LRN Holding, Inc. v. Windlake Capital Advisors, LLC

Opinion

No. 3--10--0194

Opinion filed May 9, 2011

IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 2011

LRN HOLDING, INC., and DAVID ) Appeal from the Circuit Court P. RANSBURG, ) of the 10th Judicial Circuit ) Peoria County, Illinois Plaintiffs-Appellants, ) ) v. ) No. 09--L--230 ) WINDLAKE CAPITAL ADVISORS, ) LLC, ) ) Honorable Joe Vespa, Defendant-Appellee. ) Judge, Presiding.

JUSTICE SCHMIDT delivered the judgment of the court, with opinion. Justice Wright specially concurred in the judgment and opinion. Justice Holdridge dissented, with opinion.

OPINION

Plaintiffs, LRN Holding, Inc. (LRN), and David Ransburg,

brought this declaratory judgment action against defendant, Windlake Capital Advisors, LLC, seeking a declaration that a

contract entered into by the parties is void. As such,

plaintiffs claimed they were entitled to recover fees associated

with the sale of LRN. Defendant, Windlake Capital Advisors,

LLC., moved to dismiss the action or, in the alternative, to stay

the action and compel arbitration. The trial court granted

defendant's motion to stay the proceeding and ordered the matter

to proceed to arbitration. Plaintiffs appeal from that order.

FACTS

Plaintiffs' complaint alleges that they entered into a

contract with defendant which stated that defendant would act as

the exclusive brokerage agent seeking to secure a purchaser of

the assets or stock of LRN. The contract called for plaintiffs

to pay defendant a $35,000 engagement fee upon the signing of the

contract and a success fee of "$200,000 + 2% of all consider-

ation" upon the closing of the transaction.

Plaintiffs' complaint acknowledges that defendant success-

fully brokered a transaction through which Robert Bosch Tool

Corporation purchased LRN assets. Defendant received $1,226,340

in compensation for its services. The complaint contains no

2 allegations suggesting defendant's services were in any way

inadequate or that the transaction somehow harmed plaintiffs.

Plaintiffs' complaint alleges, however, that their contract

with defendant should be declared void as defendant failed to

properly register its services with the State of Illinois. As

such, plaintiffs claim they are entitled to collect defendant's

$1,226,340 fee, as well as interest on those monies and attorney

fees. Attached to the complaint is a photocopy of an "LLC File

Detail Report" from the Illinois Secretary of State, the

agreement between the parties, and photocopies of two pages

associated with a "broker search" from the Illinois Secretary of

State's Web site.

Defendant never answered plaintiffs' complaint but instead

filed a "Motion to Dismiss or Stay Proceedings and to Compel

Arbitration" pursuant to section 2-619 of the Code of Civil

Procedure. 735 ILCS 5/2-619(a)(9) (West 2008). In its

memorandum in support of its motion, defendant noted the

agreement between it and plaintiffs contained an arbitration

provision mandating that any controversy between the parties

relating to this agreement shall be resolved by binding

3 arbitration.

Defendant submitted that arbitration was mandated by both

the Federal Arbitration Act (9 U.S.C. §1 et seq. (2006)) and the

Illinois Uniform Arbitration Act (710 ILCS 5/1 et seq. (West

2008)). The trial court agreed and granted defendant's motion to

stay the proceedings and compel arbitration. Plaintiffs appeal.

ANALYSIS

The sole issue raised on appeal is whether the trial court

erred when granting defendant's motion. "[T]he decision whether

to compel arbitration is not discretionary. Where there is a

valid arbitration agreement and the parties' dispute falls within

the scope of that agreement, arbitration is mandatory and the

trial court must compel it. [Citation.] *** On the other hand,

where there is no valid arbitration agreement or where the

parties' dispute does not fall within the scope of that

agreement, the trial court may not compel it. [Citation.] ***

Accordingly, we will employ a de novo standard of review ***."

Travis v. American Manufacturers Mutual Insurance Co., 335 Ill.

App. 3d 1171, 1175 (2002).

While our standard of review is de novo, our supreme court

4 has clearly indicated that when a trial court is "presented with

a motion to stay litigation pending arbitration under section 3

of the FAA, the court's inquiry is limited to whether an

agreement to arbitrate exists and whether it encompasses the

issue in dispute." Jensen v. Quik International, 213 Ill. 2d

119, 123-24 (2004).

Plaintiffs make numerous arguments to support their claim

that the trial court improperly compelled arbitration. The

plaintiffs' first argument centers on their assertion that no

contract existed between them and defendant. As such, plaintiffs

suggest, "Illinois case law clearly mandates that the court, and

not an arbitrator, make the determination regarding whether a

contract with an unlicensed professional is void." Intertwined

with this theory is plaintiffs' assertion that the "Illinois

Arbitration Act applies to this case, and requires that the court

determine that the purported agreement is void, notwithstanding

federal cases interpreting the Federal Arbitration Act."

