THE CITIZENS BANK v. ALAFABCO, INC., et al.

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52 OCTOBER TERM, 2002
Syllabus
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 peti-
tioner 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 agree-
ments. 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 insuffi-
cient 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 arbi-
tration provision enforceable under the FAA. By applying to a con-
tract “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 debt-
restructuring agreements were executed in Alabama by Alabama resi-
dents, 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, in-
cluding its inventory of goods assembled from out-of-state parts and raw
materials. Third, commercial lending has a broad impact on the na-
tional economy. The Alabama Supreme Court’s cramped view of Con-
gress’ 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.

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53 Cite as: 539 U. S. 52 (2003)
Per Curiam
Per Curiam.
The question presented is whether the parties’ debt-
restructuring agreement is “a contract evidencing a transac-
tion involving commerce” within the meaning of the Federal
Arbitration Act (FAA). 9 U. S. C. § 2. As we concluded in
Allied-Bruce Terminix Cos. 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.
I
Petitioner The Citizens Bank—an Alabama lending insti-
tution—seeks to compel arbitration of a financial dispute
with respondents Alafabco, Inc.—an Alabama fabrication and
construction company—and its officers. According to a com-
plaint filed by respondents in Alabama state court, the dis-
pute 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 rela-
tionship began to sour in 1998, when the bank allegedly en-
couraged 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 agree-
ment, Alafabco completed the Courtland project with funds
that would otherwise have been dedicated to repaying exist-
ing obligations to the bank. Alafabco in turn became delin-
quent 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

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54 CITIZENS BANK v. ALAFABCO, INC.
Per Curiam
restructured and redocumented. 872 So. 2d 798 (Ala. 2002).
The debt-restructuring arrangement included an arbitration
agreement covering “ ‘all disputes, claims, or controversies.’ ”
That agreement provided that the FAA “ ‘shall apply to [its]
construction, interpretation, and enforcement.’ ” Id., at 799.
Alafabco defaulted on its obligations under the renewal notes
and sought bankruptcy protection in federal court in Sep-
tember 1999.
In return for the dismissal of Alafabco’s bankruptcy peti-
tion, the bank agreed to renegotiate the outstanding loans in
a second debt-restructuring agreement. On December 10,
1999, the parties executed new loan documents encompassing
Alafabco’s entire outstanding debt, approximately $430,000,
which was secured by a mortgage on commercial real estate
owned by the individual respondents, by Alafabco’s accounts
receivable, inventory, supplies, fixtures, machinery, and
equipment, and by a mortgage on the house of one of the
individual respondents. Id., at 800. As part of the second
debt-restructuring agreement, the parties executed an arbi-
tration agreement functionally identical to that of May 3,
1999.
Within a year of the December 1999 debt restructuring,
Alafabco brought suit in the Circuit Court of Lawrence
County, Alabama, against the bank and its officers. Ala-
fabco alleged, among other causes of action, breach of con-
tract, fraud, breach of fiduciary duties, intentional infliction
of emotional distress, and interference with a contractual or
business relationship. Essentially, the suit alleged that Ala-
fabco detrimentally “ ‘incur[red] massive debt’ ” because the
bank had unlawfully reneged on its agreement to provide
capital sufficient to complete the Courtland project. Id., at
799. Invoking the arbitration agreements, the bank moved
to compel arbitration of the parties’ dispute. The Circuit
Court ordered respondents to submit to arbitration in ac-
cordance with the arbitration agreements.

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55 Cite as: 539 U. S. 52 (2003)
Per Curiam
The Supreme Court of Alabama reversed over Justice
See’s dissent. Applying a test it first adopted in Sisters of
the Visitation v. Cochran Plastering Co., 775 So. 2d 759
(2000), the court held that the debt-restructuring agree-
ments were the relevant transactions and proceeded to
determine whether those transactions, by themselves, had
a “substantial effect on interstate commerce.” 872 So. 2d,
at 801, 803. Because there was no showing “that any por-
tion of the restructured debt was actually attributable to
interstate transactions; that the funds comprising that debt
originated out-of-state; or that the restructured debt was in-
separable from any out-of-state projects,” id., at 805, the
court found an insufficient nexus with interstate commerce
to establish FAA coverage of the parties’ dispute.
Justice See in dissent explained why, in his view, the court
had erred by using the test formulated in Sisters of the Visi-
tation, in which the Supreme Court of Alabama read this
Court’s opinion in United States v. Lopez, 514 U. S. 549
(1995), to require that “a particular contract, in order to be
enforceable under the Federal Arbitration Act must, by it-
self, have a substantial effect on interstate commerce.” 872
So. 2d, at 808. Rejecting that stringent test and assessing
the evidence with a more generous view of the necessary
effect on interstate commerce, Justice See would have found
that the bank’s loans to Alafabco satisfied the FAA’s “involv-
ing commerce” requirement.
II
The FAA provides that a
“written provision in any maritime transaction or a con-
tract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising out
of such contract or transaction, or the refusal to perform
the whole or any part thereof, or an agreement in writ-
ing to submit to arbitration an existing controversy aris-
ing out of such a contract, transaction, or refusal, shall

