Friday, April 21, 2023

FYI: Indiana Sup Ct Reverses Order Compelling Arbitration in "Overdraft Fee" Class Action

The Supreme Court of Indiana recently reversed and remanded a trial court's order compelling arbitration of two bank customers' putative class action complaint.

 

In so ruling, the Indiana Supreme Court held that the account agreements change-of-terms clause did not allow the defendant bank to add an addendum compelling arbitration and restricting class actions to the terms and conditions of the customer's account agreement.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2019, the Plaintiffs were assessed a $37 overdraft fee to their checking account at the defendant bank (Bank). The Plaintiffs disputed the validity of the overdraft fee. At issue was the language of the terms of the account agreement. Specifically, the Plaintiffs account agreement ("account agreement") stated:

 

(10) Amendments and Termination. We may change any term of this agreement. Rules governing changes in interest rates are provided separately in the Truth-in-Savings disclosure or in another document. For other changes, we will give you reasonable notice in writing or by any other method permitted by law. . .. Reasonable notice depends on the circumstances . . .. If we have notified you of a change in any term of your account and you continue to have your account after the effective date of the change, you have agreed to the new term(s).

 

The account agreement did not mention arbitration, class actions, or resolution.

 

In 2020, prior to the onset of litigation, the Bank provided the Plaintiffs with a monthly statement that included an addendum to the account agreement providing that claims against the Bank were subject to arbitration and could be brought only in a customer's individual capacity. The addendum noted that it would become effective within ten days if the Plaintiffs retained their account with the Bank.

 

The Plaintiffs kept their account open with the bank and proceeded with filing a putative class action complaint against the Bank alleging improper overdraft fees. The Bank filed a motion to compel arbitration based on the addendum. The trial court granted the Bank's motion and dismissed the Plaintiffs' complaint.

 

The Plaintiffs appealed, and the Indiana Court of Appeals reversed and remanded for further proceedings. Decker v. Star Fin. Grp., Inc., 187 N.E.3d 937 (Ind. Ct. App. 2022). The Bank then sought transfer, which the Supreme Court of Indiana granted. 194 N.E.3d 594 (Ind. 2022).

 

On appeal before the Supreme Court of Indiana, the Plaintiff raised three arguments. First, they argued that the Bank buried the notice of the addendum at the end of the monthly statement and did not provide reasonable notice under the contract.  Second, the Plaintiffs argued that the account agreement's change of terms clause did not allow the Bank to add the addendum; Third, the Plaintiffs continued use of their checking account did not manifest their assent to the addendum.

 

In Indiana, a party cannot be required to submit to arbitration unless it has agreed to do so. MPACT Constr. Grp., LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 905 (Ind. 2004). The Indiana Supreme Court reviews questions of contract interpretation de novo.

 

The Indiana Supreme Court reached its decision by exclusively analyzing the second issue raised by the Plaintiff.  In the Plaintiffs account agreement, Section 10 stated that the Bank could change "any term" of the account agreement. The Supreme Court noted the importance of the use of "any term" and held that this alone limited the Bank to modifying the terms that existed in the original account agreement.

 

As the original agreement did not contain a general dispute-resolution provision, a specific arbitration, or a no-class-action provision, the Court held that these provisions were not "any term" that the Bank could effectively change through an addendum. As a result, the Indiana Supreme Court ruled that the trial court ultimately erred by relying on the account agreement and compelling arbitration because the addendum was not a valid amendment to the account agreement.

 

The Indiana Supreme Court further noted that the California Court of Appeals ruled in similar fashion and interpreted the language of an account agreement against the drafter of the agreement, the bank, when ruling the parties did not intend that the change of terms provision should permit the bank to add new contract terms that differ in kind from the terms and conditions included in the original agreement. Badie v. Bank of America 79 Cal. Rptr. 2d 273, 277, 289 (Ct. App. 1998).

 

Similar to the ruling in Badie, the Supreme Court of Indiana noted that their opinion hinge on what the parties intended on by using the words "any term." Because the agreement did not define "any" it was given its ordinary meaning and using "any" means that the agreement did not allow the Bank to add new terms that differed in kind from the terms included in the original account agreement. Section 10 as written only allowed the Bank to change the terms existing in the original account agreement not add new ones. Because the original account agreement did not contain any reference to arbitration or class action provisions, the Bank could not add these provisions by amendment. Therefore, the addendum was not a valid amendment to the account agreement.

 

Accordingly, the trial court's judgment was reversed and the case remanded.

 

Concurring Opinion

 

Notably, a justice separately concurred that the Plaintiffs were not bound by the arbitration addendum but for different reasons.

 

In support of this minority opinion, the concurring justice noted that section 2 of the original account agreement acknowledged that additional terms may form part of the contract and this section combined with section 10's reference to customers continued usage of the account after the effective date of the change meant the customer assented to the new terms of the addendum.

