Citizens Bank v. Alafabco, Inc.

PETITIONER: The Citizens Bank
RESPONDENT: Alafabco, Inc. et al.
LOCATION: Lawrence County Courthouse

DOCKET NO.: 02-1295
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: Supreme Court of Alabama

CITATION: 539 US 52 (2003)
DECIDED: Jun 02, 2003
GRANTED: Jun 02, 2003

Facts of the case

Citizens Bank (Citizens) and Alafabco Inc. (Alafabco) had multiple business dealings with each other spanning over a decade. In 1998, Alafabco bid on a construction job based on a contract it had with Citizens to finance the project. When Citizens did not finance the project, Alafabco used existing funds meant to repay the debts it owed to Citizens to fund the project and subsequently defaulted on its loan payments to Citizens. Citizens and Alafabco composed two different debt-restructuring agreements, both of which included arbitration clauses that stated that the Federal Arbitration Act (FAA) would apply. Alafabco sued Citizens in Alabama state court for breach of contract and claimed that it had incurred detrimental debt because of Citizens’ breach. Citizens invoked the arbitration clause, and the state court ordered the parties to submit to arbitration pursuant to their agreement. The Supreme Court of Alabama reversed and held that, because the debt-restructuring agreements did not substantially involve interstate commerce, the FAA did not apply to the parties’ disputes.

Question

Is a debt-restructuring agreement between two parties a transaction that substantially involves interstate commerce so that the Federal Arbitration Act may apply?