## Facts

- Citizens Bank, an Alabama lender, had a long-running lending relationship with Alafabco, an Alabama fabrication and construction company.
- In 1998, Alafabco bid on a construction project expecting financing from Citizens; when financing was not provided, Alafabco used funds intended for loan repayment to finance the project and later defaulted.
- The parties entered into two debt-restructuring agreements to address Alafabco’s defaults.
- Each restructuring agreement included an arbitration clause and stated that the Federal Arbitration Act (FAA) would apply.
- Alafabco sued Citizens in Alabama state court, alleging the bank unlawfully reneged on an agreement to provide sufficient capital for a specific project, causing substantial debt.
- Citizens moved to compel arbitration under the FAA.

## Issues

1. Whether the debt-restructuring agreements were “contract[s] evidencing a transaction involving commerce” under FAA § 2, requiring enforcement of the arbitration provisions.

## Decision

- The U.S. Supreme Court reversed the Alabama Supreme Court (per curiam) and remanded.
- The Court held the agreements had a sufficient connection to interstate commerce for FAA coverage, making the arbitration clauses enforceable.
- The Court rejected the state court’s requirement that the particular transaction itself show a substantial effect on interstate commerce as too restrictive.

## Legal Principles

- FAA § 2 applies to contracts “evidencing a transaction involving commerce,” reaching the full scope of Congress’s Commerce Clause authority.
- “Involving commerce” is read broadly as the functional equivalent of “affecting commerce,” and is not limited to transactions that are themselves interstate.
- FAA coverage may be shown by the aggregate interstate connections of commercial activity, including:
  - financing tied to multi-state business operations,
  - security interests in business assets incorporating out-of-state parts and raw materials, and
  - the national economic significance of commercial lending.
- Limits discussed in Commerce Clause cases do not bar application of the FAA to disputes arising from ordinary commercial loan and restructuring transactions with sufficient interstate connections.

## Conclusion

The Court held that the FAA required enforcement of the arbitration provisions because the debt-restructuring transactions “involved commerce” within the broad reach of the Commerce Clause, and it reversed the state court’s narrower approach to FAA coverage.


Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003)