American Heritage Life Insurance v. Lang

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 02-60639
Summary Calendar
AMERICAN HERITAGE LIFE INSURANCE COMPANY; FIRST COLONIAL
INSURANCE COMPANY; AND FIDELITY NATIONAL CORPORATION, d/b/a
REPUBLIC FINANCE, INC.
Plaintiffs-Appellants,
versus
ELLIS B. LANG
Defendant-Appellee.
________________________________________
Appeals from the United States District Court
for the Northern District of Mississippi
________________________________________
February 26, 2003
Before HIGGINBOTHAM, SMITH, and CLEMENT, Circuit Judges.
CLEMENT, Circuit Judge:
Plaintiffs-Appellants assert that the district court erred in denying their motion to compel
arbitration. This Court remands to the district court for adjudication of Defendant-
Appellee’s claim of fraud in the inducement.
I.FACTS & PROCEEDINGS
On September 13, 2001, Plaintiffs-Appellants American Heritage Life Insurance
Company (“American Heritage”), First Colonial Insurance Company (“First Colonial”),
and Fidelity National Corporation d/b/a Republic Finance, Inc. (“Fidelity”) brought suit
in the U.S. District Court for the Northern District of Mississippi to enforce four
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arbitration agreements signed by Defendant-Appellee Ellis B. Lang (“Lang”) in
connection with loan agreements and insurance contracts he entered into with Fidelity.
Lang only attended school through the first grade. As a result, Lang cannot read
and can only write his own name.
Lang executed loans with Fidelity on December 10, 1993; February 26, 1995;
May 30, 1995; July 10, 1995; December 27, 1995; October 31, 1996; November 11,
1997; October 28, 1998; September 17, 1999; and October 30, 2000. Lang signed
identical arbitration agreements with Fidelity on four of these occasions (November 11,
1997; October 28, 1998; September 17, 1999; and October 30, 2000). The arbitration
agreements were stand-alone agreements. See Richard A. Bales, Compulsory Arbitration
of Employment Claims: A Practical Guide to Designing and Implementing Enforceable
Agreements, 47 Baylor L. Rev. 591, 594 (1995) (noting that “arbitration provisions can
be created as st and-alone agreements or they can be inserted as part of broader written . .
. agreements”); Roger J. Perlstadt, Timing of Institutional Bias Challenges to Arbitration,
69 U. Chi. L. Rev. 1983, 1992 (2002) (stating that “an arbitration agreement is often not
a stand-alone contract between two parties, but rather a short clause inserted in a much
broader contract”); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 397-
98, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967) (discussing arbitration agreement that was
not a stand-alone agreement).
On appeal, the Appellants and Appellee presented this Court with the four
arbitration agreements and related affidavits as evidence. None of the loan or insurance
documents are before this Court.
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There is a dispute as to whether Lang knew that he was signing arbitration
agreements on the aforementioned dates. Jimmy Taggart (“Taggart”), the manager of
Fidelity’s branch office in Columbus, Mississippi, claimed in his Second Affidavit that
he “explained each loan and insurance instrument, document or paper to” Lang. In his
affidavit, Lang agreed that Taggart “stated the amount of my loan, when my monthly
payments were due, and how much I had to pay for the insurance.” Taggart also stated
that on each of the aforementioned dates, he told Lang “this is an arbitration agreement,
and if you have any claims against [Fidelity] about this note, you agree to go through an
arbitrator.” According to Taggart, Lang “never said he did not understand, and he never
asked me any questions about or to further explain, arbitration or the arbitration
agreements.”
In his Affidavit, Lang claims he informed Taggart that he “was unable to read and
understand the loan documents and insurance papers.” For this reason, Lang asked
Taggart “to explain each of the documents [Lang] signed.” Taggart allegedly stated that
“each document [Lang] signed was either dealing with the loan or the insurance.”
According to Lang, Taggart “never mentioned arbitration.” Lang stated that “[p]rior to a
discussion with [his] attorney, [he] did not understand the term arbitration or what it
involved,” and he “would not have signed an arbitration agreement if [he] had known
what arbitration was and had been given a meaningful answer to [his] direct question
with regards to what [he] was signing.”