The gravamen of plaintiffs' initial argument is that an

Illinois statute renders the agreement between plaintiffs and

defendant void ab initio. As such, no enforceable arbitration

5 clause existed and, therefore, the trial court erred in

compelling arbitration. To support this proposition, plaintiffs

direct our attention to the Illinois Business Brokers Act of 1995

(Brokers Act) (815 ILCS 307/10-5.10 et seq. (West 2008)), Aste v.

Metropolitan Life Insurance Co., 312 Ill. App. 3d 972 (2000), and

Kaplan v. Tabb Associates, Inc., 276 Ill. App. 3d 320 (1995).

Defendant disagrees with the plaintiffs, claiming even a

broad challenge to the agreement as a whole must be decided in

arbitration. To support its position, defendant cites to the

Federal Arbitration Act (FAA) (9 U.S.C. §1 et seq.) and numerous

cases that interpret it.

A. The Agreement, Brokers Act and FAA

The arbitration provision in the agreement between the

parties reads as follows:

"Arbitration. Any controversy, dispute, or

claim between the parties relating to this

Agreement shall be resolved by binding

arbitration in accordance with the rules of

the American Arbitration Association, as

amended from time to time. The parties

6 agree that the venue for any such

arbitration shall be Chicago, Illinois."

Section 10-10 of the Brokers Act mandates that every "person

engaging in the business of business brokering" register with the

Illinois Secretary of State. 815 ILCS 307/10-10 (West 2008). It

further notes that if "a business broker commits a material

violation of Section 10-10, 10-20, or 10-30 of this Act, in

connection with a contract for business brokering services, the

contract is void, and the prospective client is entitled to

receive from the business broker all sums paid to the business

broker, with interest and any attorney's fee required to enforce

this Section." 815 ILCS 307/10-60 (West 2008). Plaintiffs'

allegations that defendant is a business broker and never

properly registered under the Brokers Act must be taken as true.

See 735 ILCS 5/2-619 (West 2008); Fremont Compensation Insurance

Co. v. Ace-Chicago Great Dane Corp., 304 Ill. App. 3d 734 (1999).

Nevertheless, we hold the trial court did not err in compelling

arbitration, as an agreement to arbitrate existed and it

encompassed this dispute.

In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440

7 (2006), the United States Supreme Court reviewed a matter in

which the Florida Supreme Court held that the issue of whether an

underlying contract between the parties was illegal and,

therefore, void ab initio, must be decided by the trial court

before arbitration of other disputes could be compelled.

Cardegna v. Buckeye Check Cashing, Inc., 894 So. 2d 860 (Fla.

2005). The Florida Supreme Court reasoned that to enforce an

agreement to arbitrate in a contract challenged as unlawful

"could breathe life into a contract that not only violates state

law, but also is criminal in nature." Cardegna, 894 So. 2d at

862. Reaffirming its holdings in Southland Corp. v. Keating, 465

U.S. 1 (1984), and Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

388 U.S. 395 (1967), the Buckeye Check Cashing Court reversed,

holding that the challenge to the validity of the contract should

"be considered by an arbitrator, not a court." Buckeye, 546 U.S.

at 446.

The Buckeye Court noted that section 2 of the FAA allows for

challenges " 'upon such grounds as exist at law or in equity for

the revocation of any contract' " which can take two forms.

Buckeye, 546 U.S. at 444 (quoting 9 U.S.C. §2). "One type

8 challenges specifically the validity of the agreement to

arbitrate." Buckeye, 546 U.S. at 444 (citing Southland Corp.,

465 U.S. at 4-5). That type of challenge is not at issue in this

matter as plaintiffs' complaint seeks a declaration that the

contract as a whole is void ab initio.

"The other challenges the contract as a whole, either on a

ground that directly affects the entire agreement (e.g., the

agreement was fraudulently induced), or on the ground that the

illegality of one of the contract's provisions renders the whole

contract invalid." Buckeye, 546 U.S. at 444. The Court noted

that in Southland Corp., it held that the FAA created a body of

federal substantive law applicable to both state and federal

courts alike. Buckeye, 546 U.S. at 445 (quoting Southland, 465

U.S. at 12). The Court specifically "rejected the view that

state law could bar enforcement of §2, even in the context of

state-law claims brought in state court." Buckeye, 546 U.S. at

445.

With this as its backdrop, the Buckeye Court went on to

note:

"First, as a matter of substantive federal

9 arbitration law, an arbitration provision is

severable from the remainder of the contract.

