Judge Blocks B of A Use of Arbitration Clause
Seiberg, Jaret, American Banker
In a warning to the industry, a state judge in California has rejected Bank of America's bid to enforce a binding arbitration contract with a checking account holder.
Judge Patti S. Kitching of the state's second appellate district ruled that Bank of America forfeited its claim because it conducted pre-trial discovery and filed motions for more than a year before demanding arbitration.
"The bank waived its right to enforce the arbitration provision," Judge Kitching wrote Feb. 2 for an unanimous three-judge panel. "This is because the bank unreasonably delayed its demand for arbitration, engaged in litigation conduct inconsistent with intent to arbitrate, and prejudiced the plaintiffs by causing them to incur costs and attorney fees."
Banks, especially on the West Coast, are trying to reduce their legal costs by including binding arbitration agreements in contracts to open checking and savings accounts. Arbitration normally costs a fraction of the expense of a court battle because it requires fewer legal filings and results in an expedited decision.
But arbitration agreements are coming under increasing legal challenge, despite two recent Supreme Court decisions limiting the power of state courts to void them. For instance, a federal judge in Alabama recently limited the ability of banks to amend account contracts to include mandatory arbitration provisions. A coalition of banking groups is challenging that case before the federal appeals court in Atlanta.
Though Judge Kitching's decision is not binding on courts outside California, it provides further proof that judges do not automatically enforce arbitration agreements.
"The outcome is disappointing," said Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association. "But it provides a fairly clear guide for future conduct and that is important."
"The principle at work is that if a great deal of discovery has taken place already, the bank waives its right to arbitration," said Steven I. …