LRN Holding, Inc. v. Windlake Capital Advisors, LLC ( 2011 )

No. 3--10--0194
Opinion filed May 9, 2011
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
A.D., 2011
LRN HOLDING, INC., and DAVID ) Appeal from the Circuit Court
P. RANSBURG, ) of the 10th Judicial Circuit
) Peoria County, Illinois
Plaintiffs-Appellants, )
)
v. ) No. 09--L--230
)
WINDLAKE CAPITAL ADVISORS, )
LLC, )
) Honorable Joe Vespa,
Defendant-Appellee. ) Judge, Presiding.
JUSTICE SCHMIDT delivered the judgment of the court, with
opinion.
Justice Wright specially concurred in the judgment and
opinion.
Justice Holdridge dissented, with opinion.
OPINION
Plaintiffs, LRN Holding, Inc. (LRN), and David Ransburg,
brought this declaratory judgment action against defendant,
Windlake Capital Advisors, LLC, seeking a declaration that a
contract entered into by the parties is void. As such,
plaintiffs claimed they were entitled to recover fees associated
with the sale of LRN. Defendant, Windlake Capital Advisors,
LLC., moved to dismiss the action or, in the alternative, to stay
the action and compel arbitration. The trial court granted
defendant's motion to stay the proceeding and ordered the matter
to proceed to arbitration. Plaintiffs appeal from that order.
FACTS
Plaintiffs' complaint alleges that they entered into a
contract with defendant which stated that defendant would act as
the exclusive brokerage agent seeking to secure a purchaser of
the assets or stock of LRN. The contract called for plaintiffs
to pay defendant a $35,000 engagement fee upon the signing of the
contract and a success fee of "$200,000 + 2% of all consider-
ation" upon the closing of the transaction.
Plaintiffs' complaint acknowledges that defendant success-
fully brokered a transaction through which Robert Bosch Tool
Corporation purchased LRN assets. Defendant received $1,226,340
in compensation for its services. The complaint contains no
2
allegations suggesting defendant's services were in any way
inadequate or that the transaction somehow harmed plaintiffs.
Plaintiffs' complaint alleges, however, that their contract
with defendant should be declared void as defendant failed to
properly register its services with the State of Illinois. As
such, plaintiffs claim they are entitled to collect defendant's
$1,226,340 fee, as well as interest on those monies and attorney
fees. Attached to the complaint is a photocopy of an "LLC File
Detail Report" from the Illinois Secretary of State, the
agreement between the parties, and photocopies of two pages
associated with a "broker search" from the Illinois Secretary of
State's Web site.
Defendant never answered plaintiffs' complaint but instead
filed a "Motion to Dismiss or Stay Proceedings and to Compel
Arbitration" pursuant to section 2-619 of the Code of Civil
Procedure. 735 ILCS 5/2-619(a)(9) (West 2008). In its
memorandum in support of its motion, defendant noted the
agreement between it and plaintiffs contained an arbitration
provision mandating that any controversy between the parties
relating to this agreement shall be resolved by binding
3
arbitration.
Defendant submitted that arbitration was mandated by both
the Federal Arbitration Act (9 U.S.C. §1 et seq. (2006)) and the
Illinois Uniform Arbitration Act (710 ILCS 5/1 et seq. (West
2008)). The trial court agreed and granted defendant's motion to
stay the proceedings and compel arbitration. Plaintiffs appeal.
ANALYSIS
The sole issue raised on appeal is whether the trial court
erred when granting defendant's motion. "[T]he decision whether
to compel arbitration is not discretionary. Where there is a
valid arbitration agreement and the parties' dispute falls within
the scope of that agreement, arbitration is mandatory and the
trial court must compel it. [Citation.] *** On the other hand,
where there is no valid arbitration agreement or where the
parties' dispute does not fall within the scope of that
agreement, the trial court may not compel it. [Citation.] ***
Accordingly, we will employ a de novo standard of review ***."
Travis v. American Manufacturers Mutual Insurance Co., 335 Ill.
App. 3d 1171, 1175 (2002).
While our standard of review is de novo, our supreme court
4
has clearly indicated that when a trial court is "presented with
a motion to stay litigation pending arbitration under section 3
of the FAA, the court's inquiry is limited to whether an
agreement to arbitrate exists and whether it encompasses the
issue in dispute." Jensen v. Quik International, 213 Ill. 2d
119, 123-24 (2004).
Plaintiffs make numerous arguments to support their claim
that the trial court improperly compelled arbitration. The
plaintiffs' first argument centers on their assertion that no
contract existed between them and defendant. As such, plaintiffs
suggest, "Illinois case law clearly mandates that the court, and
not an arbitrator, make the determination regarding whether a
contract with an unlicensed professional is void." Intertwined
with this theory is plaintiffs' assertion that the "Illinois
Arbitration Act applies to this case, and requires that the court
determine that the purported agreement is void, notwithstanding
federal cases interpreting the Federal Arbitration Act."
