Citizens Bank v. Alafabco, Inc.
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539 U.S. 52 (2003)
OCTOBER TERM, 2002
THE CITIZENS BANK v. ALAFABCO, INC., ET AL.
ON PETITION FOR WRIT OF CERTIORARI TO THE SUPREME COURT OF ALABAMA
No. 02-1295. Decided June 2, 2003
Respondents Alafabco, Inc., and its officers filed suit in Alabama Circuit Court, alleging that Alafabco had incurred massive debt because petitioner bank had unlawfully reneged on an agreement to provide capital sufficient to complete a specific building project. The bank moved to compel arbitration as provided in the parties' debt-restructuring agreements. The court ordered respondents to submit to arbitration, but the State Supreme Court reversed, finding that, because the agreements had no substantial effect on interstate commerce, there was an insufficient nexus with such commerce to establish Federal Arbitration Act (FAA) coverage of the parties' dispute.
Held: There is sufficient nexus with interstate commerce to make the arbitration provision enforceable under the FAA. By applying to a contract "evidencing a transaction involving commerce," 9 U. S. C. § 2, the FAA provides for "the enforcement of arbitration agreements within the full reach of the Commerce Clause," Perry v. Thomas, 482 U. S. 483, 490. It is thus perfectly clear that the FAA encompasses a wider range of transactions than those actually "in commerce." Although the debtrestructuring agreements were executed in Alabama by Alabama residents, they nonetheless satisfy the FAA's "involving commerce" test. First, Alafabco engaged in business throughout the southeastern United States, using substantial loans from the bank that were renegotiated and redocumented in the debt-restructuring agreements. Second, the restructured debt was secured by all of Alafabco's business assets, including its inventory of goods assembled from out-of-state parts and raw materials. Third, commercial lending has a broad impact on the national economy. The Alabama Supreme Court's cramped view of Congress' Commerce Clause power appears to rest on a misreading of United States v. Lopez, 514 U. S. 549, which does not suggest that limits on the power to regulate commerce are breached by applying the FAA to disputes arising out of commercial loan transactions such as these.
Certiorari granted; reversed and remanded.
The question presented is whether the parties' debtrestructuring agreement is "a contract evidencing a transaction involving commerce" within the meaning of the Federal Arbitration Act (FAA). 9 U. s. C. § 2. As we concluded in Allied-Bruce Terminix Coso v. Dobson, 513 U. S. 265 (1995), there is a sufficient nexus with interstate commerce to make enforceable, pursuant to the FAA, an arbitration provision included in that agreement.
Petitioner The Citizens Bank-an Alabama lending institution-seeks to compel arbitration of a financial dispute with respondents Alafabco, Inc.-an Alabama fabrication and construction company-and its officers. According to a complaint filed by respondents in Alabama state court, the dispute among the parties arose out of a series of commercial loan transactions made over a decade-long course of business dealings. In 1986, the complaint alleges, the parties entered into a quasi-contractual relationship in which the bank agreed to provide operating capital necessary for Alafabco to secure and complete construction contracts. That relationship began to sour in 1998, when the bank allegedly encouraged Alafabco to bid on a large construction contract in Courtland, Alabama, but refused to provide the capital necessary to complete the project. In order to compensate for the bank's alleged breach of the parties' implied agreement, Alafabco completed the Courtland project with funds that would otherwise have been dedicated to repaying existing obligations to the bank. Alafabco in turn became delinquent in repaying those existing obligations.
On two occasions, the parties attempted to resolve the outstanding debts. On May 3, 1999, Alafabco and the bank executed "'renewal notes'" in which all previous loans were