Second, unless the challenge is to the arbi-

tration clause itself, the issue of the

contract's validity is considered by the arbi-

trator in the first instance. Third, this

arbitration law applies in state as well as

federal courts. *** [W]e conclude that because

respondents challenge the Agreement, but not

specifically its arbitration provisions, those

provisions are enforceable apart from the

remainder of the contract. The challenge should

therefore be considered by an arbitrator, not a

court." Buckeye, 546 U.S. at 445-46.

The Buckeye Court then noted that the Florida Supreme Court

attempted to distinguish Prima Paint by relying "on the

distinction between void and voidable contracts." Buckeye, 546

U.S. at 446. The Court noted the Florida Supreme Court's

proclamation that Florida law permitted " 'no severable, or

salvageable, parts of a contract found illegal and void' " was

10 "irrelevant." Buckeye, 546 U.S. at 446 (quoting Cardegna, 894

So. 2d at 864). The Court noted that Prima Paint "expressly

disclaimed any need to decide what state-law remedy was

available" and, as such, the Court specifically rejected "the

Florida Supreme Court's conclusion that enforceability of the

arbitration agreement should turn on 'Florida public policy and

contract law.' " Buckeye, 546 U.S. at 446 (quoting Cardegna, 894

So. 2d at 864).

Justice Scalia acknowledged that the Prima Paint "rule

permits a court to enforce an arbitration agreement in a contract

that the arbitrator later finds to be void. But, it is equally

true that respondents' approach permits a court to deny effect to

an arbitration provision in a contract that the court later finds

to be perfectly enforceable. Prima Paint resolved this

conundrum-and resolved it in favor of the separate enforceability

of arbitration provisions. We reaffirm today that, regardless of

whether the challenge is brought in federal or state court, a

challenge to the validity of the contract as a whole, and not

specifically to the arbitration clause, must go to the arbitra-

tor." Buckeye, 546 U.S. at 448-49.

11 Two years after Buckeye, in Preston v. Ferrer, 552 U.S. 346

(2008), the Court revisited the question of what forum properly

decides the validity of a contract that includes an arbitration

provision. Preston involved a contract dispute between "Judge

Alex" and his attorney/agent. Preston, 552 U.S. at 350. The

attorney/agent invoked the arbitration agreement when seeking

fees allegedly due under the contract. Preston, 552 U.S. at 350.

Judge Alex countered his attorney/agent's demand for arbitration

by filing a petition to the California labor commissioner

charging that the contract was invalid and unenforceable under

the California Talent Agencies Act (TAA) (Cal. Lab. Code §1700 et

seq. (West 2003 & Supp. 2008)). Preston, 552 U.S. at 350. Judge

Alex asserted that the attorney/agent acted as a talent agent

without the license required by the TAA and, therefore his

unlicensed status rendered the entire contract void. Preston,

552 U.S. at 355.

The trial court in California denied the attorney/agent's

motion to compel arbitration and the California appellate court

affirmed that ruling holding that relevant portions of the TAA

vested "exclusive original jurisdiction" over the dispute in the

12 Labor Commissioner. Ferrer v. Preston, 51 Cal. Rptr. 3d 628, 634

(Cal. Ct. App. 2006). The California appellate court further

ruled that Buckeye was "inapposite" because Buckeye "did not

involve an administrative agency with exclusive jurisdiction over

a disputed issue." Ferrer v. Preston, 51 Cal. Rptr. 3d at 634.

The California Supreme Court denied the attorney/agent's petition

for review. Ferrer v. Preston, No. S149190, 2007 Cal. LEXIS 1539

(Cal. Feb. 14, 2007). The Preston Court noted that the

"dispositive issue" was not whether the FAA preempts the TAA but

instead "who decides whether Preston acted as a personal manager

or as talent agent." Preston, 552 U.S. at 352.

The Preston Court noted that a "recurring question under

[section] 2 [of the FAA] is who should decide whether 'grounds

... exist at law or in equity' to invalidate an arbitration

agreement." Preston, 552 U.S. at 353 (quoting 9 U.S.C. §2). The

Court recounted its holdings from Prima Paint and Buckeye

regarding the two types of challenges one may bring, either to

the contract as a whole or the arbitration clause specifically,

and the corresponding path of analysis taken. Preston, 552 U.S.

at 353-54. The Court then reaffirmed its prior holdings and

13 found that since Judge Alex challenged the contract as a whole,

the issue of the contract's validity must proceed to arbitration

and not to the labor commissioner. Preston, 552 U.S. at 359

("When parties agree to arbitrate all questions arising under a

contract, the FAA supersedes state laws lodging primary

jurisdiction in another forum, whether judicial or

administrative."). The Preston Court acknowledged that the TAA

specifically stated that " 'an unlicensed person's contract with

an artist to provide services of a talent agency is illegal and

void.' " Preston, 552 U.S. at 355 (quoting Styne v. Stevens, 26

P. 3d 343, 349 (Cal. 2001)). Nevertheless, the ultimate holding

of the Court made clear that it was for an arbitrator to decide

the "dispositive" issue of whether the attorney/agent acted as a

talent agent. Preston, 552 U.S. at 359.

