 S.Ct. 1801 (1967), requires arbitration of

Brown’s capacity defense. We agree, and reverse the judgment of

the district court.

DISCUSSION

This court reviews de novo the grant or denial of a

petition to compel arbitration pursuant to § 4 of the FAA. Webb v.

Investacorp, 89 F.3d 252, 257 (5th Cir. 1996). 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. Southland Corp. v. Keating, 465 U.S. 1, 10,

104 S.Ct. 852 (1984).

“Courts perform a two-step inquiry to determine whether

parties should be compelled to arbitrate a dispute. First, the

court must determine whether the parties agreed to arbitrate the

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dispute. Once the court finds that the parties agreed to

arbitrate, it must consider whether any federal statute or policy

renders the claims nonarbitrable.” R.M. Perez & Assoc., Inc. v.

Welch, 960 F.2d 534, 538 (5th Cir. 1992) (citing Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346

(1983)). When conducting this two-pronged analysis, courts must

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

Corp. v. Mason, 18 F.3d 1261, 1267 (5th Cir. 1994). “Under § 4 of

the FAA, the federal district court ascertains only whether the

arbitration clause covers the allegations at issue. ‘If the

dispute is within the scope of the arbitration clause, the court

may not delve further into the merits of the dispute.’” Id.

(quoting Municipal Energy Agency of Miss. v. Big Rivers Elec.

Corp., 804 F.2d 338, 342 (5th Cir. 1986)).

Brown’s contract with CitiFinancial contains an express

arbitration agreement. Brown’s state court claims fall within the

scope of the arbitration agreement. There are no external

impediments to the arbitrability of Brown’s claims.1 Therefore, a

straightforward application of the required two-pronged inquiry

supports CitiFinancial’s petition to compel arbitration.

1
Brown also argues that arbitration costs render the arbitration
clause “substantively unconscionable.” The Supreme Court, in Green Tree
Financial Corp. v. Randolf, 531 U.S. 79, 91-92, 121 S.Ct. 513 (2000), explained
that “a party seeking to avoid arbitration on the ground that arbitration would
be prohibitively expensive” bears the burden of showing the likelihood of
incurring prohibitive costs. Brown has failed to carry this burden. Brown also
suggests that the arbitration agreement is “procedurally unconscionable” on other
grounds. This argument is without merit.

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 The district court nevertheless refused to compel

arbitration by delving into the merits of the underlying dispute.

Specifically, the district court determined that Brown lacked the

capacity to contract under Mississippi law. As explained above,

the district court’s inquiry when reviewing a petition to compel

arbitration is limited. “[T]he merits of the underlying dispute

are for the arbitrator to consider, not for this Court or the

district court.” Snap-On Tools Corp., 18 F.3d at 1267. Brown’s

capacity defense is part of the underlying dispute between the

parties, and the defense must be submitted to the arbitrator.

In Prima Paint, the Court held that, under § 4 of the

FAA, the “making” of an agreement to arbitrate was not called into

question by an allegation that the entire contract was void as

fraudulently induced. 388 U.S. at 403-04, 87 S.Ct. 1801. “[The

FAA] does not permit the federal court to consider claims of fraud

in the inducement of the contract generally . . . A federal court

may consider only issues relating to the making and performance of

the agreement to arbitrate.” Id. Accordingly, unless a defense

relates specifically to the arbitration agreement, it must be

submitted to the arbitrator as part of the underlying dispute.

This court has applied the Prima Paint rule on numerous

occasions. See Snap-On Tools Corp., 18 F.3d at 1267-68 (submitting

fraudulent inducement defense to arbitration because allegations of

fraud did not specifically relate to the arbitration clause); R.M.

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Perez & Assoc., Inc., 960 F.2d at 538-39 (submitting allegations of

fraud in obtaining signatures to contract to arbitration because

defense was not specific to the arbitration agreement); Lawrence v.

Comprehensive Business Serv. Co., 833 F.2d 1159, 1162 (5th Cir.

