Usurious payday loans (continued)

In my previous post, I restated the facts in the Buckeye Check Cashing case. A consumer was challenging the legality of his payday loans under state law, but the loan documents he signed contained a mandatory arbitration clause. So, how was this case decided? After the consumer sued the lender, Buckeye petitioned the trial judge to compel arbitration. The judge, however, denied Buckeye’s motion, holding that it (the court) would have to decide first whether the payday loans Buckeye made were illegal under state law. The lender then appealed to the Court of Appeals of Florida for the Fourth District. When the court of appeal reversed the trial court and held that the question of the contract’s legality should be decided by the arbitrator, the consumer appealed to the Florida Supreme Court. The state supreme court then reversed the court of appeals, resting its decision on common law grounds. Specifically, because illegal agreements are void under Florida law, the Florida Supreme Court reasoned that sending the dispute to an arbitrator would “breathe life” into an illegal contract. The lender appealed to the Supreme Court of the United States (SCOTUS).

Although SCOTUS’s appellate jurisdiction is discretionary–about 99% of all cases appealed to SCOTUS are denied outright–SCOTUS agreed to hear this case, and Justice Antonin Scalia, writing for a seven justice majority (see image below), ended up ruling in favor of the lender. (Justice Alito recused himself, as he was not yet a confirmed justice when the case was argued, and Justice Thomas dissented.) For my part, the most contentious aspect of Justice Scalia’s opinion was his analysis of the meaning of the word “contract.” The consumer had emphasized the plain meaning of the word “contract” in the text of the Federal Arbitration Act (FAA) and argued that an illegal agreement that is void under state law is not a legally-enforceable “contract” under the FAA. In other words, the FAA should apply only to arbitration clauses located within enforceable “contracts,” not to arbitration clauses located in illegal agreements. Justice Scalia, however, brushed aside this common law argument. Instead, what mattered to the majority was whether the plaintiff in the Buckeye case was challenging the legality of the loan documents he signed or the legality of the arbitration clause in those documents: because the plaintiff was challenging the legality of the loan—not the legality of the arbitration clause itself—the arbitrator would get to decide whether the loan was legal under state law.

In any case (pun intended), Buckeye Check Cashing, Inc. v. Cardegna raises an even deeper and more delicate question about the moral status of usurious loans. Even if such loans are illegal under state law, doesn’t the borrower still have a moral obligation to repay his payday loans? I will sketch a potential solution to this difficult moral dilemma in my next few posts.

Screen Shot 2019-09-26 at 8.18.30 PM

Image credit: oyez.org

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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