Lang signed all four stand-alone arbitration agreements. However, Taggart only
signed three of them. The fourth one (dated October 30, 2000) bears the signature of a
third party, who is presumably a Fidelity employee. This evidence casts doubt on
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Taggart’s statement in his Second Affidavit that he was the person respo nsible for
explaining all of the arbitration agreements to Lang on each of the aforementioned dates.
Taggart heavily qualified his statements in his Second Affidavit, stating that he based his
knowledge on “the best of [his] recollection and . . . on [his] usual and customary
procedure and practice and a review of [Fidelity’s] reco rds.” Lang does not qualify his
statements in his Affidavit.
The district court denied the Appellants’ Motion to Compel Arbitration and Stay
Proceedings, holding that the dispute over whether Taggart properly explained the
arbitration agreement was subject to adjudication by a court rather than an arbitrator
under Prima Paint, 388 U.S. at 403-4.
II. STANDARD OF REVIEW
This Court reviews “the grant or denial of a motion to compel arbitration de
novo.” Webb v. Investacorp, 89 F.3d 252, 257 (5th Cir. 1996); Snap-On Tools Corp. v.
Mason, 18 F.3d 1261, 1264 (5th Cir. 1994).
III. ANALYSIS
This Court has jurisdiction over denials of motions to compel arbitration under
the Federal Arbitration Act (“FAA”), 9 U.S.C.A. § 16(a) (West 1999); McDermott Int'l v.
Underwriters at Lloyds, 981 F.2d 744, 746-47 (5th Cir. 1993). However, the FAA does
not create any independent subject-matter jurisdiction. United Offshore Co. v. Southern
Deepwater Pipeline Co., 899 F.2d 405, 407 (5th Cir. 1990) (citing Southland Corp. v.
Keating, 465 U.S. 1, 15 n.9, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984)).
To sue in federal court to enforce an arbitration claim, a petitioner must
demonstrate the existence of federal subject matter jurisdiction on the underlying
contract claim. As a result, suits to compel arbitration may only be brought in
federal court if diversity of citizenship or a federal question exists.
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Bank One, N.A. v. Shumake, 281 F.3d 507, 513 (5th Cir.) (emphasis in original), cert.
denied 123 S. Ct. 94 (2002).
The Appellants based their suit on diversit y jurisdiction. Neither party argues on
appeal that diversity jurisdiction is lacking. However, this court has "a duty to raise the
issue of subject-matter jurisdiction sua sponte." H&D Tire and Automotive-Hardware,
Inc. v. Pitney Bowes Inc., 227 F.3d 326, 328 (5th Cir. 2000). The instant dispute involves
ten loans and the purchase of multiple, allegedly unnecessary insurance products over
seven years. Lang asserts eight distinct claims against the Appellants and seeks
significant compensatory and punitive damages well in excess of $75,000. Based on this
evidence, it is facially apparent that the damages sought or incurred are likely above
$75,000. De Aguilar v. Boeing Co., 11 F.3d 55, 57-8 (5th Cir. 1993); Asociacion
Nacional De Pescadores A Pequena Escala O Artesanales De Colombia (ANPAC) v.
Dow Quimica De Columbia S.A., 988 F.2d 559, 566 (5th Cir. 1993); St. Paul
Reinsurance Co. Ltd. v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998).
Lang correctly recognizes that illiteracy alone is not a sufficient basis for the
invalidation of an arbitration agreement. Mixon v. Sovereign Camp., W.O.W., 125 So.
413, 415 (Miss. 1930) (holding that “there cannot be two separate departments in the law
of contracts, one for the educated and another for those who are not”). Lang argues,
however, that his illiteracy is relevant because Taggart allegedly failed to inform Lang
that he was signing arbitration agreements. Therefore, Taggart fraudulently induced Lang
to sign the arbitration agreements. Since Lang did not know what he was signing, he
argues that he could not have “agreed” to arbitrate. Lang claims he is attacking the
making of the agreements to arbitrate rather than the arbitration agreements themselves.
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The Appellants contend that Lang is attacking the arbitration agreements rather
than the making of the agreements. In addition, the Appellants argue that the arbitration
agreements are valid and that the federal policy favoring arbitration mandates that the
parties be compelled to arbitrate their dispute.
The first question to be addressed in adjudicating a motion to compel arbitration
under the FAA is “whether the parties agreed to arbitrate the dispute in question. This
determination involves two considerations: (1) whether there is a valid agreement to
arbitrate between the parties; and (2) whether the dispute in question falls within the
scope of that arbitration agreement.” Webb, 89 F.3d at 258 (internal citations omitted).