Similarly in the case at bar, LRN posits that the defen-

dant's unregistered status renders the entire contract void ab

initio pursuant to the Brokers Act. LRN claims that, as such, it

is for the trial court to determine whether any contract existed

before the case can be submitted to arbitration pursuant to the

arbitration agreement. We disagree.

14 LRN does not attack the arbitration agreement specifically;

it seeks to invalidate the entire contract. The arbitration

clause, similar to the clauses in Preston and Buckeye, notes that

"any controversy, dispute, or claim between the parties relating

to this Agreement shall be resolved by binding arbitration in

accordance with the rules of the American Arbitration Associa-

tion." Clearly, pursuant to Buckeye and Preston, the dispute

between the parties must proceed to arbitration.

Our supreme court seemingly acknowledged the Prima Paint

"severability" principle in Jensen v. Quik International, 213

Ill. 2d 119 (2004). The Jensen court noted that when

presented with a motion to stay litigation pending

arbitration pursuant to the FAA, "the court's inquiry is

limited to whether an agreement to arbitrate exists and

whether it encompasses the issue in dispute." Jensen, 213

Ill. 2d at 123. We note the Jensen court did not say the

inquiry encompassed whether the contract between the parties

is valid, but instead whether an "agreement to arbitrate"

existed. The Jensen court continued that if "the court

15 finds that an agreement to arbitrate exists and the issue

presented is within the scope of that agreement, a stay ***

is mandatory." Jensen, 213 Ill. 2d at 123-24.

The Jensen court cautioned that when "parties choose

arbitration in their contract, the party later seeking to

avoid arbitration should not be allowed to do so by merely

alleging that no contract exists" and that "almost any

plaintiff can find some theory or claim upon which to allege

that no contact existed, thereby avoiding arbitration."

Jensen, 213 Ill. 2d at 126, 129. The Jensen court held that

the issue of whether one party to the contract in dispute

was entitled to rescission of the contract as a whole must

be submitted to arbitration. Jensen, 213 Ill. 2d at 128-29.

We acknowledge that dicta in Jensen suggested that the

holding may be different had the legislature specifically

provided that specific contracts were void and unenforceable

instead of merely providing the remedy of rescission.

Jensen, 213 Ill. 2d at 127 ("Had the legislature intended

16 that a franchise agreement entered into in violation of

sections 5 and 10 be unenforceable, it could have easily so

provided."). However, Jensen (2004) is a pre-Buckeye (2006)

and pre-Preston (2008) case.

B. The Illinois Uniform Arbitration Act

Plaintiffs also argue that the Uniform Arbitration Act (Arbitration Act), and not the FAA,

applies to this matter and the Arbitration Act mandates we allow the trial court to determine the

validity of the contract. Plaintiffs claim it is well settled that where parties to a contract have

agreed to arbitrate in accordance with state law, the FAA does not apply even where interstate

commerce is involved.

Plaintiffs note that section 2(a) of the Arbitration Act states that when an "opposing party

denies the existence of the agreement to arbitrate," a "court shall proceed summarily to the

determination of the issue." 710 ILCS 5/2(a)(West 2008). Plaintiffs claim that section 10 of the

contract mandates the Arbitration Act and not the FAA applies to this matter. Section 10 states,

"Governing Law. This Agreement shall be interpreted under and governed in accordance with

the laws of the State of Illinois."

Defendant claims plaintiffs have waived this matter by failing to raise it below.

However, a review of plaintiffs' "response in opposition to motion to dismiss or stay proceedings

and to compel arbitration" indicates that plaintiffs, in fact, argued to the trial court that pursuant

to "Section 2(a) of the Illinois Arbitration Act," they were denying the existence of an agreement.

17 We find that the plaintiffs have not waived this issue.

Plaintiffs are correct that courts have held where parties to a contract agree to arbitrate in

accordance with state law, the FAA does not apply, even where interstate commerce is involved.

See Tortoriello v. Gerald Nissan of North Aurora, Inc., 379 Ill. App. 3d 214 (2008); see also

Glazer's Distributors of Illinois, Inc. v. NWS-Illinois, LLC, 376 Ill. App. 3d 411 (2007).

However, defendant denies that it "agreed to arbitrate in accordance with state law" and notes

that the arbitration provision clearly indicates that arbitration will proceed based upon the rules

of the American Arbitration Association and not the Arbitration Act. Again, the United States

Supreme Court has settled this issue.

