FYI: Indiana Sup Ct Rules Silence and Inaction Not Enough for Enforceable Arbitration Agreement

The Indiana Supreme Court recently reversed the judgment of a trial court granting a credit union's motion to compel individual arbitration and finding an enforceable agreement to arbitrate between the parties.

 

In so ruling, the Indiana Supreme Court held that a consumer's silence and inaction did not amount to acceptance of the arbitration agreement.

 

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

 

When the consumer, who maintained at least two checking accounts with the credit union, registered for online banking for one of her accounts, she received by email an agreement permitting the credit union to modify the terms and conditions to its services and send any notice to the consumer via email. Under the terms of the notice, the consumer was deemed to have received any such notice three days after it was sent.

 

The credit union later sent to its customers a proposed modification to the agreement, the addendum. The terms of this addendum (1) permitted either party to require arbitration to resolve disputes without the other party's consent and (2) prohibited members from initiating or joining a class-action lawsuit. The addendum also specified, under a heading in bold and in all-capital letters, the member's "right to opt out" of the arbitration addendum if he or she so informed the credit union within 30 days of receiving notice. Otherwise, according to its terms, the addendum became binding on the member.

 

The consumer received the addendum by email and regular U.S. mail. The subject line of the email indicated only that a "New eStatement" was available "in Online Banking," and the body mentioned nothing about the addendum. But a link in the email would have directed the consumer to her five-page monthly account statement, the first page of which referenced the addendum in bold, all-capital letters and directed her to review the updated terms "at the end of [the] statement."

 

The document the consumer received by regular U.S. mail consisted of a two-page monthly account statement, the first page of which likewise noted the addendum in bold, all-capital letters and directed her to review the updated terms "included in this mailing." The consumer claimed to have seen neither version of the addendum, and she never notified the credit union of her preference to opt out.

 

The consumer later filed a putative class action complaint alleging breach of contract and other related claims. The credit union moved to compel individual arbitration, which the trial court granted.

 

On discretionary interlocutory appeal, the appellate court reversed, holding that the credit union failed to provide reasonable notice to the consumer by either email or regular mail. The credit union petitioned for transfer, which the Indiana Supreme Court granted, thus vacating the appellate court's opinion.

 

The credit union first argued on appeal that the appellate court unjustifiably adopted a heightened standard for what constitutes sufficient notice under a contract. The Indiana Supreme Court disagreed and held that the question was not whether a pure reasonableness standard always governs notice. Instead, a court will "defend the freedom of contract by enforcing parties' agreed terms," whether those terms call for notice by email, regular U.S. mail, or other means. See Care Grp. Heart Hosp., LLC v. Sawyer, 93 N.E.3d 745, 758 (Ind. 2018). Thus, insofar as the contracting parties agreed on what constitutes effective notice, their agreement controls. But to the extent an agreement fails to define notice, the court will apply a reasonableness standard as an exercise in contract interpretation.

 

Here, the Indiana Supreme Court held that the agreement did not define what constitutes "written notice," other than saying it is effective once properly mailed. Therefore, in analyzing whether the credit union complied with the agreement's terms of notice by mail, the Court applied an "objective theory" of contract interpretation. See Akin v. Simons, 180 N.E.3d 366, 377 (Ind. Ct. App. 2021). In other words, it became a question of reasonableness for the courts to decide as a matter of law. See Indiana Farm Bureau Ins. Co. v. Harleysville Ins. Co., 965 N.E.2d 62, 68 (Ind. Ct. App. 2012).

 

The consumer received two notices of the addendum in the account statements sent to her from the credit union—one by email and one by regular U.S. mail. The email notice contained an inconspicuous subject line, and the body of the email itself said nothing of the addendum. However, even if the email notice did not qualify as effective notice as defined in the agreement, the Indiana Supreme Court concluded that the notice sent to her by regular U.S. mail did constitute reasonable notice.

 

In addition to providing the consumer with a detailed list of account transactions (both debits and credits), the Court determined that a monthly account statement provides important contact information for member service, the account's beginning and ending balance, the total number of withdrawals, the amount of fees she incurred (including overdraft fees and returned-item fees), the total dividends paid to her (if any), her balance due on any outstanding loans, the annual percentage rate for those loans, and the payments she's made toward those loans. Additionally, it may help a customer discover unauthorized transactions that require further action. Thus, the Court concluded that it made sense for the credit union to have included its proposed modification to the agreement among this information.

 

Turning next to the question of acceptance, the Indiana Supreme Court observed that the credit union explicitly notified the consumer that the failure to opt out of the arbitration addendum within 30 days of receiving notice would bind her to the addendum.

 

However, the Court held that the "mere fact that an offeror states that silence will constitute acceptance does not deprive the offeree of his privilege to remain silent without accepting." Restatement (Second) of Contracts § 69 cmt. c. Instead, the credit union must have shown that the consumer "in remaining silent and inactive intend[ed] to accept the offer." See id. § 69(1)(b). Under the Restatement, the "case for acceptance is strongest" when the offeree's "reliance is definite and substantial" or when the offeree's "intent to accept is objectively manifested though not communicated to the offeror." Id. § 69 cmt. c.

