Dispute under "illegal" consumer loan contract must be arbitrated, Supreme Court says

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U.S. Supreme Court requires arbitration of payday loan dispute under a contract alleged to be unlawful, according to Connecticut attorney Hilary B. Miller.

In an abrupt reversal, the U.S. Supreme Court Tuesday upheld the arbitration clause contained in a consumer “payday loan” contract, despite the consumer’s allegation that the contract itself was illegal. Hilary B. Miller, an attorney active in the industry, termed the reversal “a stunning victory for the financial services industry.”

According to Miller, the lawsuit arose from a $337.50 loan made by Buckeye Check Cashing Inc. to John Cardegna in 1999. Cardegna sued Buckeye in Florida state court, claiming the loan — which bore interest at rates in excess of 137% — to be usurious. Because the loan agreement contained a clause requiring “any claim” to be resolved by binding arbitration, Buckeye moved to compel arbitration.

Cardegna claimed that he did not have to arbitrate, because a usurious contract is void under Florida law. The trial court agreed and refused to compel arbitration. Ultimately, the Florida Supreme Court upheld this decision, requiring the dispute to be heard by a judge and jury, rather than by an arbitrator.

In today’s decision — according to Miller, the first U.S. Supreme Court case involving the payday loan industry — the court held, by a 7-1 vote, that challenges to the validity of a contract containing an arbitration clause “must go to the arbitrator,” not to a judge and jury — and the result is the same regardless of whether the case arises in state or federal court.

The decision was announced on Justice Alito’s first day on the bench. The decision in Buckeye Check Cashing, Inc. v. Cardegna, No. 04-1264, was written by Justice Scalia and concurred in by six other justices (Justice Alito did not participate); Justice Thomas filed the lone dissent.

Miller, who practices in Greenwich, Connecticut, noted that arbitration clauses have been in widespread use in credit card and telecommunications contracts; such clauses have been a generally effective tool for lenders in managing defense costs while providing consumers with a fair, expeditious and cost-effective means of resolving their claims.

Following today’s decision, lenders will wish to review existing arbitration clauses with their attorneys to ensure that they will produce the expected results, Miller said.

Miller is the founder and president of the Payday Loan Bar Association. Additional information about Buckeye Check Cashing, Inc. v. Cardegna and arbitration of financial services disputes is available from his office at (203) 399-1320.

Law offices of Hilary B. Miller

112 Parsonage Road

Greenwich, CT 06830-3942

(203) 399-1320 voice

(914) 206-3727 fax

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Hilary B. Miller, Esq.