Plaintiffs read Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford

Junior University, 489 U.S. 468 (1981), to support its position that the Arbitration Act should

apply to this controversy. In Volt, the Court held that where "the parties have agreed to abide by

state rules of arbitration, enforcing those rules according to the terms of the agreement is fully

consistent with the goals of the FAA, even if the result is that arbitration is stayed where the

[FAA] would otherwise permit it to go forward." Volt, 489 U.S. at 479. We acknowledge that

the Volt Court specifically found that "the application of the California statute is not pre-empted

by the [FAA] *** in a case where the parties have agreed that their arbitration agreement will be

governed by the law of California." Volt, 489 U.S. at 470. Plaintiffs fail to address, however,

subsequent United States Supreme Court case law that clarifies the holding of Volt and leads us

to the conclusion that the FAA and rules of the American Arbitration Association apply to this

18 matter, not the Arbitration Act.

In Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995), the Court held

that federal rules of arbitration applied to a dispute despite the fact that the contract at issue

contained a clause providing that the contract " 'shall be governed by the laws of the State of New

York.' " Mastrobuono, 514 U.S. at 53. Mastrobuono dictates that general choice-of-law clauses

do not incorporate state rules which govern allocation of authority between arbitrators and courts.

Mastrobuono, 514 U.S. at 60. Courts that have interpreted Mastobuono have noted that the

"construction of an agreement to arbitrate is governed by the FAA unless the agreement

expressly provides that state law should govern." Dominium Austin Partners, L.L.C. v. Emerson,

248 F.3d 720, 729 n.9 (8th Cir. 2001) (citing UHC Management Co. v. Computer Sciences

Corp., 148 F.3d 992 (8th Cir. 1998)). See also Roadway Package System, Inc. v. Kayser, 257

F.3d 287 (3d Cir. 2001); Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266 (9th Cir. 2002);

Ferro Corp. v. Garrison Industries, Inc., 142 F.3d 926 (6th Cir. 1998).

The 2008 Preston case further clarified the Court's holding in Volt. As noted above,

Preston involved an attempt by one party to a contract to have a dispute over the validity of the

contract settled, pursuant to California statute, by an administrative agency instead of through

arbitration. Preston, 552 U.S. at 349. The contract in Preston contained an arbitration clause

mandating that " 'any dispute ... relating to ... the breach, validity, or legality' " of the contract

should be arbitrated in accordance with the AAA rules as well as a choice-of-law clause stating

that the " 'agreement shall be governed by the laws of the state of California.' " Preston, 552 U.S.

19 at 361.

When one of the Preston parties demanded arbitration to settle the dispute, the other

petitioned the California labor commissioner asking that the contract be declared void pursuant

to the California Talent Agencies Act. Cal. Lab. Code §1700 et seq. (West 2003 & Supp. 2008);

Preston, 552 U.S. at 350. The California state courts concluded that the California Talent

Agencies Act vested "exclusive original jurisdiction" over the dispute with the Labor

Commissioner. Preston, 552 U.S. at 352. The party in Preston attempting to avoid arbitration

argued that the holding in Volt mandated affirmation of the California state courts.

The Court disagreed, noting:

"Ferrer's reliance on Volt is misplaced

for two discrete reasons. First, arbitration

was stayed in Volt to accommodate litigation

involving third parties who were strangers to

the arbitration agreement. Nothing in the

arbitration agreement addressed the order of

proceedings when pending litigation with third

parties presented the prospect of inconsistent

rulings. We thought it proper, in those

circumstances, to recognize state law as the

gap filler.

20 Here, in contrast, the arbitration clause

speaks to the matter in controversy; it states

that 'any dispute ... relating to ... the breach,

validity, or legality' of the contract should be

arbitrated in accordance with the American

Arbitration Association (AAA) rules. [Citation.]

Both parties are bound by the arbitration agreement;

the question of Preston's status as a talent agent

relates to the validity or legality of the contract;

there is no risk that related litigation will

yield conflicting rulings on common issues; and

there is no other procedural void for the choice-

of-law clause to fill.

Second, we are guided by our more recent

decision in Mastrobuono [citation]. Although

the contract in Volt provided for 'arbitration

in accordance with the Construction Industry

Arbitration Rules of the American Arbitration

Association,' [citation] (internal quotation

marks omitted), Volt never argued that incorpor-

21 ation of those rules trumped the choice-of-law

clause contained in the contract ***.

