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6th Cir. Holds Arbitration and Other Amendments to Deposit Agreement Failed for Lack of Mutual Assent

bankingThe U.S. Court of Appeals for the Sixth Circuit recently held that a bank services agreement and its subsequent amendments were invalid to the extent that they materially changed the terms of the original agreement.

In so ruling, the Sixth Circuit noted that the defendant bank gave the plaintiffs no choice other than to agree to the new terms or to close their high-yield savings accounts subject to the bank services agreement (“BSA”), and therefore that the parties did not mutually assent to the amendments.

The Court also concluded that the bank did not act reasonably when it added the arbitration provision years after the plaintiffs’ accounts were established, thus violating the implied covenant of good faith and fair dealing.

A copy of the opinion in Sevier Cnty. Schs. Fed. Credit Union v. Branch Banking & Trust Co. is available at: Link to Opinion.

In 1989, the plaintiffs opened money market investment accounts (“MMIA”) with a bank. The bank guaranteed that the MMIAs’ annual rate of interest would “never fall below 6.5%.”

The original contract did not limit an account holder’s right to enforce the agreement in court but stated: “Changes in the terms of this agreement may be made by the financial institution from time to time and shall become effective upon the earlier of (a) the expiration of a thirty-day period of posting of such changes in the financial institution, or (b) the making or delivery of notice thereof to the depositor by the notice in the depositor’s monthly statement for one month.”

In 1997, the bank merged with another bank, and then in 2001, merged with the defendant bank, which sent a BSA with an arbitration provision to each account holder. A 2004 BSA amendment added a class action waiver.

A 2017 amendment made more changes to the BSA, including a more extensive arbitration provision and a statement that continued use of the account after receiving notice constituted acceptance of the changes. The plaintiffs maintained their accounts. In 2018, the plaintiffs were notified that the annual percentage rate applicable to their accounts would drop from 6.5% to 1.05%.

In March 2019, the plaintiffs filed a putative class action against the defendant bank for breach of contract due to its actions in lowering the guaranteed interest rate. The defendant bank filed a motion to dismiss and to compel arbitration, which the trial court granted. The plaintiffs timely appealed.

The Sixth Circuit reviews de novo both the existence and validity of an agreement to arbitrate. Walker v. Ryan’s Family Steak Houses, Inc., 400 F.3d 370, 376 (6th Cir. 2005). Such review is conducted pursuant to “ordinary state-law principles that govern the formation of contracts.” Glazer v. Lehman Bros., Inc., 394 F.3d 444, 450 (6th Cir. 2005).

Here, the relevant law was Tennessee state law. Williams v. Smith, 465 S.W. 3d 150, 153 (Tenn. Ct. App. 2014). Despite “a national policy favoring arbitration,” Southland Corp. v. Keating, 465 U.S. 1, 10 (1984), an arbitration agreement will not be enforced if the parties never agreed to arbitrate in the first place. Capps v. Adams Wholesale Co., Inc., 2015 WL 2445970, at *3 (Tenn. Ct. App. 2015).

In Tennessee, two essential elements in the formation of a valid contract are (1) consideration and (2) mutual assent. Staubach Retail Servs.-Southeast, LLC v. H.G. Hill Realty Co., 160 S.W.3d 521, 524 (Tenn. 2005). The plaintiffs argued that both consideration and mutual assent were missing regarding the arbitration provision.

The Sixth Circuit rejected the plaintiffs’ argument that consideration was lacking, noting that both state and federal courts have consistently found that consideration exists so long as the arbitration agreement binds both parties. Pyburn v. Bill Heard Chevrolet, 63 S.W.3d 351, 358 (Tenn. Ct. App. 2001)

However, the Sixth Circuit agreed with the plaintiffs that mutual assent to the arbitration provision was missing. A meeting of the minds sufficient to give rise to mutual assent “is determined by assessing the parties’ manifestations according to an objective standard.” Wofford v. M.J. Edwards & Sons Funeral Home Inc, 490 S.W.3d 800, 810 (Tenn. Ct. App. 2015). Whether any given action “constitutes an acceptance must be assessed in terms of whether it would lead a reasonable person to conclude that the offer has been accepted.” Rode Oil Co. v. Lamar Advert. Co., 2008 WL 4367300, at *8 (Tenn. Ct. App. Sept. 18, 2008).