1987) (submitting illegality defense to arbitration because it did

not specifically relate to arbitration clause); Mesa Operating Ltd.

Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 244

(5th Cir. 1986) (submitting claim that contract was void ab initio

to arbitration because parties failed to demonstrate that the

arbitration agreement was “invalid separately from the entire

contract”).

As in each of these cases, Brown’s capacity defense is a

defense to his entire agreement with CitiFinancial and not a

specific challenge to the arbitration clause. Therefore, Brown’s

capacity defense is part of the underlying dispute between the

parties which, in light of Prima Paint and its progeny, must be

submitted to the arbitrator.2 We need not reach the other issues

raised by the parties.

2
The district court determined that the Prima Paint rule applied to
defenses which render a contract voidable, but did not apply to defenses which
render a contract void. This distinction is inconsistent with Mesa Operating,
which applied the Prima Paint rule to a defense which, if proven, would have
rendered the contract containing the arbitration clause “void as never having
been entered into.” 797 F.2d at 244; see also Lawrence, 833 F.2d at 1162
(following Mesa Operating and submitting illegality defense to arbitrator).

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 CONCLUSION

For the reasons stated above, we REVERSE the judgment of

the district court and REMAND for proceedings consistent with this

opinion.

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DENNIS, Circuit Judge, concurring.

I concur in the judgment of the majority opinion. I write

separately to note the district court’s finding, which the parties

apparently do not dispute, that Mr. Brown “has been profoundly

retarded since birth.” The district court also found that the loan

agency “required him to sign the loan agreement containing the

arbitration clause by printing his name on a piece of paper and

having him copy it on the appropriate line.” Under Mississippi law,

contracts entered into by incompetent persons are voidable. See

Williams v. Wilson, 335 So.2d 110, 112 (Miss. 1976) (stating that a

contract made by an incompetent “may be avoided on the ground of

insanity”). Similarly, when a party contracting with an incompetent

has knowledge of the incompetent’s condition, the contract “will be

rescinded.” Id. at 112-13 (emphasis added).

Against this backdrop, I note the grounds on which this Court

will vacate a decision of an arbitrator: (1) the award is contrary to

public policy, (2) the award is arbitrary and capricious, (3) the

award fails to draw its essence from the underlying contract, and (4)

the award is in manifest disregard of the law. See Williams v. Cigna

Fin. Advisors Inc., 197 F.3d 752, 758, 761-62 (5th Cir. 1999).

Hence, if the facts are as they appear to be on the record before us,

I can conceive of no way in which the contract underlying this action

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could be enforced against the profoundly retarded and incompetent Mr.

Brown.

Finally, with regard to the broad statement that “unless a

defense relates specifically to the arbitration agreement, it must be

submitted to the arbitrator as part of the underlying dispute” and

the related footnote two, I note that this circuit has not considered

the authority of other circuits applying the Prima Paint rule to the

distinction between voidable contracts and those contracts deemed not

to have existed. We have decided that the question of whether a

contract as a whole was illegal must be submitted to arbitration.

See Lawrence v. Comprehensive Bus. Servs. Co., 833 F.2d 1159 (5th

Cir. 1987); Mesa Operating Ltd. P’ship v. Louisiana Intrastate Gas

Corp., 797 F.2d 238 (5th Cir. 1986). But we have not yet thoroughly

analyzed or squarely decided whether challenges going to the very

existence of a contract must be submitted to arbitration. Other

circuits have split on this question. See, e.g., Three Valleys Mun.

Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir. 1991) (no);

I.S. Joseph Co. v. Michigan Sugar Co., 803 F.2d 396 (8th Cir. 1986)

(no); Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998

(11th Cir. 1986) (no); Unionmutual Stock Life Ins. Co. v. Beneficial

Life Ins. Co., 774 F.2d 524 (1st Cir. 1985) (yes); Par-Knit Mills,

Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir. 1980) (no).

Because it is not necessary for us to reach that question here, the

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majority opinion’s statements thereon are dicta, in which I do not

join.

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