***

Preston and Ferrer's contract, as noted,

provides for arbitration in accordance with the

AAA rules. [Citation.] One of those rules

states that '[t]he arbitrator shall have the

power to determine the existence or validity of

a contract of which an arbitration clause forms

a part.' [Citation.] The incorporation of the

AAA rules *** weighs against inferring from the

choice-of-law clause an understanding shared by

Ferrer and Preston that their disputes would be

heard, in the first instance, by the Labor

Commissioner. Following the guide Mastrobuono

provides, the 'best way to harmonize' the parties'

adoption of the AAA rules and their selection of

California law is to read the latter to encompass

prescriptions governing the substantive rights and

obligations of the parties, but not the State's

22 'special rules limiting the authority of arbi-

trators.' [Citation.]" Preston, 552 U.S. at 361-63.

Just as in Preston, the contract in this matter contained a generic state choice-of-law

clause but also incorporated the AAA rules of arbitration. As such, we cannot find that the

parties explicitly intended, by the mere inclusion of the generic choice-of-law clause, that

disputes encompassed by the arbitration agreement be settled pursuant to the Arbitration Act. 710

ILCS 5/2(a) (West 2008).

CONCLUSION

In a nutshell, the plaintiffs agreed that "any controversy, dispute or claim between the

parties relating to this agreement shall be resolved by binding arbitration in accordance with the

rules of the American Arbitration Association." Certainly, the issue of whether or not the

agreement is void ab initio is a "controversy, dispute, or claim between the parties relating to

[the] agreement." The law is clear; the issue must be arbitrated.

For the foregoing reasons, the judgment of the circuit court of Peoria County is affirmed.

Affirmed.

JUSTICE WRIGHT, specially concurring:

Relying on Aste v Metropolitan Life Insurance Co., 312 Ill App. 3d 972 (2000) and

Kaplan v. Tabb Associates, Inc., 276 Ill. App. 3d 320 (1995), plaintiff contends that Illinois law

requires the court to first determine whether the entire contract at issue is void and unenforceable

before referring the matter to an arbitrator. Based only on the concessions of the plaintiff in this

23 case and the language of this specific agreement, now subject to our review, I specially concur.

However, I recognize that the outcome of this decision may be inconsistent with the first district

cases previously decided, but our decision is entirely consistent with the United States Supreme

Court’s holding in Preston v. Ferrer, 552 U.S. 346, 128 S. Ct. 978 (2008).

It is important to remember that plaintiff concedes that interstate commerce is involved in

this case and agrees the parties contemplated their contractual disputes would be resolved by an

arbitration process.1 In my view, these concessions are significant.

When the parties dispute whether an arbitration clause or separate arbitration agreement

was contemplated by the parties to become part of their agreement, then under Illinois law, the

court must first decide if the parties actually agreed to resolve disputes by means of arbitration.

Donaldson, Lufkin, & Jenrette Futures, Inc. v. Barr, 124 Ill. 2d 435, 443-45 (1988). Such is not

the case here. In this case, plaintiff concedes the arbitration clause was the subject of a meeting

1 These circumstances are distinguishable from those considered by this court in Peterson

v. Residential Alternatives of Illinois, Inc., 402 Ill. App. 3d 240 (2010). In Peterson, the primary

issue was whether the parties agreed to arbitration at all. The parties in that case signed two

separate agreements, which included an inartful attempt to create a separate arbitration

agreement. This court found that neither contract signed by the parties referred to the other

contract and therefore, after examining both agreements separately, we concluded an agreement

to arbitrate the nursing home health care contract was neither contemplated by nor agreed upon

by both parties.

24 of the minds. Instead, the issue before us is whether the arbitration clause and the contract,

which the parties drafted, now requires the court or the arbitrator to decide whether plaintiff’s

contention that the contract was void, based on State law, has merit.

The contract at the heart of this appeal contains explicit language agreeing that the

arbitration process would be controlled by the rules of the American Arbitration Association

(AAA). Significantly, when the rules of the AAA are incorporated into a contract, as they were

in this case, those same rules mandate that the parties to this contract “shall be deemed to have

made these rules [of the AAA] a part of their arbitration agreement.” American Arbitration

Association, Commercial Arbitration Rules, R-1. Thus, I find it very difficult to accept

plaintiff’s claim that the parties to this appeal agreed to arbitrate in accordance with Illinois law.

Further, the AAA rules, agreed to by plaintiff, grant the arbitrator “the power to

determine the existence or validity of a contract of which an arbitration clause forms a part.”

American Arbitration Association, Commercial Arbitration Rules, R-7(b). These AAA rules, not

State or Federal law, require the arbitrator to separately consider the arbitration clause from

other provisions of this contract. Also according to these rules, the arbitrator is given the

authority to determine whether the contract is void and if so, then determine the continued

validity of the arbitration clause. American Arbitration Association, Commercial Arbitration

Rules, R-7(b).

The contract in this case provides not only that the arbitration process would be

controlled by the AAA rules, but also that the proceedings would take place in Chicago.

