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4th Cir. Holds Arbitration Provision Enforceable Despite Change in Other Terms

The U.S. Court of Appeals for the Fourth Circuit recently held that an arbitration provision was enforceable under the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., and under Maryland law, even though the arbitration provision appeared in an amended finance agreement that was not signed by the finance company, and even though additional terms in the amended finance agreement were later modified.

A copy of the opinion in Galloway v. Santander Consumer USA, Inc. is available at:  Link to Opinion.

The plaintiff was the obligor on a retail installment sales contract (RISC) she obtained to finance the purchase of her vehicle.   The RISC listed the total amount financed as $22,916.28, requiring the plaintiff to make 72 payments of $487.46 monthly. The RISC also included a modification provision stating that any change to the contract must be in writing and signed by the finance company.

The RISC was sold and assigned to a finance company. The plaintiff subsequently requested a reduction in the amount of her monthly loan payment.  The finance company allegedly told her it would consider whether to approve her request and notify her in writing.

The finance company sent the plaintiff an amended agreement for her to sign and return for further review, approval, and consideration of her reduction request. The terms of the amended agreement reduced the monthly payment to $365.57 and included an arbitration provision. The plaintiff signed and sent the amended agreement to the finance company on Nov. 12, 2008.

The monthly payments were eventually lowered to $366.43 — 86 cents more than the amount contemplated in the amended agreement. The plaintiff began making payments of that amount and did so for several years.  In December 2011, the finance company sold and assigned the RISC to a second finance company, the defendant in this case.

The plaintiff eventually fell behind on her payments and the defendant repossessed the vehicle. The plaintiff then brought this action in state court, alleging that the defendant failed to provide required notices before selling the vehicle. The plaintiff sought to bring suit on behalf of herself and a class of all persons similarly situated.

The defendant removed the case to federal court and filed a motion to compel arbitration and stay federal district court proceedings under the Federal Arbitration Act, arguing that the plaintiff agreed to arbitrate any disputes concerning her loan.

The district court concluded that, as a matter of law, the plaintiff had agreed to arbitration and that the agreement to arbitrate was enforceable under the FAA, even though the RISC required that any change to the contract must be in writing and signed by the finance company, and the finance company did not sign the amended agreement and the payment amounts actually made were different from what the amended agreement required.

The district court reasoned that the first finance company’s sending of the amended agreement to the plaintiff was a mere invitation for the plaintiff to make an offer, because the company retained the right at that time to reject the plaintiff’s refinancing application, even if she signed the agreement.  The district court concluded that the plaintiff’s returning a copy of the executed agreement constituted an offer to enter into the agreement and that the finance company accepted that offer by reducing her monthly payments albeit in a different amount.

The district court also found that the finance company’s proposal to reduce the payments to $366.43 constituted a counteroffer to make a minor modification to the dollar amounts in the amended agreement, which the plaintiff accepted by making payments in the requested amount for several years without objection.

The district court initially granted the defendant’s motion to compel arbitration and stayed the case, but then on reconsideration dismissed the case as to allow the plaintiff to pursue an immediate appeal.

As you may recall, application of the FAA requires demonstration of four elements: (1) the existence of a dispute between the parties; (2) a written agreement that includes an arbitration provision which purports to cover the dispute; (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce; and (4) the failure, neglect or refusal of the defendant to arbitrate the dispute.

Under Maryland contract law, there must be mutual assent between the parties in order to form a contract. A contract is formed when an unrevoked offer made by one person is accepted by another. An offer is a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. Acceptance may be manifested by actions as well as words.

Only the second element in the application of the FAA was at issue in this case. The plaintiff alleged that the district court erred in concluding the arbitration provision was a term of any enforceable contract and it erred in ruling the acceptance of that provision satisfied the FAA’s writing requirement.

The Fourth Circuit first looked at whether the plaintiff was entitled to a jury trial regarding whether she and the financing company entered into a binding contract which included the arbitration agreement.

The Fourth Circuit found that the sending of the amended agreement by the finance company to the plaintiff was a mere invitation for the plaintiff to make an offer. Thus, the execution of the amended agreement and sending a copy of the signed document by the plaintiff to the finance company was an offer to the finance company to enter into the agreement.

The plaintiff argued that the finance company’s actions were not an acceptance of her offer because, under Maryland law, any variation from the terms of the offer is considered as a counteroffer. Thus, according to the plaintiff, the new monthly payment price — 86 cents more than shown in the amended agreement — was a counteroffer.  However, the Fourth Circuit followed the district court’s holding that even if the actions were considered a counteroffer, the plaintiff accepted such terms by making payments of the slightly increased amount.

The plaintiff also argued that under Maryland law, the parties could not validly modify the RISC without setting out all of the new terms together in a written document, and signing the document. However, the Fourth Circuit held there was no term in the amended agreement that indicated the finance company’s signature was necessary to bind the parties to the contract.

The Court noted that the only contractual language the plaintiff cited as the basis for her position that a written agreement signed by both parties was necessary to effectively modify the RISC was the language in the original RISC itself stating that any future amendment would need to be by a signed writing. However, the Fourth Circuit held that, under Maryland law, contractual limitations on future modifications are not effective to prevent parties from entering into new agreements orally or by performance; rather, they only provide context for interpreting subsequent conduct.

Here, the Fourth Circuit found, the parties’ conduct left no doubt that they intended to modify the terms of the RISC, even in the absence of a signed writing memorializing all of the new terms to which they agreed.

Thus, the Fourth Circuit held that the district court properly concluded that the arbitration agreement was a term of the contract that the parties entered into.

The Fourth Circuit then looked to the plaintiff’s argument that any arbitration agreement the parties entered into by their conduct was not enforceable under the FAA.  Specifically, the Court noted, the question was whether the parties’ non-written modification of a separate term of the amended agreement rendered the arbitration agreement unenforceable under the FAA.

Following similar rulings in other federal courts of appeal, the Fourth Circuit held that the FAA’s written arbitration agreement requirement is met by an actual document, but need not include any written assent to the obligations.

The Fourth Circuit held that, because the plaintiff assented to be bound by the amended agreement when she signed it and made payments, and because the arbitration provision in the amended agreement was in writing, it did not matter that she also assented to other modified terms as to the amount of the monthly payment that may not have been in writing.

Thus, the Fourth Circuit found that the district court was correct to enforce the arbitration agreement, and affirmed the district court’s order dismissing the plaintiff’s action.

One judge dissented on the grounds that the parties disputed what was agreed to and whether it was memorialized by a writing. Therefore, the dissenting judge noted, the plaintiff had shown there was a material fact in dispute and was entitled to have a jury decide the dispute.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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