Home | Business News | Browse by Publication | T | Trial

Supreme court weighs enforcement of arbitration clause in 'payday' loans.

Article Excerpt
If a contract is alleged to be illegal, but it contains a mandatory arbitration provision, should a court or an arbitrator determine the contract's legality? The U.S. Supreme Court recently heard oral arguments on that question in Buckeye Check Cashing, Inc. v. Cardegna. (No. 041264 (U.S. argued Nov. 29, 2005).)

John Cardegna filed a class action against Buckeye Check Cashing, Inc., a "payday lender," alleging that his and other borrowers' check-cashing transactions with Buckeye actually were usurious loans that violate Florida law. Consumers typically get cash from so-called payday lenders by providing a personal check (for an amount greater than the cash received), which the lender holds until the consumer's next payday. Then, the consumer repays the amount, allows the lender to cash the check, or rolls over the loan.

Buckeye charged customers interest rates between 137 percent and 1,317 percent APR, according to the plaintiffs' brief to the Supreme Court. In Florida, charging interest rates higher than 25 percent is criminal usury. The plaintiffs alleged that Buckeye's transactions violated Florida's Lending Practices Act, Consumer Finance Act, Deceptive and Unfair Trade Practices Act, and other laws.

Cardegna's contract contained an arbitration provision, so the company moved to compel arbitration to resolve the issue, arguing that the Federal Arbitration Act (FAA) preempts state law and the matter should be decided by an arbitrator, not a court. Cardegna alleged that the entire contract was illegal and usurious--and therefore void ab initio--so no part of it (including the arbitration provision) could be enforced until a court...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!