25 Obviously, based upon the contractual language at issue, we could not require the parties to

travel to Peoria rather than Chicago for the arbitration hearing. Similarly, we cannot allow the

court to first examine whether the contract in this case is void when the rules of the AAA,

selected by the parties, require the arbitrator to first make this determination. In this appeal, we

do not have a contract which is silent regarding whether the arbitration process will be governed

by guidelines consistent with the Federal Arbitration Act (FAA) or will be governed by rules that

may differ from the FAA.

Consequently, I respectfully suggest that we need not engage in a lengthy discussion

explaining the relationship of the Illinois Arbitration Act to the FAA in order to resolve this

appeal. Although, I agree with the majority’s analysis of the case law as discussed, I write

separately to emphasize that the trial court, and now this court, have simply upheld the explicit

contractual choices incorporated by the parties to this contract which provide the blueprint for the

course of their dispute resolution. Here, as part of their contract, the parties specifically agreed

that all disputes would be resolved through arbitration and, in turn, also agreed their arbitration

proceedings would be controlled by the rules of the AAA.

For these reasons, I specially concur.

JUSTICE HOLDRIDGE, dissenting:

I disagree with the majority’s holding that Buckeye Check Cashing, Inc. v. Cardegna, 546

U.S. 440 (2006), and Preston v. Ferrer, 552 U.S. 346 (2008), prevent an Illinois court from

enforcing section 10-10 of the Illinois Business Brokers Act of 1995 (Brokers Act) (815 ILCS

26 307/10-5.10 et seq. (West 2008)). I, therefore, respectfully dissent. I would reverse the trial

court’s order staying the plaintiffs’ action for declaratory judgment and compelling arbitration. I

would remand this matter to the circuit court with directions to adjudicate whether Windlake is in

compliance with the Brokers Act and, if not, the court should order all relief mandated under that

statute.

It is well settled that an arbitration clause in an agreement entered into in contravention of

an Illinois statute requiring a party to register with the state prior to engaging in any licensed

activity does not divest Illinois courts of jurisdiction to hear claims that a party has violated the

licensing statute. Aste v. Metropolitan Life Insurance Co., 312 Ill. App. 3d 972 (2000); Kaplan

v. Tabb Associates, Inc., 276 Ill. App. 3d 320 (1995). The court in Aste, quoting section 181 of

the Restatement (Second) of Contracts, noted that " ‘[i]f a party is prohibited from doing an act

because of his failure to comply with a licensing, registration or similar requirement, a promise in

consideration of his doing that act or his promise to do it is unenforceable on grounds of public

policy if (a) the requirement has a regulatory purpose, and (b) the interest in the enforcement of

the promise is clearly outweighed by the public policy behind the requirement.’ " Aste, 312 Ill.

App. 3d at 980 (quoting Restatement (Second) of Contracts §181 (1981). Here, there is no

question that the Brokers Act has a regulatory purpose and a clear public policy purpose of

protecting Illinois citizens from unlicensed business brokers.

Moreover, the Kaplan court noted that not only the contract as a whole, but each of the

clauses, including the arbitration clause, is void as against public policy where a party has failed

27 to obtain a license required to protect the public from unlicensed practitioners. Kaplan, 276 Ill.

App. 3d at 325 ("the Agreement between the plaintiffs and the defendant, including the

arbitration clause, is void because the defendant filed to obtain a license to provide architectural

services"). In other words, not only the putative agreement as a whole, but each and every

provision of the agreement, including the arbitration clause, made in consideration of the promise

by a nonlicensed party to provide business broker services is void. Clearly, if a party lacks the

legal capacity to enter into a contract, it must also lack the legal capacity to enter into any of that

contract’s provisions. I would therefore find that the arbitration provision, upon which the

majority relies to find that this dispute must be arbitrated, is void and cannot divest the circuit

court of jurisdiction over suits brought under the Brokers Act.

Relying upon Buckeye Check Cashing, the majority finds that the arbitration clause

contained in the parties’ agreement mandates that the question of whether the defendant was in

compliance with the Brokers Act at the time it entered into the contract must be decided by an

arbitrator. I disagree with the majority and take issue with its application of the holding in

Buckeye Check Cashing to the facts in the instant matter. As the majority points out, in Buckeye

Check Cashing, the Court held that the validity of a contract as a whole should "be considered by

an arbitrator, not a court." Buckeye, 546 U.S. at 446. However, where the challenge is to the

validity of the arbitration clause, independent of a challenge to the validity of the contract as a

whole, it is appropriate for the court to decide the matter. Buckeye, 546 U.S. at 445-46.

28 What Buckeye Check Cashing does not address is what happens if the challenge is to both

the contract as a whole and the validity of the arbitration clause. Such is the matter herein.

