Primerica Life Insurance v. Brown

304 F.3d 469, 2002 U.S. App. LEXIS 17836, 2002 WL 1988234

• Court: Court of Appeals for the Fifth Circuit
• Decided: August 28, 2002
• Docket: 01-60852
• Status: Published

Opinions

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 CitiFinan-cial 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, 18 L.Ed.2d 1270 (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 arbi-trability of claims should be resolved in favor of arbitration. Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (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 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, 87 L.Ed.2d 444 (1985)). 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 dis-r pute.’” 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 arbi-trability of Brown’s claims.¹ Therefore, a straightforward application of the required two-pronged inquiry supports CitiFinan-eial’s petition to compel arbitration.

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. 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 CitiFinaneial 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.

CONCLUSION

For the reasons stated above, we REVERSE the judgment of the district court and REMAND for proceedings consistent with this opinion.

1 . Brown also argues that arbitration costs render the arbitration clause "substantively unconscionable.” The Supreme Court, in Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 91-92, 121 S.Ct. 513, 148 L.Ed.2d 373 (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.

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).