The gravamen of plaintiffs' initial argument is that an
Illinois statute renders the agreement between plaintiffs and
defendant void ab initio. As such, no enforceable arbitration
5
clause existed and, therefore, the trial court erred in
compelling arbitration. To support this proposition, plaintiffs
direct our attention to the Illinois Business Brokers Act of 1995
(Brokers Act) (815 ILCS 307/10-5.10 et seq. (West 2008)), Aste v.
Metropolitan Life Insurance Co., 312 Ill. App. 3d 972 (2000), and
Kaplan v. Tabb Associates, Inc., 276 Ill. App. 3d 320 (1995).
Defendant disagrees with the plaintiffs, claiming even a
broad challenge to the agreement as a whole must be decided in
arbitration. To support its position, defendant cites to the
Federal Arbitration Act (FAA) (9 U.S.C. §1 et seq.) and numerous
cases that interpret it.
A. The Agreement, Brokers Act and FAA
The arbitration provision in the agreement between the
parties reads as follows:
"Arbitration. Any controversy, dispute, or
claim between the parties relating to this
Agreement shall be resolved by binding
arbitration in accordance with the rules of
the American Arbitration Association, as
amended from time to time. The parties
6
agree that the venue for any such
arbitration shall be Chicago, Illinois."
Section 10-10 of the Brokers Act mandates that every "person
engaging in the business of business brokering" register with the
Illinois Secretary of State. 815 ILCS 307/10-10 (West 2008). It
further notes that if "a business broker commits a material
violation of Section 10-10, 10-20, or 10-30 of this Act, in
connection with a contract for business brokering services, the
contract is void, and the prospective client is entitled to
receive from the business broker all sums paid to the business
broker, with interest and any attorney's fee required to enforce
this Section." 815 ILCS 307/10-60 (West 2008). Plaintiffs'
allegations that defendant is a business broker and never
properly registered under the Brokers Act must be taken as true.
See 735 ILCS 5/2-619 (West 2008); Fremont Compensation Insurance
Co. v. Ace-Chicago Great Dane Corp., 304 Ill. App. 3d 734 (1999).
Nevertheless, we hold the trial court did not err in compelling
arbitration, as an agreement to arbitrate existed and it
encompassed this dispute.
In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 4407
(2006), the United States Supreme Court reviewed a matter in
which the Florida Supreme Court held that the issue of whether an
underlying contract between the parties was illegal and,
therefore, void ab initio, must be decided by the trial court
before arbitration of other disputes could be compelled.
Cardegna v. Buckeye Check Cashing, Inc., 894 So. 2d 860 (Fla.
2005). The Florida Supreme Court reasoned that to enforce an
agreement to arbitrate in a contract challenged as unlawful
"could breathe life into a contract that not only violates state
law, but also is criminal in nature." Cardegna, 894 So. 2d at
862. Reaffirming its holdings in Southland Corp. v. Keating, 465
U.S. 1 (1984), and Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395 (1967), the Buckeye Check Cashing Court reversed,
holding that the challenge to the validity of the contract should
"be considered by an arbitrator, not a court." Buckeye, 546 U.S.
at 446.
The Buckeye Court noted that section 2 of the FAA allows for
challenges " 'upon such grounds as exist at law or in equity for
the revocation of any contract' " which can take two forms.
Buckeye, 546 U.S. at 444 (quoting 9 U.S.C. §2). "One type
8
challenges specifically the validity of the agreement to
arbitrate." Buckeye, 546 U.S. at 444 (citing Southland Corp.,
465 U.S. at 4-5). That type of challenge is not at issue in this
matter as plaintiffs' complaint seeks a declaration that the
contract as a whole is void ab initio.
"The other challenges the contract as a whole, either on a
ground that directly affects the entire agreement (e.g., the
agreement was fraudulently induced), or on the ground that the
illegality of one of the contract's provisions renders the whole
contract invalid." Buckeye, 546 U.S. at 444. The Court noted
that in Southland Corp., it held that the FAA created a body of
federal substantive law applicable to both state and federal
courts alike. Buckeye, 546 U.S. at 445 (quoting Southland, 465
U.S. at 12). The Court specifically "rejected the view that
state law could bar enforcement of §2, even in the context of
state-law claims brought in state court." Buckeye, 546 U.S. at
445.
With this as its backdrop, the Buckeye Court went on to
note:
"First, as a matter of substantive federal
9
arbitration law, an arbitration provision is
severable from the remainder of the contract.
