United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
March 19, 2004
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 02-60794
_____________________
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,
versus
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,
versus
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,
versus
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,
versus
WILLIE NMI CURRY; ET AL.,
Defendants,
WILLIE NMI CURRY,
Defendant - Appellee.
_________________________________________________________________
Appeals from the United States District Court
for the Northern District of Mississippi
_________________________________________________________________
2
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.
3
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
1
Miriah Phinizee did not sign an arbitration agreement with WM
Finance. She claims to have co-signed the loan and insurance
documents along with her husband, a claim that WM Finance disputes.
It is undisputed, however, that her husband signed an arbitration
agreement in connection with these same documents.
2
The FAA, 9 U.S.C. § 4, reads:
A party aggrieved by the alleged failure,
neglect, or refusal of another to arbitrate
under a written agreement for arbitration may
petition any United States district court . .
. for an order directing that such arbitration
proceed in the manner provided for in such
agreement. . . . [U]pon being satisfied that
the making of the agreement for arbitration or
the failure to comply therewith is not in
issue, the court shall make an order directing
the parties to proceed to arbitration in
accordance with the terms of the agreement.
4
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
5
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
3
Specifically, the Insurer Appellants contend that the
district court relied on facts outside of the pleadings in
determining that the Illiterate Appellees were in fact illiterate.
Accordingly, the Insurer Appellants assert that the motion to
dismiss should have been converted to a motion for summary judgment
and they should have been permitted discovery on the issue of the
Illiterate Appellees’ purported illiteracy. It appears that the
district court did in fact rely on facts outside the pleadings in
some aspects. However, we do not need to address this issue given
our conclusion that the appellees’ illiteracy, even if established,
was insufficient to invalidate the arbitration agreements.
6
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 (5 th 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 (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 agreeement 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,
7
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
8
sufficient basis for concluding that a contract is unenforceable.
See Mixon v. Sovereign Camp, W.O.W., 125 So. 413, 415 (Miss. 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 contract
have an affirmative duty to read that contract and thus, knowledge
of the contract’s terms is imputed to those parties irrespective of
whether they read the contract. In Russell, the Mississippi
Supreme Court found that “[i]n Mississippi, a person is charged
with knowing the contents of any document that he executes.” 826
So.2d at 726. Therefore, “[a] person cannot avoid a written
contract which he has entered into on the ground that he did not
read it or have it read to him.” J. R. Watkins Co. v. Runnels, 172
So.2d 567, 571 (Miss. 1965) (emphasis added). See Tel-Com
Management, Inc. v. Waveland Resort Inns, Inc., 782 So.2d 149, 153
(Miss. 2001) (holding that “[t]o permit a party when sued on a
written contract, to admit that he signed it . . . but did not read
it or know its stipulations would absolutely destroy the value of
all contracts”); see also Haggans v. State Farm Fire & Cas. Co.,
803 So.2d 1249 (Miss. 2002); Cherry v. Anthony, Gibbs, Sage, 501
So.2d 416 (Miss. 1987).
9
The same conclusion has been reached by this court and other
federal courts construing Mississippi law. See, e.g., Ross v.
Citifinancial, Inc., 344 F.3d 458, 464-66 (5th Cir. 2003) (holding
that under Mississippi law, signatories to a contract are under an
obligation to read the contract before signing it and thus, “are
bound as a matter of law by the knowledge of the contents of a
contract in which they entered notwithstanding whether they
actually read the policy”) (citations omitted); American Heritage
Life Ins. Co. v. Lang, 321 F.3d 533, 537 (5th Cir. 2003) (holding
that under Mississippi law, “illiteracy alone is not a sufficient
basis for the invalidation of an arbitration agreement”); Dixon v.
First Family Fin. Servs. Inc., No. 3:01-CV-137BN, 2003 WL 21788959,
at *3 (S.D. Miss. July, 15, 2003) (holding that, given a person’s
affirmative obligation to read a contract under Mississippi law,
“[a] person who cannot read has a duty to find someone to read the
contract to him”) (citations and quotations omitted). Accordingly,
we hold that under Mississippi law, the inability to read and
understand the arbitration agreement does not render the agreement
unconscionable or otherwise unenforceable.
We similarly reject the district court’s holding that the
agreement is unconscionable and unenforceable because WM Finance
failed specifically to inform the Illiterate Appellees that they
were signing an arbitration agreement after having been made aware
of the Illiterate Appellees’ inability to read. As we previously
have noted, Mississippi law charges parties to a contract with the
10
obligation to read that contract or “have it read to [them],”
Russell, 826 So.2d at 726, and does not permit such a party “to
admit that he signed it . . . but did not read it or know its
stipulations.” Tel-Com Management Inc., 782 So.2d at 153. We find
no authority supporting the district court’s assertion that
illiteracy removes this affirmative obligation from a signatory.
