In granting a motion to compel arbitration of a loan dispute, a Virginia federal court rejected a claim for fraud in the inducement because the allegations applied to the entire contract rather than the arbitration provision specifically.

In Reel v. Anderson Financial Services, LLC, No. 5:07CV00080, 2008 WL 53222 (W.D. Va. Jan. 02, 2008), Reel obtained a $200 loan from Anderson Financial Services as part of an open-end credit plan. Later, Reel sued Anderson Financial Services for violations of the Truth in Lending Act and Virginia Consumer Protection Act, usury, and fraud in the inducement.

In response, Anderson Financial Services moved to compel arbitration based upon an arbitration agreement in the parties' loan contract. Reel opposed the motion, arguing Anderson Financial Services committed "fraud specific to the arbitration clause" by tricking them into signing the loan contract, failing to disclose that Reel would be waiving his right to a jury trial, and not furnishing a copy of the loan documents containing the arbitration agreement. Moreover, he argued the arbitration clause was unconscionable.

Granting Anderson Financial Services' motion to compel arbitration, the Court upheld the arbitration agreement, finding it was not fraudulently induced or unconscionable. Under Federal and Virginia law, claims of fraud in the inducement relating to the entire contract are for the arbitrator's determination whereas those specifically challenging the arbitration provision are for judicial determination. The Court found Reel's argument that his alleged illiteracy, combined with Anderson Financial Services' oral misrepresentation and failure to provide the four-page loan document, amounted to an attack on the entire contract rather than the arbitration provision.

The Court also concluded that the arbitration agreement was not unconscionable. Instead, the Court found the arbitration agreement was procedurally fair, as "it allows for an unbiased decision by a neutral decision maker." Moreover, the arbitration agreement allows Reel "to select the arbitrator from multiple recognized rosters of neutrals" and "requires the neutral to be an experienced member of the Bar who is presumably familiar with the applicable state law." Finally, the Court found "the arbitration provision meets or exceeds minimum standards of procedural fairness." Consequently, the Court determined the arbitration provision was valid and enforceable.