 

Here, even assuming the consumer was aware of the offer to arbitrate, the Indiana Supreme Court found no evidence of her "definite and substantial" reliance on the arbitration addendum. Furthermore, the Court saw no objective manifestation of intent to accept through the consumer's continued use of her checking accounts.

 

First, nothing in the agreement or the disclosure suggested that silence and continued use of the accounts would result in acceptance of any future modification to those original contracts. Cf. Heiges v. JP Morgan Chase Bank, N.A., 521 F. Supp. 2d 641, 647 (N.D. Ohio 2007). Second, nothing in the credit union's offer to amend those original contracts conditioned continued use of the accounts on acceptance of the addendum.

 

Accordingly, the Indiana Supreme Court held that, although the credit union provided the consumer with reasonable notice of its offer to amend the agreement, the consumer's subsequent silence and inaction did not amount to acceptance of the addendum. Thus, with no enforceable agreement to arbitrate, the Court reversed the trial court and remanded for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: 10th Cir Rejects Warehouse Lenders' Attempt to Split Claims Under Auditor's Policy

In an action brought by two warehouse lenders, the U.S. Court of Appeals for the Tenth Circuit recently held that multiple negligent audits of the mortgage lender borrower were "interrelated" under an auditor's insurance policy and that the claim of one warehouse lender was "interrelated" with the claim of the other warehouse lender when they arose from the same audit.

 

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

 

Two warehouse lenders (creditors) loaned money to a mortgage lender (company), and the creditors' auditor audited the company's finances each year for three years. The auditor's annual reports failed to note that the company was committing fraud. The creditors sued the auditor, and the auditor's insurer defended the suit.

 

The insurance policy at issue would pay up to $1,000,000 per individual claim and up to $3,000,000 in the aggregate. Under the policy's terms, "interrelated claims" were considered one claim and the per-claim $1,000,000 limit applied regardless of the number of interrelated claims or claimants. The insurance policy defined "interrelated claims" as "all claims arising out of a single act or omission or arising out of interrelated acts or omissions in the rendering of professional services." Additionally, the policy described "interrelated acts or omissions" as "all acts or omissions in the rendering of professional services that are logically or causally connected by any common fact, circumstance, situation, transaction, event, advice or decision."

 

The trial court held that each negligently conducted audit report was not "interrelated" to each other, and that both creditors' claims on each audit in the same year were "interrelated." Both sides timely appealed.

 

The first question on appeal here was whether the audit reports were "interrelated acts" as defined under the insurance policy. In other words, the Tenth Circuit needed to determine whether the different audit reports were "logically or causally connected by any common fact, circumstance, situation, transaction, event, advice or decision." Furthermore, because of the use of the word "or", the Court reasoned that it could resolve this question by exclusively exploring what it means to be "logically connected."

 

The Tenth Circuit concluded that "logically connected" means "connected by an inevitable or predictable interrelation or sequence of events." Berry & Murphy, P.C. v. Carolina Cas. Ins. Co., 586 F.3d 803, 811–12 (10th Cir. 2009). To find a logical connection between each act, the Court looked at whether the acts inevitably or predictably flowed from each other. Id. at 811. And what determined whether the acts flowed from one another is whether each act shared "any common fact, circumstance, situation, transaction, event, advice or decision."

 

Within that framework, the Tenth Circuit held that the "relevant act or omission" here was the failure to identify the absence of security interests in each of the three audit reports. Moreover, the Court held that each audit report was logically related because the same common facts and circumstances tied the recurring negligent acts together. Specifically, each audit report "flow[ed] from the other" as a result of one common circumstance: the Auditor's negligence. Berry & Murphy, P.C., 586 F.3d at 811. The Court explained that the common facts and circumstances underlying the recurring negligence here made it "predictable" that the Auditor may make the same mistake—just as he did. Id.

 

Because the multiple audits here were logically connected by common facts and circumstances, the Tenth Circuit reversed the trial court's decision. All the audits should have been considered one "claim" under the policy, which means that the creditors could only have received up to $1,000,000 for the individual claim.

 

The Tenth Circuit also concluded that the trial court did not err when it decided that the claims from both creditors stemming from the same audit were interrelated because the policy clarified as much, irrespective of the number or type of claimants.

 

Specifically, the policy stated that "[t]he limits of liability shown in the Declarations and subject to the provisions of this Policy is the amount we will pay as damages and claim expenses regardless of the number of you, claims made or persons or entities making claims." Thus, the Court also noted that, even if multiple parties made separate claims of liability, the policy limited the amount among all parties by treating the separate claims as "interrelated claims" if they arose from the same act.

 

Accordingly, the Tenth Circuit reversed the trial court in part and held that each negligent audit was interrelated. However, the Court also affirmed the trial court in part and held that one creditor's claim arising from an audit was interrelated to the other creditor's claim arising from the same audit.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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