Finally, we reject the Illiterate Appellees’ argument -- made
and rejected already by the district court and then raised here
again on appeal -- that the arbitration clause is procedurally
unconscionable because WM Finance misrepresented the nature of the
arbitration clause they signed. Specifically, the Illiterate
Appellees contend that prior to signing the documents related to
the loan and insurance which included the arbitration clause, they
informed WM Finance that they could not read and inquired as to the
nature of the documents they were signing. The Illiterate
Appellees assert that WM Finance’s reply -- that they were signing
insurance and finance papers -- constituted a misrepresentation
that fraudulently induced them into signing the arbitration
agreement.
11
We reject this argument for two reasons.4 First, the
representations made by WM Finance here cannot be characterized as
fraudulent. The record does indicate that at least some of the
Illiterate Appellees asked questions about the nature of the
documents they were signing. However, these questions were general
in nature, i.e., they were not directed at any particular document
in the package of documents they were signing, but referenced the
general nature of all the documents, and were met with a general
response: you are signing insurance and financial paperwork. This
response is not plainly misleading. Indeed, there is no evidence
in the record that WM Finance was ever directly asked about the
arbitration agreement itself. We thus find no basis to support the
Illiterate Appellees’ claim that they were misled regarding the
contents of the arbitration agreement they signed.
4
WM Finance contends that the question of whether the
Illiterate Appellees were fraudulently induced into signing the
arbitration agreement is not properly before us, but should be
determined by the arbitrator. They cite Prima Paint Corp. v. Flood
& Conklin Mfg. Co., 388 U.S. 395 (1967) and Primerica Life Ins. Co.
v. Brown, 304 F.3d 469 (5th Cir. 2002) for this proposition. This
argument, however, mischaracterizes the holding of these two cases.
Primerica did hold that a claim of fraudulent inducement should be
submitted to the arbitrator. However, it did so only after noting
that the fraudulent inducement claim asserted there applied to the
entire contract and was therefore “part of the underlying dispute
between the parties which, in light of Prima Paint and its progeny,
must be submitted to the arbitrator.” 304 F.3d at 472. In
contrast, where, like here, “the defense relates specifically to
the arbitration agreement,” a federal court may consider the
question as it “relates to the making and performance of the
agreement to arbitrate.” Id. (citations and quotations omitted).
12
Second, and more important to our reasoning in this appeal,
any inaccurate impressions WM Finance’s statements may have created
would indisputably have been cleared up had the Illiterate
Appellees simply complied with their legal obligation to read the
contract or have it read to them. The Mississippi Supreme Court
has indicated that parties to a contract “will not as a general
rule be heard to complain of an oral misrepresentation the error of
which would have been disclosed by reading the contract.” Godfrey,
Bassett & Kuykendall Architects, Ltd. v. Huntington Lumber & Supply
Co., Inc., 584 So.2d 1254, 1257 (Miss. 1991); Ross, 344 F.3d at
464-65. The arbitration agreement here was not hidden or
disguised; it was printed on a separate document headlined by the
following phrase in prominent, all-caps print: “ALTERNATIVE DISPUTE
RESOLUTION AGREEMENT.” Had the Illiterate Appellees had someone
read the document to them, the nature of the document they were
signing would have been clear. However, in each case, the
Illiterate Appellees failed to do this. Accordingly, there is no
basis in Mississippi law for not enforcing the arbitration
agreements here.
III
Having found enforceable arbitration agreements, we need not
address further WM Finance and the Insurer Appellants’ argument
that the district court improperly granted the Illiterate
Appellees’ motion to dismiss the complaint. The granting of this
motion was premised on the district court’s finding that there was
13
no enforceable arbitration agreement. As we have determined this
premise to be incorrect, the granting of the Illiterate Appellees’
motion to dismiss is REVERSED.
IV
Finally, we turn to the district court’s holding that Miriah
Phinizee could not be compelled to arbitrate her claim because
although her husband signed the agreement, she never did so
herself.5 WM Finance and the Insurer Appellants argue that even if
Miriah Phinizee did not sign an arbitration agreement, she is
nevertheless bound to its terms under ordinary principles of
contract and agency law. We agree. As the Second Circuit has
accurately noted, while arbitration is contractual by nature:
It does not follow . . . that under the
[Federal Arbitration] Act an obligation to
arbitrate attaches only to one who has
personally signed the written arbitration
provision. [We have made] clear that a
nonsignatory party may be bound to an
arbitration agreement if so dictated by the
ordinary principles of contract and agency.
Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773, 776
(2d Cir. 1995) (citations and quotations omitted). See also
Grigson v. Creative Artists Agency L.L.C., 210 F.3d 524, 527 (5th
5
Miriah Phinizee did not obtain any loans or credit insurance
from WM Finance herself. She is suing on loans and credit
insurance her husband obtained, which she claims that she co-
signed. WM Finance disputes this fact, claiming that Miriah
Phinizee never co-signed any of the obligations she is now suing
under. Either way, however, Miriah Phinizee’s entire case hinges
on rights arising from her husband’s loan and credit insurance
transactions as those contractual transactions form the factual
basis of each of her claims.
14
Cir. 2000) (recognizing that arbitration can be compelled even when
all parties are not signatories to the agreement).
Thus, the issue before us concerns whether Miriah Phinizee is,
under ordinary principles of contract law, bound to the terms of
the arbitration agreement signed by her husband, but not by her.