Second, unless the challenge is to the arbi-
tration clause itself, the issue of the
contract's validity is considered by the arbi-
trator in the first instance. Third, this
arbitration law applies in state as well as
federal courts. *** [W]e conclude that because
respondents challenge the Agreement, but not
specifically its arbitration provisions, those
provisions are enforceable apart from the
remainder of the contract. The challenge should
therefore be considered by an arbitrator, not a
court." Buckeye, 546 U.S. at 445-46.
The Buckeye Court then noted that the Florida Supreme Court
attempted to distinguish Prima Paint by relying "on the
distinction between void and voidable contracts." Buckeye, 546
U.S. at 446. The Court noted the Florida Supreme Court's
proclamation that Florida law permitted " 'no severable, or
salvageable, parts of a contract found illegal and void' " was
10
"irrelevant." Buckeye, 546 U.S. at 446 (quoting Cardegna, 894
So. 2d at 864). The Court noted that Prima Paint "expressly
disclaimed any need to decide what state-law remedy was
available" and, as such, the Court specifically rejected "the
Florida Supreme Court's conclusion that enforceability of the
arbitration agreement should turn on 'Florida public policy and
contract law.' " Buckeye, 546 U.S. at 446 (quoting Cardegna, 894
So. 2d at 864).
Justice Scalia acknowledged that the Prima Paint "rule
permits a court to enforce an arbitration agreement in a contract
that the arbitrator later finds to be void. But, it is equally
true that respondents' approach permits a court to deny effect to
an arbitration provision in a contract that the court later finds
to be perfectly enforceable. Prima Paint resolved this
conundrum-and resolved it in favor of the separate enforceability
of arbitration provisions. We reaffirm today that, regardless of
whether the challenge is brought in federal or state court, a
challenge to the validity of the contract as a whole, and not
specifically to the arbitration clause, must go to the arbitra-
tor." Buckeye, 546 U.S. at 448-49.
11
Two years after Buckeye, in Preston v. Ferrer, 552 U.S. 346(2008), the Court revisited the question of what forum properly
decides the validity of a contract that includes an arbitration
provision. Preston involved a contract dispute between "Judge
Alex" and his attorney/agent. Preston, 552 U.S. at 350. The
attorney/agent invoked the arbitration agreement when seeking
fees allegedly due under the contract. Preston, 552 U.S. at 350.
Judge Alex countered his attorney/agent's demand for arbitration
by filing a petition to the California labor commissioner
charging that the contract was invalid and unenforceable under
the California Talent Agencies Act (TAA) (Cal. Lab. Code §1700 et
seq. (West 2003 & Supp. 2008)). Preston, 552 U.S. at 350. Judge
Alex asserted that the attorney/agent acted as a talent agent
without the license required by the TAA and, therefore his
unlicensed status rendered the entire contract void. Preston,
552 U.S. at 355.
The trial court in California denied the attorney/agent's
motion to compel arbitration and the California appellate court
affirmed that ruling holding that relevant portions of the TAA
vested "exclusive original jurisdiction" over the dispute in the
12
Labor Commissioner. Ferrer v. Preston, 51 Cal. Rptr. 3d 628, 634
(Cal. Ct. App. 2006). The California appellate court further
ruled that Buckeye was "inapposite" because Buckeye "did not
involve an administrative agency with exclusive jurisdiction over
a disputed issue." Ferrer v. Preston, 51 Cal. Rptr. 3d at 634.
The California Supreme Court denied the attorney/agent's petition
for review. Ferrer v. Preston, No. S149190, 2007 Cal. LEXIS 1539(Cal. Feb. 14, 2007). The Preston Court noted that the
"dispositive issue" was not whether the FAA preempts the TAA but
instead "who decides whether Preston acted as a personal manager
or as talent agent." Preston, 552 U.S. at 352.
The Preston Court noted that a "recurring question under
[section] 2 [of the FAA] is who should decide whether 'grounds
... exist at law or in equity' to invalidate an arbitration
agreement." Preston, 552 U.S. at 353 (quoting 9 U.S.C. §2). The
Court recounted its holdings from Prima Paint and Buckeye
regarding the two types of challenges one may bring, either to
the contract as a whole or the arbitration clause specifically,
and the corresponding path of analysis taken. Preston, 552 U.S.
at 353-54. The Court then reaffirmed its prior holdings and
13
found that since Judge Alex challenged the contract as a whole,
the issue of the contract's validity must proceed to arbitration
and not to the labor commissioner. Preston, 552 U.S. at 359("When parties agree to arbitrate all questions arising under a
contract, the FAA supersedes state laws lodging primary
jurisdiction in another forum, whether judicial or
administrative."). The Preston Court acknowledged that the TAA
specifically stated that " 'an unlicensed person's contract with
an artist to provide services of a talent agency is illegal and
void.' " Preston, 552 U.S. at 355 (quoting Styne v. Stevens, 26
P. 3d 343, 349 (Cal. 2001)). Nevertheless, the ultimate holding
of the Court made clear that it was for an arbitrator to decide
the "dispositive" issue of whether the attorney/agent acted as a
talent agent. Preston, 552 U.S. at 359.