However, when applying this rationale to the Plaintiffs' particular situation the concurring justice noted that the Plaintiffs did not assent to the addendum by failing to close their accounts within ten (10) days because Plaintiffs' actions did not constitute definite and substantial reliance on the addendum.

 

Furthermore, the mere receipt of unsolicited offer did not impair the Plaintiffs' freedom of action or inaction because the original account agreement required Plaintiffs to review the addendum within 30 days while the arbitration addendum required the Plaintiffs to close their checking account within ten (10) days. Due to this conflict the concurring justice did not believe the Plaintiffs had a reasonable opportunity to reject the offer.

 

In conclusion, the concurring justice agreed with majority of the Indiana Supreme Court that the Plaintiffs were not bound by the arbitration addendum but not because the agreement prohibits the Bank from adding new terms but, rather, because the Plaintiffs failure to close the account within ten days did not constitute assent to the addendum.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, April 19, 2023

FYI: DC Cir Offers Tips on Dealing With "Fail Safe" Classes

The U.S. Court of Appeals for the District of Columbia Circuit recently reversed and remanded a trial court's order denying class certification, finding that the trial court improperly bypassed Fed. R. Civ. Pro. Rule 23's prerequisites for class certification and based its denial of class certification entirely on the putative class's "fail-safe" character.

 

In so ruling, the DC Circuit noted that any "fail-safe" concerns a trial court can be addressed under Rule 23's specified requirements when making class certification decisions, and provided some examples in this regard. 

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiffs, a group of former employees of a hotel chain, sought class certification to pursue various claims against the hotel chain's retirement plan for what they alleged were unlawfully denied vested retirement benefits.

 

The trial court ultimately denied certification on the ground that the former employees had proposed an "impermissibly 'fail-safe'" class—that is, a class definition for which membership can only be ascertained through "a determination of the merits of the case." The former employees timely appealed.

 

Rule 23(a) of the Federal Rules of Civil Procedure sets out the prerequisites for class certification. FED. R. CIV. P. 23(a). They are (1) numerosity, meaning that the "class is so numerous that joinder of all members is impracticable[,]" (2) commonality in that the "questions of law or fact" at issue in the case are "common to the class[,]" (3) typicality, which requires that the "claims or defenses of the representative parties [be] typical of the claims or defenses of the class[,]" and (4) adequacy in that the named representative parties "will fairly and adequately protect the interests of the class[.]" FED. R. CIV. P. 23(a).

 

After the Rule 23(a) requirements for certification are met, putative class members must show that their action is maintainable under one of the class-action types identified in Rule 23(b). And Rule 23 expressly directs that the definition of a class be determined and that its members be identified or identifiable early in the litigation, not at its end. See FED. R. CIV. P. 23(c)(1)(A).

 

The DC Circuit began by noting that courts have identified two main problems with certifying a so-called "fail-safe" class, the membership of which depends on the merits. First, if membership in a class depends on a final resolution of the merits, it is administratively difficult to determine class membership early on. See Jamie S. v. Milwaukee Pub. Schs., 668 F.3d 481, 492–497 (7th Cir. 2012). Second, if the only members of a fail-safe class are those who have viable claims on the merits, then class members either win or, by virtue of losing, are defined out of the class, escaping the bars of res judicata and collateral estoppel. See Young v. Nationwide Mut. Ins. Co., 693 F.3d 532, 538 (6th Cir. 2012).

 

By way of illustration, the DC Circuit noted that, for a class definition that encompasses "all those whom Company X defrauded," the "defrauded" addendum makes the definition circular. That is, whether or not certain actions constitute fraud, a tortious activity for which Company X would be subject to liability, is just what the litigation is meant to find out. As for the res judicata effect, if a defendant is found not to have defrauded anyone, then there would be zero class members.

 

However, the DC Circuit also concluded that any "fail-safe" concerns a court has would be assuaged by following Rule 23's specified requirements when making class certification decisions.

 

Specifically, the putative class prosecuting the action must be too numerous for individualized litigation to be practicable. FED. R. CIV. P. 23(a)(1). That numerosity must exist throughout the litigation. Yet a class that could be defined to have zero members if the plaintiffs lose is not numerous at all.

 

Similarly, the Court concluded that a circular class definition could reveal the lack of a genuine common issue of law or fact. See FED. R. CIV. P. 23(a)(2). Typicality too would be difficult to establish if the named plaintiffs might not be members of the class come final judgment. See FED. R. CIV. P. 23(a)(3); see also Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 626, n.20 (1997).