First, the arbitration agreements may not be valid. “[I]t is axiomatic that
‘arbitration is a matter of contract and a party cannot be required to submit to arbitration
any dispute which he has not agreed so to submit.’” Hill v. GE Power Systems, 282 F.3d
343, 347 (5th Cir. 2002) (quoting AT&T Technologies v. Communications Workers of
America, 475 U.S. 643, 648, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986)). Lang contends
that he did not know he was signing arbitration agreements; therefore, he did not “agree”
to them and they are not valid.
Normally, doubts must be resolved in favor of arbitration, United Steelworkers of
America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 583, 80 S. Ct. 1347, 4 L. Ed.
2d 1409 (1960), but the “federal policy favoring arbitration does not apply to the
determination of whether there is a valid agreement to arbitrate between the parties” or to
“the determination of who is bound” by the arbitration agreement. Fleetwood Enters. Inc.
v. Gaskamp, 280 F.3d 1069, 1073-74 (5th Cir. 2002). Instead, this Court determines
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whether there is a valid agreement to arbitrate and who is bound by it based on “ordinary
contract principles.” Id.“It is a widely accepted principle of contracts that one who signs or accepts a
written instrument will normally be bound in accordance with its written terms.” Samson
Plastic Conduit & Pipe Corp. v. Battenfeld Extrusionstechnik GMBH, 718 F. Supp. 886,
890 (M.D. Ala. 1989); St. Petersburg Bank & Trust Co. v. Boutin, 445 F.2d 1028, 1032
(5th Cir. 1971) (holding that “[o]ne who reads a written document, or signs it (even
without reading it) is bound by its terms”). By this logic, Lang, illiterate or not, would be
bound by the terms of the arbitration agreements to which he affixed his signature. St.
Petersburg Bank, 445 F.2d at 1032; Laborers' Pension Fund v. A & C Envtl., Inc., 301
F.3d 768, 781 (7th Cir. 2002) (citing Paper Express, Ltd. v. Pfankuch Maschinen, 972
F.2d 753, 757 (7th Cir. 1992)) (holding t hat parties should be held to contracts, even if
the contracts are in foreign languages or the parties cannot read or understand the
contracts due to blindness or illiteracy).
However, ordinary contract principles require a “meeting of the minds” between
the parties in order for agreements to be valid. Louisville & N. R. Co. v. Kentucky, 161
U.S. 677, 692, 16 S. Ct. 714, 40 L. Ed. 849 (1896) (holding that “[i]t is a fundamental
principle in the law of contracts that, to make a valid agreement, there must be a meeting
of the minds”); United States v. Barnes, 83 F.3d 934, 938 (7th Cir. 1995). Lang’s alleged
ignorance of the fact that he was signing arbitration agreements signifies that he may not
have consented to them and a meeting of the minds may not have existed. Volt Infor.
Scis. v. Bd. of Trs., 489 U.S. 468, 478-79 (1989) (holding that “the FAA does not require
parties to arbitrate when they have not agreed to do so” and “[a]rbitration under the
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[FAA] is a matter of consent, not coercion”); French v. Shoemaker, 81 U.S. 314, 333, 20
L. Ed. 852 (1871) (holding that “consent . . . is the essence of every valid contract”).
In addition, ordinary contract principles prohibit parties from engaging in fraud to
induce other parties to sign agreements. Samson Plastic, 718 F. Supp. at 890 (holding that
“[a]s a general rule, ignorance by one part y as to the terms of an agreement [may]
constitute grounds for relief [if] it was induced by acts of the other party”) (citing
Southern Nat’l Bank v. Crateo, 458 F.2d 688, 693 (5th Cir. 1972)). Taggart’s alleged
failure to inform Lang that he was signing arbitration agreements may be regarded as
fraud in the inducement of the arbitration agreement s if Taggart “misrepresented the
facts, . . . acted in less than good faith, or . . . had notice of [Lang's] ignorance.” Southern
Nat’l Bank, 458 F.2d at 692. Lang’s Affidavit indicates that Taggart knew that Lang was
illiterate, a fact that Taggart does not deny in his Second Affidavit. Therefore, Taggart
had notice of Lang’s ignorance, which indicates that the alleged failure to identify and
explain the arbitration agreements may constitute fraud in the inducement. Id.; Bhatia v.