Similarly in the case at bar, LRN posits that the defen-
dant's unregistered status renders the entire contract void ab
initio pursuant to the Brokers Act. LRN claims that, as such, it
is for the trial court to determine whether any contract existed
before the case can be submitted to arbitration pursuant to the
arbitration agreement. We disagree.
14
LRN does not attack the arbitration agreement specifically;
it seeks to invalidate the entire contract. The arbitration
clause, similar to the clauses in Preston and Buckeye, notes that
"any controversy, dispute, or claim between the parties relating
to this Agreement shall be resolved by binding arbitration in
accordance with the rules of the American Arbitration Associa-
tion." Clearly, pursuant to Buckeye and Preston, the dispute
between the parties must proceed to arbitration.
Our supreme court seemingly acknowledged the Prima Paint
"severability" principle in Jensen v. Quik International, 213
Ill. 2d 119 (2004). The Jensen court noted that when
presented with a motion to stay litigation pending
arbitration pursuant to the FAA, "the court's inquiry is
limited to whether an agreement to arbitrate exists and
whether it encompasses the issue in dispute." Jensen, 213
Ill. 2d at 123. We note the Jensen court did not say the
inquiry encompassed whether the contract between the parties
is valid, but instead whether an "agreement to arbitrate"
existed. The Jensen court continued that if "the court
15
finds that an agreement to arbitrate exists and the issue
presented is within the scope of that agreement, a stay ***
is mandatory." Jensen, 213 Ill. 2d at 123-24.
The Jensen court cautioned that when "parties choose
arbitration in their contract, the party later seeking to
avoid arbitration should not be allowed to do so by merely
alleging that no contract exists" and that "almost any
plaintiff can find some theory or claim upon which to allege
that no contact existed, thereby avoiding arbitration."
Jensen, 213 Ill. 2d at 126, 129. The Jensen court held that
the issue of whether one party to the contract in dispute
was entitled to rescission of the contract as a whole must
be submitted to arbitration. Jensen, 213 Ill. 2d at 128-29.
We acknowledge that dicta in Jensen suggested that the
holding may be different had the legislature specifically
provided that specific contracts were void and unenforceable
instead of merely providing the remedy of rescission.
Jensen, 213 Ill. 2d at 127 ("Had the legislature intended
16
that a franchise agreement entered into in violation of
sections 5 and 10 be unenforceable, it could have easily so
provided."). However, Jensen (2004) is a pre-Buckeye (2006)
and pre-Preston (2008) case.
B. The Illinois Uniform Arbitration Act
Plaintiffs also argue that the Uniform Arbitration Act (Arbitration Act), and not the FAA,
applies to this matter and the Arbitration Act mandates we allow the trial court to determine the
validity of the contract. Plaintiffs claim it is well settled that where parties to a contract have
agreed to arbitrate in accordance with state law, the FAA does not apply even where interstate
commerce is involved.
Plaintiffs note that section 2(a) of the Arbitration Act states that when an "opposing party
denies the existence of the agreement to arbitrate," a "court shall proceed summarily to the
determination of the issue." 710 ILCS 5/2(a)(West 2008). Plaintiffs claim that section 10 of the
contract mandates the Arbitration Act and not the FAA applies to this matter. Section 10 states,
"Governing Law. This Agreement shall be interpreted under and governed in accordance with
the laws of the State of Illinois."
Defendant claims plaintiffs have waived this matter by failing to raise it below.
However, a review of plaintiffs' "response in opposition to motion to dismiss or stay proceedings
and to compel arbitration" indicates that plaintiffs, in fact, argued to the trial court that pursuant
to "Section 2(a) of the Illinois Arbitration Act," they were denying the existence of an agreement.
17
We find that the plaintiffs have not waived this issue.
Plaintiffs are correct that courts have held where parties to a contract agree to arbitrate in
accordance with state law, the FAA does not apply, even where interstate commerce is involved.
See Tortoriello v. Gerald Nissan of North Aurora, Inc., 379 Ill. App. 3d 214 (2008); see also
Glazer's Distributors of Illinois, Inc. v. NWS-Illinois, LLC, 376 Ill. App. 3d 411 (2007).
However, defendant denies that it "agreed to arbitrate in accordance with state law" and notes
that the arbitration provision clearly indicates that arbitration will proceed based upon the rules
of the American Arbitration Association and not the Arbitration Act. Again, the United States
Supreme Court has settled this issue.