Although the majority characterizes the plaintiffs’ complaint as seeking a declaration that the

contract as a whole is void ab initio, the plaintiffs actually sought a declaration that the defendant

had violated the Brokers Act and then sought all appropriate remedies under that statute. Under

the Brokers Act, a contract for business brokerage services entered into by a nonlicensed broker

is void, as is each provision of the agreement, including an agreement to arbitrate disputes under

the putative agreement. Kaplan, 276 Ill. App. 3d at 325. The plaintiffs’ challenge is not only to

the legality of the contract as a whole, but also the legality of each and every provision of the

agreement. In other words, what is at issue here is whether a party that cannot legally enter into a

business brokerage contract can nonetheless legally enter into an agreement to arbitrate any

disputes arising under that contract. I find nothing in law cited by the majority to support a

conclusion that an agreement to arbitrate contained within an illegal contract is any more

enforceable independently than the agreement itself. Both the entire agreement and each clause

contained therein are equally susceptible to a challenge. The arbitration clause, as part of the

agreement entered into in violation of the Brokers Act, is also independently in violation of the

Brokers Act and is, therefore, subject to the same challenge as the agreement as a whole.

Consistent with Buckeye Check Cashing, I would hold that the plaintiffs challenged the legality

of the arbitration clause as well as the contract as a whole, and I would find that the court is the

appropriate forum in which to bring a cause of action under the Brokers Act.

29 I would also find that Preston v. Ferrer is distinguishable from the instant matter in that

Preston presented a specific factual question as to whether a California statute covering talent

agents applied to the contract at issue. Preston, 552 U.S. at 352 ("The dispositive issue, then,

contrary to Ferrer’s suggestion, is not whether the FAA [Federal Arbitration Act] preempts the

TAA [Talent Agent Act] wholesale. [Citation.] *** Instead, the question is simply who decides

whether Preston acted as [a] personal manager or as [a] talent agent"). The Court held that such

a factual question was within the arbitrator’s ken. Preston, 552 U.S. at 353. Here, there is no

question that the defendant was acting as a business broker and that the Brokers Act therefore

applied.

In addition, there is nothing in the holdings of either Buckeye Check Cashing or Preston

that overrules our supreme court’s guidance in Jensen v. Quik International, 213 Ill. 2d 119, 127

(2004), wherein the court noted that where registration pursuant to statute is a statutory

prerequisite to entering into a valid agreement, the entire agreement, including arbitration

provision, is unenforceable. Jensen, 213 Ill. 2d at 127 ("Had the legislature intended that a

franchise agreement entered into in violation of sections 5 and 10 be unenforceable, it could have

easily so provided."). See Galasso v. KNS Cos., Inc., 364 Ill. App. 3d 124, 128 (2006) (citing

Jensen for the proposition that where a statute requires registration as a condition precedent to a

valid agreement and not merely as a basis for rescission of the agreement, the arbitration

provision contained in the agreement is likewise void). Here, unlike the Franchise Disclosure

Act of 1987 (815 ILCS 705/5 (West 2008) at issue in Jensen, the Brokers Act contains an

30 express provision that proper registration as a business broker is a condition precedent to a valid

business broker agreement (815 ILCS 307/10-60 (West 2008)). I would find that Jensen still

dictates the result in this matter and should guide our resolution of this matter.

Moreover, the instant matter is distinguishable from all other cases relied upon by the

majority in that, here, the contract at issue is fully executed. The defendant has been paid in full

for its services, and the plaintiffs raised no controversy, dispute or claim relating to the

agreement. The only issue raised in the instant litigation was whether the defendant was a

properly registered and licensed business broker under the Brokers Act. Based upon the

pleadings, there was no question of fact as to whether the defendant was acting as a business

broker. The only question was whether the defendant was properly registered as a business

broker. The answer to that question is either a simple "yes," in which case the litigation is at an

end and the defendant is allowed to keep the fee it received under the contract, or a simple "no,"

in which case the defendant must return the fees charged in violation of the Brokers Act and pay

the plaintiffs’ attorney fees in bringing this action under the Brokers Act.2

2 I am somewhat perplexed by the defendant’s insistence in prolonging the litigation in

this matter. The Brokers Act is very clear that strict compliance with the registration and

licensing requirements of section 10-10 is required in order to engage in the practice of business

brokering in this state. Either the defendant is in strict compliance with the Brokers Act or it is

not, and it should answer the question forthwith so that this matter may be concluded in a

judicious manner.

31 Because I would find that the matter of the defendant’s ability to render business broker

services in Illinois is not a matter within the ken of an arbitrator, I would reverse the judgment of

the circuit court of Peoria County compelling arbitration and I would remand this matter to the

circuit court with direction that the defendant be ordered to answer the complaint. Depending

upon the answer, the court should then enter an appropriate judgment forthwith.