 

Furthermore, a class action would fail to be a superior device for resolving a dispute if the class would collapse should the plaintiffs lose on the merits. See FED. R. CIV. P. 23(b)(3). Finally, even more fatal to an indeterminate class definition can be the requirement in Rule 23(c) that the trial court ensure up front the "binding effect of a class judgment on members[.]" FED. R. CIV. P. 23(c)(2)(B)(vii).4

 

In summary, the DC Circuit found that the textual requirements of Rule 23 are fully capable of guarding against unwise uses of the class action mechanism, so the Court rejected a rule against "fail-safe" classes as a freestanding bar to class certification ungrounded in Rule 23's prescribed criteria. Instead, trial courts should rely on the carefully calibrated requirements in Rule 23 to guide their class certification decisions and the authority the Rule gives them to deal with curable misarticulations of a proposed class definition.

 

Accordingly, because the trial court based its denial of class certification entirely on the class's "fail-safe" character, the DC Circuit reversed and remanded for further proceedings consistent with this opinion.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Sunday, April 16, 2023

FYI: 3rd Cir Holds TILA Does Not Require Breakdown of Annual Credit Card Fee

The U.S. Court of Appeals for the Third Circuit recently affirmed the dismissal of a consumer's claims under the federal Truth in Lending Act (TILA), 15 U.S.C. 1601, and its implementing regulation, Regulation Z (12 C.F.R. § 1026).

 

In so ruling, the Third Circuit held that TILA does not require disclosure of each individual component of the total annual fee in a renewal notice for a credit card.

 

A copy of the opinion is available at:  Link to Opinion

 

A consumer's credit card member agreement entered into with a bank disclosed an "Annual Membership Fee" to be added to his billing statement and that the consumer may request an additional card for an authorized user. A "Rates and Fees Table" disclosed the annual membership fee as $450 plus $75 for each additional card. The consumer included one additional user.

 

The consumer alleged that his December 2019 billing statement included a renewal notice, stating that the consumer's annual $525 membership fee would be billed on 02/01/2020, how the fee would be charged, and how the consumer could avoid it. 

 

However, the notice purportedly did not specify the breakdown: $450 for the primary cardholder and $75 for the additional user. The fees appeared as separate items on the consumer's February 2020 billing statement: a $450 charge and another for $75. The consumer paid $525 but claimed that had he been aware he could retain his credit card for $450, he would have paid only that amount.

 

The consumer filed a putative class action, alleging that the bank's failure to itemize each component of the renewal fee in the December 2019 renewal notice violated TILA and Regulation Z. The trial court granted the bank's motion to dismiss, and the consumer timely appealed.

 

The Third Circuit held that the consumer had standing, but also determined that he failed to allege that the bank's renewal notice violated TILA or Regulation Z.

 

Under TILA and Regulation Z, a renewal notice must contain "clear and conspicuous disclosure[s]" of the following: (1) "the date by which, the month by which, or the billing period at the close of which, the account will expire if not renewed"; (2) "[a]ny annual fee, other periodic fee, or membership fee imposed for the issuance or availability of a credit card, including any account maintenance fee or other charge imposed based on activity or inactivity for the account during the billing cycle"; and (3) "the method by which the consumer may terminate continued credit availability under the account." 15 U.S.C. §1637(d)(1). Regulation Z further provides that a renewal notice must "reflect the terms actually in effect at the time of renewal." 12 C.F.R. § 1026, Supp. I, Part 1, cmt. 9(e), ¶ 3.

 

The Third Circuit found that there was no dispute that the bank's notice provided the date on which the account would close if not renewed and the method for canceling the consumer's account. Moreover, the notice disclosed the terms actually in effect at the time of renewal because, as stated in the consumer's cardholder agreement, the consumer was required to pay an annual fee of $525 for the primary card and the additional card for an authorized user. The Court therefore concluded that the notice clearly and conspicuously disclosed the "annual fee . . . imposed for the issuance or availability of a credit card." 15 U.S.C. § 1637(c)(1)(A)(ii)(I); 12 C.F.R. § 1026.60(b)(2)(i).

 

Additionally, the Third Circuit determined that, while there is an itemization requirement in the statutes and regulations governing periodic disclosures, the same requirement is not included in the statutes and regulations applicable to renewal notices. See 12 C.F.R. § 1026.7(b)(6)(iii). Moreover, the Court held that renewal notices are not subject to the same disclosure requirements as solicitations and applications, which are provided to consumers before the parties have any relationship. At account renewal, TILA and Regulation Z require only that a creditor disclose terms "that would apply if the account were renewed." 15 U.S.C. § 1637(d)(1)(B); 12 C.F.R. § 1026.9(e)(i); see also 12 C.F.R. § 1026, Supp. I, Part 1, cmt. 9(e), ¶ 3.    

                                                                                                                                                                                                                                             

Accordingly, the Third Circuit held that TILA did not require the bank to itemize in the renewal notice the fees to be paid to keep the consumer's account open. Thus, the Court affirmed the trial court's dismissal of the consumer's complaint.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

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