Plaintiffs read Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford
Junior University, 489 U.S. 468 (1981), to support its position that the Arbitration Act should
apply to this controversy. In Volt, the Court held that where "the parties have agreed to abide by
state rules of arbitration, enforcing those rules according to the terms of the agreement is fully
consistent with the goals of the FAA, even if the result is that arbitration is stayed where the
[FAA] would otherwise permit it to go forward." Volt, 489 U.S. at 479. We acknowledge that
the Volt Court specifically found that "the application of the California statute is not pre-empted
by the [FAA] *** in a case where the parties have agreed that their arbitration agreement will be
governed by the law of California." Volt, 489 U.S. at 470. Plaintiffs fail to address, however,
subsequent United States Supreme Court case law that clarifies the holding of Volt and leads us
to the conclusion that the FAA and rules of the American Arbitration Association apply to this
18
matter, not the Arbitration Act.
In Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995), the Court held
that federal rules of arbitration applied to a dispute despite the fact that the contract at issue
contained a clause providing that the contract " 'shall be governed by the laws of the State of New
York.' " Mastrobuono, 514 U.S. at 53. Mastrobuono dictates that general choice-of-law clauses
do not incorporate state rules which govern allocation of authority between arbitrators and courts.
Mastrobuono, 514 U.S. at 60. Courts that have interpreted Mastobuono have noted that the
"construction of an agreement to arbitrate is governed by the FAA unless the agreement
expressly provides that state law should govern." Dominium Austin Partners, L.L.C. v. Emerson,
248 F.3d 720, 729 n.9 (8th Cir. 2001) (citing UHC Management Co. v. Computer Sciences
Corp., 148 F.3d 992 (8th Cir. 1998)). See also Roadway Package System, Inc. v. Kayser, 257
F.3d 287 (3d Cir. 2001); Sovak v. Chugai Pharmaceutical Co., 280 F.3d 1266 (9th Cir. 2002);
Ferro Corp. v. Garrison Industries, Inc., 142 F.3d 926 (6th Cir. 1998).
The 2008 Preston case further clarified the Court's holding in Volt. As noted above,
Preston involved an attempt by one party to a contract to have a dispute over the validity of the
contract settled, pursuant to California statute, by an administrative agency instead of through
arbitration. Preston, 552 U.S. at 349. The contract in Preston contained an arbitration clause
mandating that " 'any dispute ... relating to ... the breach, validity, or legality' " of the contract
should be arbitrated in accordance with the AAA rules as well as a choice-of-law clause stating
that the " 'agreement shall be governed by the laws of the state of California.' " Preston, 552 U.S.
19at 361.
When one of the Preston parties demanded arbitration to settle the dispute, the other
petitioned the California labor commissioner asking that the contract be declared void pursuant
to the California Talent Agencies Act. Cal. Lab. Code §1700 et seq. (West 2003 & Supp. 2008);
Preston, 552 U.S. at 350. The California state courts concluded that the California Talent
Agencies Act vested "exclusive original jurisdiction" over the dispute with the Labor
Commissioner. Preston, 552 U.S. at 352. The party in Preston attempting to avoid arbitration
argued that the holding in Volt mandated affirmation of the California state courts.
The Court disagreed, noting:
"Ferrer's reliance on Volt is misplaced
for two discrete reasons. First, arbitration
was stayed in Volt to accommodate litigation
involving third parties who were strangers to
the arbitration agreement. Nothing in the
arbitration agreement addressed the order of
proceedings when pending litigation with third
parties presented the prospect of inconsistent
rulings. We thought it proper, in those
circumstances, to recognize state law as the
gap filler.
20
Here, in contrast, the arbitration clause
speaks to the matter in controversy; it states
that 'any dispute ... relating to ... the breach,
validity, or legality' of the contract should be
arbitrated in accordance with the American
Arbitration Association (AAA) rules. [Citation.]
Both parties are bound by the arbitration agreement;
the question of Preston's status as a talent agent
relates to the validity or legality of the contract;
there is no risk that related litigation will
yield conflicting rulings on common issues; and
there is no other procedural void for the choice-
of-law clause to fill.
Second, we are guided by our more recent
decision in Mastrobuono [citation]. Although
the contract in Volt provided for 'arbitration
in accordance with the Construction Industry
Arbitration Rules of the American Arbitration
Association,' [citation] (internal quotation
marks omitted), Volt never argued that incorpor-
21
ation of those rules trumped the choice-of-law
clause contained in the contract ***.
