Today's Trends in Credit Regulation

Interstate Commerce? It Doesn't Take Much
By Thomas B. Hudson

Plaintiffs' lawyers really, really hate it when they learn that their clients' transaction documents include mandatory arbitration agreements. That's because most arbitration agreements prohibit class arbitration, removing a great deal of the leverage that a lawyer has when threatening a dealer with a lawsuit. Also, it is often the case that arbitration proceedings are quicker and less expensive than lawsuits, making it more difficult for the lawyer to make money on a case.

So, a lawyer's first maneuver after discovering that his client has signed an arbitration agreement is to argue that the arbitration agreement should not be enforced. A recent case illustrates such an argument. Here's what happened.

Kentucky residents Jerry Tracy Hurt and Jerry Dale Hurt bought a car from Johnson Nissan in Kentucky. The Hurts later sued to have the contract voided, claiming that Johnson Nissan falsified their credit applications.

Johnson Nissan moved to compel arbitration under the arbitration clause in the contract. The trial court denied the motion, finding the arbitration clause unenforceable. The trial court found that the clause did not comply with the Kentucky Uniform Arbitration Act because it did not require arbitration in Kentucky and fell outside the purview of the Federal Arbitration Act because the transaction did not involve interstate commerce. The Hurts appealed to the Court of Appeals of Kentucky.

The appellate court reversed and remanded with directions to enter an order compelling arbitration. The Kentucky Supreme Court agreed that the arbitration clause was unenforceable under the KUAA, but concluded that the arbitration clause was enforceable under the FAA, which applies to transactions "involving commerce." The appellate court noted that the FAA encompasses a wider range of transactions than those actually "in commerce."

The Hurts argued that the sale of their vehicle was a transaction between a Kentucky resident and a Kentucky business concerning a vehicle located in Kentucky, and that it had nothing to do with interstate commerce. The Hurts, however, didn't understand how tenuous the connection to interstate commerce can be and still support the application of the FAA.

The appellate court found a sufficient "nexus" (a $10 lawyer word that means "connection") with interstate commerce so as to bring the transaction under the purview of the FAA. The appellate court made this determination based on the fact that, prior to the sale of the car to the Hurts, the car had been transported between various states, including being sold at auction in Tennessee. The appellate court also noted that the Hurts filled out the credit application with an out-of-state credit application processing entity and financed the car with an out-of-state financial institution.

Because the transaction involved commerce, the appellate court concluded that the FAA applied and the arbitration clause was enforceable under the FAA. In coming to this conclusion, the Kentucky high court aligned itself with a number of other courts that have addressed the issue.

No doubt lawyers will keep trying the "no interstate commerce argument" until they learn that the slimmest connection with other states is sufficient to support the application of the FAA.

Nissan v. Hurt, 2013 Ky. App. Unpub. LEXIS 817 (Ky. App. October 11, 2013).

Thomas B. Hudson is a partner in the Maryland office of Hudson Cook, LLP. He can be reached at 410-865-5411 or by email at

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