Johnson, 818 F.2d 418, 421 (5th Cir. 1987) (holding that if the claim of fraud focuses
specifically on the arbitration agreement, then the federal court may consider it). Lang
further contends that Taggart misrepresented the facts by identifying the arbitration
agreements as loan or insurance documents, which could also constitute fraud in the
inducement. Southern Nat’l Bank, 458 F.2d at 692; Bhatia, 818 F.2d at 421.
In sum, there is sufficient evidence to indicate that the arbitration agreements may
not have been valid under ordinary contract principles. In particular, Lang may not have
“agreed” to the arbitration agreements, and Taggart, through his notice of Lang’s
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ignorance and alleged misrepresentation of the facts, may have fraudulently induced
Lang into signing the arbitration agreements.
Second, the dispute in question does not fall within the scope of the arbitration
agreement. Lang contends that he was fraudulently induced into signing the arbitration
agreements. R.M. Perez & Assoc., Inc. v. Welch, 960 F.2d 534, 538 (5th Cir. 1992)
(holding that “the type of fraud alleged is [not] determinative of arbitrability”). “Under
Prima Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395, 404, 87 S. Ct. 1801, 18
L. Ed. 2d 1270 (1967), and its progeny, the central issue in a case like this is whether the
plaintiffs' claim of fraud relates to the making of the arbitration agreement itself or to the
contract as a whole.” R.M. Perez, 960 F.2d at 538; Bhatia, 818 F.2d at 421 (holding that
courts "must determine whether [the] complaint is directed at the entire contract or only
the arbitration clause."). The Supreme Court held that
[i]f the claim is fraud in the inducement of the arbitration clause itself—an issue
which goes to the "making" of the agreement to arbitrate—the federal court may
proceed to adjudicate it. But the statutory language [of the FAA] does not permit
the federal court to consider claims of fraud in the inducement of the contract
generally.
Prima Paint, 388 U.S. at 403-4.
On appeal, Lang does not challenge Taggart’s identification or explanation of the
loan or insurance documents, only his alleged failure to inform Lang that he was signing
arbitration agreements. Lang signed four identical arbitration agreements that were not
contained in a clause of a larger contract, but instead existed as stand-alone agreements.
Cf. R.M. Perez, 960 F.2d at 538 (discussing claim of fraud as it related to contract
containing an arbitration clause). Indeed, no loan or insurance documents are even before
this Court. In this light, it is clear that Lang’s claim of fraud in the inducement is limited
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to the arbitration agreements themselves, not the loan or insurance documents. Cf.
Bhatia, 818 F.2d at 422 (holding that the plaintiff’s claim of fraud in the inducement was
not limited to the arbitration agreement, and thus his claim was arbitrable under Prima
Paint); R.M. Perez, 960 F.2d at 538 (holding that plaintiffs’ claims of fraud related to
contract containing arbitration clause rather than the arbitration clause alone); American
Security Ins. Co. v. Lang, No. 02-60104 (Nov. 7, 2002) (unpublished) (holding that “[i]f
the alleged ‘fraudulent inducement focused specifically on the arbitration provision, the
court may first address the issue’”) (quoting Bhatia, 818 F.2d at 421). Under these facts,
Lang’s claim of fraud in the inducement is not arbitrable because it goes to the making of
the arbitration agreement. Prima Paint, 388 U.S. at 403-4. Therefore, it is for the court to
adjudicate the fraud claim. Id.As the party resisting arbitration, Lang bears the burden of showing that the
dispute is not arbitrable under § 4 of the FAA. Bhatia, 818 F.2d at 422 (citing Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 637 F.2d 391 (5th Cir., Unit B, Feb.
1981)). Lang’s Affidavit, Taggart’s heavily qualified and somewhat inaccurate
statements in his Second Affidavit, and the four stand-alone arbitration agreements
indicate that this dispute may not be arbitrable because the parties may not have a valid
arbitration agreement, Southern Nat’l Bank, 458 F.2d at 692, and Lang’s claim of fraud
in the inducement goes t o the making of the arbitration agreements. Prima Paint, 388
U.S. at 403-4.
Accordingly, this Court remands to the district court for adjudication of Lang’s
claim of fraud in the inducement.
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