WM Finance and the Insurer Appellants correctly point out that all
of Miriah Phinizee’s claims against them arise directly from the
loans her husband obtained from WM Finance and the credit insurance
he bought in connection with those loans. They thus assert that
the arbitration agreement her husband signed is operable against
her under the principle of equitable estoppel, which precludes a
party from claiming the benefits of a contract while simultaneously
attempting to avoid the burdens that contract imposes as well. We
agree.
Numerous federal circuit courts, including this one, have
recognized the operation of the doctrine of equitable estoppel on
non-signatories in an arbitration context. See, e.g., Dominium
Austin Partners, L.L.C. v. Emerson, 248 F.3d 720, 728 (8th Cir.
2001); Grigson, 210 F.3d at 527; International Paper Co. v.
Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417-18 (4th
Cir. 2000); Thomson-CSF, 64 F.3d at 778; Sunkist Soft Drinks, Inc.
v. Sunkist Growers, Inc., 10 F.3d 753, 756-58 (11th Cir. 1993);
Hughes Masonry Co., Inc. v. Greater Clark County Sch. Bldg. Corp.,
15
659 F.2d 836, 838-39 (7th Cir. 1981).6 In International Paper, the
Fourth Circuit explained:
In the arbitration context, the doctrine [of
estoppel] recognizes that a party may be
estopped from asserting that the lack of his
signature on a written contract precludes
enforcement of the contract's arbitration
clause when he has consistently maintained
6
In determining whether a party should be compelled to
arbitrate its claims against another, we acknowledge that whether
a court should apply state law or “the federal substantive law of
arbitrability,” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24 (1983), is often an uncertain question. That said,
nearly all federal circuit courts faced with the specific question
posed by Miriah Phinizee -- namely, to what extent a non-signatory
is bound by an arbitration provision contained in a contract she is
suing under -- have applied the federal substantive law of
arbitrability to resolve the issue. See, e.g., Dominium Austin
Partners, 248 F.3d at 728; Grigson, 210 F.3d at 527; International
Paper Co., 206 F.3d at 417-18; Thomson-CSF, 64 F.3d at 778; Sunkist
Soft Drinks, 10 F.3d at 756-58; Hughes Masonry Co., 659 F.2d at
838-39. But see Fleetwood Enterprises, Inc. v. Gaskamp, 280 F.3d
1069, 1074-75 (5th Cir. 2002) (applying Texas law to determine
whether a particular non-signatory was bound by an arbitration
agreement). In explaining its conclusion that federal substantive
law applied, the International Paper court reasoned that because
the determination of whether a non-signatory is bound by an
arbitration provision “presents no state law question of contract
formation or validity,” a court should “look to the federal
substantive law of arbitrability to resolve this question.” 206
F.3d at 417 n.4. We agree with this analysis and thus find it
appropriate to apply the doctrine of equitable estoppel as outlined
by federal courts without reference to Mississippi law. However,
we also note there is no reason to think Mississippi law would
compel a different result in this case; although no Mississippi
court has ever explicitly applied equitable estoppel in this
context, the Mississippi Supreme Court has clearly held that
parties can be compelled to arbitrate disputes regardless of
whether they are signatories to the arbitration agreement. See
Smith Barney, Inc. v. Henry, 775 So.2d 722, 727 (Miss. 2001) (“[W]e
have held that a written agreement to arbitrate does not
necessarily have to be signed by both parties.”) (quoting Collins
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 561 So.2d 952, 956
(La.Ct.App. 1990)).
16
that other provisions of the same contract
should be enforced to benefit him. To allow
[a plaintiff] to claim the benefit of the
contract and simultaneously avoid its burdens
would both disregard equity and contravene the
purposes underlying enactment of the
Arbitration Act.
International Paper Co., 206 F.3d at 418 (citations and quotations
omitted).
Restated, the doctrine of estoppel prevents a party from
“having it both ways.” Grigson, 210 F.3d at 528. Yet this is
precisely what Miriah Phinizee is attempting to do here: suing
based upon one part of a transaction that she says grants her
rights while simultaneously attempting to avoid other parts of the
same transaction that she views as a burden -- namely, the
arbitration agreement. We find that the doctrine of equitable
estoppel acts to prevent her from taking such inconsistent
positions.7 Accordingly, we REVERSE the district court’s denial of
WM Finance and the Insurer Appellants’ motion to compel Miriah
Phinizee to arbitrate her claims.
V
In conclusion, we hold that the district court erred in
holding that the arbitration agreements are procedurally
unconscionable and therefore, unenforceable. We also hold that the
district court erred in not enforcing the arbitration agreement
against Miriah Phinizee. Accordingly, we REVERSE the district
7
We should note that Miriah Phinizee fails to respond to these
arguments in her brief on appeal.
17
court’s denial of WM Finance’s motion to compel arbitration and
REMAND for entry of an order compelling arbitration for all parties
to this action. We also REVERSE the district court’s grant of the
appellees’ motion to dismiss.
REVERSED and REMANDED FOR ENTRY OF JUDGMENT.
18