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56 CITIZENS BANK v. ALAFABCO, INC.
Per Curiam
be valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation
of any contract.” 9 U. S. C. § 2 (emphasis added).
The statute further defines “commerce” to include “com-
merce among the several States.” § 1. Echoing Justice
See’s dissenting opinion, petitioner contends that the deci-
sion below gives inadequate breadth to the “involving com-
merce” language of the statute. We agree.
We have interpreted the term “involving commerce” in the
FAA as the functional equivalent of the more familiar term
“affecting commerce”—words of art that ordinarily signal
the broadest permissible exercise of Congress’ Commerce
Clause power. Allied-Bruce Terminix Cos., 513 U. S., at
273–274. Because the statute provides for “the enforcement
of arbitration agreements within the full reach of the Com-
merce Clause,” Perry v. Thomas, 482 U. S. 483, 490 (1987), it
is perfectly clear that the FAA encompasses a wider range
of transactions than those actually “in commerce”—that is,
“within the flow of interstate commerce,” Allied-Bruce Ter-
minix Cos., supra, at 273 (internal quotation marks, citation,
and emphasis omitted).
The Supreme Court of Alabama was therefore misguided
in its search for evidence that a “portion of the restructured
debt was actually attributable to interstate transactions” or
that the loans “originated out-of-state” or that “the restruc-
tured debt was inseparable from any out-of-state projects.”
872 So. 2d, at 805. Such evidence might be required if the
FAA were restricted to transactions actually “ ‘in com-
merce,’ ” Gulf Oil Corp. v. Copp Paving Co., 419 U. S. 186,
195–196 (1974), but, as we have explained, that is not the
limit of the FAA’s reach.
Nor is application of the FAA defeated because the in-
dividual debt-restructuring transactions, taken alone, did
not have a “substantial effect on interstate commerce.” 872
So. 2d, at 803. Congress’ Commerce Clause power “may
be exercised in individual cases without showing any

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specific effect upon interstate commerce” if in the aggregate
the economic activity in question would represent “a general
practice . . . subject to federal control.” Mandeville Island
Farms, Inc. v. American Crystal Sugar Co., 334 U. S. 219,
236 (1948). See also Perez v. United States, 402 U. S. 146,
154 (1971); Wickard v. Filburn, 317 U. S. 111, 127–128 (1942).
Only that general practice need bear on interstate commerce
in a substantial way. Maryland v. Wirtz, 392 U. S. 183, 196–
197, n. 27 (1968); NLRB v. Jones & Laughlin Steel Corp., 301
U. S. 1, 37–38 (1937).
This case is well within our previous pronouncements on
the extent of Congress’ Commerce Clause power. Although
the debt-restructuring agreements were executed in Ala-
bama by Alabama residents, they nonetheless satisfy the
FAA’s “involving commerce” test for at least three reasons.
First, Alafabco engaged in business throughout the south-
eastern United States using substantial loans from the bank
that were renegotiated and redocumented in the debt-
restructuring agreements. Indeed, the gravamen of Alafab-
co’s state-court suit was that it had incurred “ ‘massive
debt’ ” to the bank in order to keep its business afloat, and
the bank submitted affidavits of bank officers establishing
that its loans to Alafabco had been used in part to finance
large construction projects in North Carolina, Tennessee,
and Alabama.
Second, the restructured debt was secured by all of Ala-
fabco’s business assets, including its inventory of goods as-
sembled from out-of-state parts and raw materials. If the
Commerce Clause gives Congress the power to regulate local
business establishments purchasing substantial quantities of
goods that have moved in interstate commerce, Katzenbach
v. McClung, 379 U. S. 294, 304–305 (1964), it necessarily
reaches substantial commercial loan transactions secured by
such goods.
Third, were there any residual doubt about the magnitude
of the impact on interstate commerce caused by the particu-

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58 CITIZENS BANK v. ALAFABCO, INC.
Per Curiam
lar economic transactions in which the parties were engaged,
that doubt would dissipate upon consideration of the “gen-
eral practice” those transactions represent. Mandeville Is-
land Farms, supra, at 236. No elaborate explanation is
needed to make evident the broad impact of commercial lend-
ing on the national economy or Congress’ power to regulate
that activity pursuant to the Commerce Clause. Lewis v.
BT Investment Managers, Inc., 447 U. S. 27, 38–39 (1980)
(“[B]anking and related financial activities are of profound
local concern. . . . Nonetheless, it does not follow that these
same activities lack important interstate attributes”); Perez,
supra, at 154–155 (“Extortionate credit transactions, though
purely intrastate, may in the judgment of Congress affect
interstate commerce”).
The decision below therefore adheres to an improperly
cramped view of Congress’ Commerce Clause power. That
view, first announced by the Supreme Court of Alabama in
Sisters of the Visitation v. Cochran Plastering Co., 775
So. 2d 759 (2000), appears to rest on a misreading of our
decision in United States v. Lopez, 514 U. S. 549 (1995).
Lopez did not restrict the reach of the FAA or implicitly
overrule Allied-Bruce Terminix Cos.—indeed, we did not
discuss that case in Lopez. Nor did Lopez purport to an-
nounce a new rule governing Congress’ Commerce Clause
power over concededly economic activity such as the debt-
restructuring agreements before us now. 514 U. S., at 561.
To be sure, “the power to regulate commerce, though broad
indeed, has limits,” Maryland v. Wirtz, supra, at 196, but
nothing in our decision in Lopez suggests that those limits
are breached by applying the FAA to disputes arising out of
the commercial loan transactions in this case.
Accordingly, the petition for writ of certiorari is granted,
the judgment of the Supreme Court of Alabama is reversed,
and the case is remanded for further proceedings not incon-
sistent with this opinion.
It is so ordered.