***
Preston and Ferrer's contract, as noted,
provides for arbitration in accordance with the
AAA rules. [Citation.] One of those rules
states that '[t]he arbitrator shall have the
power to determine the existence or validity of
a contract of which an arbitration clause forms
a part.' [Citation.] The incorporation of the
AAA rules *** weighs against inferring from the
choice-of-law clause an understanding shared by
Ferrer and Preston that their disputes would be
heard, in the first instance, by the Labor
Commissioner. Following the guide Mastrobuono
provides, the 'best way to harmonize' the parties'
adoption of the AAA rules and their selection of
California law is to read the latter to encompass
prescriptions governing the substantive rights and
obligations of the parties, but not the State's
22
'special rules limiting the authority of arbi-
trators.' [Citation.]" Preston, 552 U.S. at 361-63.
Just as in Preston, the contract in this matter contained a generic state choice-of-law
clause but also incorporated the AAA rules of arbitration. As such, we cannot find that the
parties explicitly intended, by the mere inclusion of the generic choice-of-law clause, that
disputes encompassed by the arbitration agreement be settled pursuant to the Arbitration Act. 710
ILCS 5/2(a) (West 2008).
CONCLUSION
In a nutshell, the plaintiffs agreed that "any controversy, dispute or claim between the
parties relating to this agreement shall be resolved by binding arbitration in accordance with the
rules of the American Arbitration Association." Certainly, the issue of whether or not the
agreement is void ab initio is a "controversy, dispute, or claim between the parties relating to
[the] agreement." The law is clear; the issue must be arbitrated.
For the foregoing reasons, the judgment of the circuit court of Peoria County is affirmed.
Affirmed.
JUSTICE WRIGHT, specially concurring:
Relying on Aste v Metropolitan Life Insurance Co., 312 Ill App. 3d 972 (2000) and
Kaplan v. Tabb Associates, Inc., 276 Ill. App. 3d 320 (1995), plaintiff contends that Illinois law
requires the court to first determine whether the entire contract at issue is void and unenforceable
before referring the matter to an arbitrator. Based only on the concessions of the plaintiff in this
23
case and the language of this specific agreement, now subject to our review, I specially concur.
However, I recognize that the outcome of this decision may be inconsistent with the first district
cases previously decided, but our decision is entirely consistent with the United States Supreme
Court’s holding in Preston v. Ferrer, 552 U.S. 346, 128 S. Ct. 978 (2008).
It is important to remember that plaintiff concedes that interstate commerce is involved in
this case and agrees the parties contemplated their contractual disputes would be resolved by an
arbitration process.1 In my view, these concessions are significant.
When the parties dispute whether an arbitration clause or separate arbitration agreement
was contemplated by the parties to become part of their agreement, then under Illinois law, the
court must first decide if the parties actually agreed to resolve disputes by means of arbitration.
Donaldson, Lufkin, & Jenrette Futures, Inc. v. Barr, 124 Ill. 2d 435, 443-45 (1988). Such is not
the case here. In this case, plaintiff concedes the arbitration clause was the subject of a meeting
1
These circumstances are distinguishable from those considered by this court in Peterson
v. Residential Alternatives of Illinois, Inc., 402 Ill. App. 3d 240 (2010). In Peterson, the primary
issue was whether the parties agreed to arbitration at all. The parties in that case signed two
separate agreements, which included an inartful attempt to create a separate arbitration
agreement. This court found that neither contract signed by the parties referred to the other
contract and therefore, after examining both agreements separately, we concluded an agreement
to arbitrate the nursing home health care contract was neither contemplated by nor agreed upon
by both parties.
24
of the minds. Instead, the issue before us is whether the arbitration clause and the contract,
which the parties drafted, now requires the court or the arbitrator to decide whether plaintiff’s
contention that the contract was void, based on State law, has merit.
The contract at the heart of this appeal contains explicit language agreeing that the
arbitration process would be controlled by the rules of the American Arbitration Association
(AAA). Significantly, when the rules of the AAA are incorporated into a contract, as they were
in this case, those same rules mandate that the parties to this contract “shall be deemed to have
made these rules [of the AAA] a part of their arbitration agreement.” American Arbitration
Association, Commercial Arbitration Rules, R-1. Thus, I find it very difficult to accept
plaintiff’s claim that the parties to this appeal agreed to arbitrate in accordance with Illinois law.
Further, the AAA rules, agreed to by plaintiff, grant the arbitrator “the power to
determine the existence or validity of a contract of which an arbitration clause forms a part.”
American Arbitration Association, Commercial Arbitration Rules, R-7(b). These AAA rules, not
State or Federal law, require the arbitrator to separately consider the arbitration clause from
other provisions of this contract. Also according to these rules, the arbitrator is given the
authority to determine whether the contract is void and if so, then determine the continued
validity of the arbitration clause. American Arbitration Association, Commercial Arbitration
Rules, R-7(b).
The contract in this case provides not only that the arbitration process would be
controlled by the AAA rules, but also that the proceedings would take place in Chicago.
25
Obviously, based upon the contractual language at issue, we could not require the parties to
travel to Peoria rather than Chicago for the arbitration hearing. Similarly, we cannot allow the
court to first examine whether the contract in this case is void when the rules of the AAA,
selected by the parties, require the arbitrator to first make this determination. In this appeal, we
do not have a contract which is silent regarding whether the arbitration process will be governed
by guidelines consistent with the Federal Arbitration Act (FAA) or will be governed by rules that
may differ from the FAA.
Consequently, I respectfully suggest that we need not engage in a lengthy discussion
explaining the relationship of the Illinois Arbitration Act to the FAA in order to resolve this
appeal. Although, I agree with the majority’s analysis of the case law as discussed, I write
separately to emphasize that the trial court, and now this court, have simply upheld the explicit
contractual choices incorporated by the parties to this contract which provide the blueprint for the
course of their dispute resolution. Here, as part of their contract, the parties specifically agreed
that all disputes would be resolved through arbitration and, in turn, also agreed their arbitration
proceedings would be controlled by the rules of the AAA.
For these reasons, I specially concur.
JUSTICE HOLDRIDGE, dissenting:
I disagree with the majority’s holding that Buckeye Check Cashing, Inc. v. Cardegna, 546
U.S. 440 (2006), and Preston v. Ferrer, 552 U.S. 346 (2008), prevent an Illinois court from
enforcing section 10-10 of the Illinois Business Brokers Act of 1995 (Brokers Act) (815 ILCS
26
307/10-5.10 et seq. (West 2008)). I, therefore, respectfully dissent. I would reverse the trial
court’s order staying the plaintiffs’ action for declaratory judgment and compelling arbitration. I
would remand this matter to the circuit court with directions to adjudicate whether Windlake is in
compliance with the Brokers Act and, if not, the court should order all relief mandated under that
statute.
It is well settled that an arbitration clause in an agreement entered into in contravention of
an Illinois statute requiring a party to register with the state prior to engaging in any licensed
activity does not divest Illinois courts of jurisdiction to hear claims that a party has violated the
licensing statute. Aste v. Metropolitan Life Insurance Co., 312 Ill. App. 3d 972 (2000); Kaplan
v. Tabb Associates, Inc., 276 Ill. App. 3d 320 (1995). The court in Aste, quoting section 181 of
the Restatement (Second) of Contracts, noted that " ‘[i]f a party is prohibited from doing an act
because of his failure to comply with a licensing, registration or similar requirement, a promise in
consideration of his doing that act or his promise to do it is unenforceable on grounds of public
policy if (a) the requirement has a regulatory purpose, and (b) the interest in the enforcement of
the promise is clearly outweighed by the public policy behind the requirement.’ " Aste, 312 Ill.
App. 3d at 980 (quoting Restatement (Second) of Contracts §181 (1981). Here, there is no
question that the Brokers Act has a regulatory purpose and a clear public policy purpose of
protecting Illinois citizens from unlicensed business brokers.
Moreover, the Kaplan court noted that not only the contract as a whole, but each of the
clauses, including the arbitration clause, is void as against public policy where a party has failed
27
to obtain a license required to protect the public from unlicensed practitioners. Kaplan, 276 Ill.
App. 3d at 325 ("the Agreement between the plaintiffs and the defendant, including the
arbitration clause, is void because the defendant filed to obtain a license to provide architectural
services"). In other words, not only the putative agreement as a whole, but each and every
provision of the agreement, including the arbitration clause, made in consideration of the promise
by a nonlicensed party to provide business broker services is void. Clearly, if a party lacks the
legal capacity to enter into a contract, it must also lack the legal capacity to enter into any of that
contract’s provisions. I would therefore find that the arbitration provision, upon which the
majority relies to find that this dispute must be arbitrated, is void and cannot divest the circuit
court of jurisdiction over suits brought under the Brokers Act.
Relying upon Buckeye Check Cashing, the majority finds that the arbitration clause
contained in the parties’ agreement mandates that the question of whether the defendant was in
compliance with the Brokers Act at the time it entered into the contract must be decided by an
arbitrator. I disagree with the majority and take issue with its application of the holding in
Buckeye Check Cashing to the facts in the instant matter. As the majority points out, in Buckeye
Check Cashing, the Court held that the validity of a contract as a whole should "be considered by
an arbitrator, not a court." Buckeye, 546 U.S. at 446. However, where the challenge is to the
validity of the arbitration clause, independent of a challenge to the validity of the contract as a
whole, it is appropriate for the court to decide the matter. Buckeye, 546 U.S. at 445-46.
28
What Buckeye Check Cashing does not address is what happens if the challenge is to both
the contract as a whole and the validity of the arbitration clause. Such is the matter herein.
Although the majority characterizes the plaintiffs’ complaint as seeking a declaration that the
contract as a whole is void ab initio, the plaintiffs actually sought a declaration that the defendant
had violated the Brokers Act and then sought all appropriate remedies under that statute. Under
the Brokers Act, a contract for business brokerage services entered into by a nonlicensed broker
is void, as is each provision of the agreement, including an agreement to arbitrate disputes under
the putative agreement. Kaplan, 276 Ill. App. 3d at 325. The plaintiffs’ challenge is not only to
the legality of the contract as a whole, but also the legality of each and every provision of the
agreement. In other words, what is at issue here is whether a party that cannot legally enter into a
business brokerage contract can nonetheless legally enter into an agreement to arbitrate any
disputes arising under that contract. I find nothing in law cited by the majority to support a
conclusion that an agreement to arbitrate contained within an illegal contract is any more
enforceable independently than the agreement itself. Both the entire agreement and each clause
contained therein are equally susceptible to a challenge. The arbitration clause, as part of the
agreement entered into in violation of the Brokers Act, is also independently in violation of the
Brokers Act and is, therefore, subject to the same challenge as the agreement as a whole.
Consistent with Buckeye Check Cashing, I would hold that the plaintiffs challenged the legality
of the arbitration clause as well as the contract as a whole, and I would find that the court is the
appropriate forum in which to bring a cause of action under the Brokers Act.
29
I would also find that Preston v. Ferrer is distinguishable from the instant matter in that
Preston presented a specific factual question as to whether a California statute covering talent
agents applied to the contract at issue. Preston, 552 U.S. at 352 ("The dispositive issue, then,
contrary to Ferrer’s suggestion, is not whether the FAA [Federal Arbitration Act] preempts the
TAA [Talent Agent Act] wholesale. [Citation.] *** Instead, the question is simply who decides
whether Preston acted as [a] personal manager or as [a] talent agent"). The Court held that such
a factual question was within the arbitrator’s ken. Preston, 552 U.S. at 353. Here, there is no
question that the defendant was acting as a business broker and that the Brokers Act therefore
applied.
In addition, there is nothing in the holdings of either Buckeye Check Cashing or Preston
that overrules our supreme court’s guidance in Jensen v. Quik International, 213 Ill. 2d 119, 127
(2004), wherein the court noted that where registration pursuant to statute is a statutory
prerequisite to entering into a valid agreement, the entire agreement, including arbitration
provision, is unenforceable. Jensen, 213 Ill. 2d at 127 ("Had the legislature intended that a
franchise agreement entered into in violation of sections 5 and 10 be unenforceable, it could have
easily so provided."). See Galasso v. KNS Cos., Inc., 364 Ill. App. 3d 124, 128 (2006) (citing
Jensen for the proposition that where a statute requires registration as a condition precedent to a
valid agreement and not merely as a basis for rescission of the agreement, the arbitration
provision contained in the agreement is likewise void). Here, unlike the Franchise Disclosure
Act of 1987 (815 ILCS 705/5 (West 2008) at issue in Jensen, the Brokers Act contains an
30
express provision that proper registration as a business broker is a condition precedent to a valid
business broker agreement (815 ILCS 307/10-60 (West 2008)). I would find that Jensen still
dictates the result in this matter and should guide our resolution of this matter.
Moreover, the instant matter is distinguishable from all other cases relied upon by the
majority in that, here, the contract at issue is fully executed. The defendant has been paid in full
for its services, and the plaintiffs raised no controversy, dispute or claim relating to the
agreement. The only issue raised in the instant litigation was whether the defendant was a
properly registered and licensed business broker under the Brokers Act. Based upon the
pleadings, there was no question of fact as to whether the defendant was acting as a business
broker. The only question was whether the defendant was properly registered as a business
broker. The answer to that question is either a simple "yes," in which case the litigation is at an
end and the defendant is allowed to keep the fee it received under the contract, or a simple "no,"
in which case the defendant must return the fees charged in violation of the Brokers Act and pay
the plaintiffs’ attorney fees in bringing this action under the Brokers Act.2
2
I am somewhat perplexed by the defendant’s insistence in prolonging the litigation in
this matter. The Brokers Act is very clear that strict compliance with the registration and
licensing requirements of section 10-10 is required in order to engage in the practice of business
brokering in this state. Either the defendant is in strict compliance with the Brokers Act or it is
not, and it should answer the question forthwith so that this matter may be concluded in a
judicious manner.
31
Because I would find that the matter of the defendant’s ability to render business broker
services in Illinois is not a matter within the ken of an arbitrator, I would reverse the judgment of
the circuit court of Peoria County compelling arbitration and I would remand this matter to the
circuit court with direction that the defendant be ordered to answer the complaint. Depending
upon the answer, the court should then enter an appropriate judgment forthwith.
32