Because the plaintiffs did not explicitly assent to the arbitration provision, the question became whether the plaintiffs were otherwise bound to the BSA and its amendments by virtue of their continued use of their accounts. The trial court determined that the plaintiffs took action sufficient to manifest assent to the arbitration provision by continuing to maintain their accounts with the defendant.

The trial court found three factors especially persuasive. First, the plaintiffs never objected, over the course of almost two decades, to the arbitration provision. Second, even though the plaintiffs never signed any of the agreements or otherwise assented in writing, the BSAs explicitly stated that continuing to hold accounts with the defendant would function as an acceptance of their terms. The final factor the court noted was that individuals and organizations who maintain accounts at banks would reasonably expect their relationship with the bank to be governed by some sort of agreement.

The Sixth Circuit found several problems with the trial court’s analysis. First, the record was unclear as to whether the BSAs were distributed in a manner consistent with the MMIA agreements.

Second, regarding the BSAs’ language that merely maintaining the accounts was deemed acceptance, the Sixth Circuit noted that it already addressed this issue in Lee v. Red Lobster Inns of America, Inc., 92 F. App’x 158 (6th Cir. 2004), reasoning that “[t]he flaw in the district court’s analysis is that it places the burden on the [consumers] to . . . object to a company’s unilaterally adopted arbitration policy or risk being found to have agreed to it. This is not how contracts are formed.” Id. at 162.

Third, the Sixth Circuit concluded that whether individuals and organizations who maintain accounts at banks would reasonably expect their relationship with the bank to be governed by some sort of agreement was not material. The proper question was whether, upon assenting to the original two-page MMIA agreement, such individuals and organizations would reasonably expect their relationship to be governed, more than a decade later, by new provisions unilaterally added by a successor bank to such an extent that the BSA ultimately contained terms that materially changed the plaintiffs’ rights and obligations under the original agreement. See Johnson v. Welch, 2004 WL 239756, at *8 (Tenn. Ct. App. 2004).

The plaintiffs did not contest that the bank could make reasonable changes to the banking agreement pursuant to the MMIA’s change-of-terms provision. They instead asserted that the bank’s discretion under the original change-of-terms provision to amend the terms was not unlimited but was subject to two requirements: (1) that any changes be reasonable, and (2) that the defendant exercise its discretion to make such changes in a manner consistent with the implied covenant of good faith and fair dealing.

In making this argument, the plaintiffs principally relied on Badie v. Bank of America, 67 Cal. App. 4th 779 (Cal. Ct. App. 1998), a case with facts materially indistinguishable from those present here. The Badie court explained that a bank does not have a unilateral right “carte blanche to make any kind of change whatsoever so long as a specific procedure is followed.” Id. at 791. The change must instead be “a modification whose general subject matter was anticipated when the contract was entered into.” Id. As a result, the court said that it could not “assume . . . that notice alone, without some affirmative evidence of the depositor’s consent, could bind a depositor to a significant change regarding matters that were not addressed in the original contract at all.” Id. at 793.

The Sixth Circuit concluded that Badie’s logic was applicable here, where the record was unclear as to whether the bank made the changes to the BSAs in a manner consistent with the original change-of-terms provision, or if the plaintiffs even received the 2001 BSA or its 2004 and 2017 amendments.

The appellate court was persuaded that the Tennessee Supreme Court would follow the logic of Badie. First, the defendant provided the plaintiffs with no opt-out opportunity. In the Court’s view, this left the plaintiffs with no choice other than to acquiesce to the new arbitration provision or to close their high-yield savings accounts. And the Court observed that closing their accounts was a totally unreasonable option because doing so would eliminate the motivating factor of maintaining the accounts, the promise of a perpetual 6.5% annual interest rate.

The Sixth Circuit also held that the defendant bank did not act reasonably when it added the arbitration provision years after the plaintiffs’ accounts were established, and that the defendant bank violated the implied covenant of good faith and fair dealing in its attempt to use the original change-of-terms provision to force the plaintiffs to arbitrate. From July 2001 to January 2018, the defendant continued to honor the 6.5% interest-rate guarantee. The Court thus concluded that the plaintiffs were lulled into not giving a thought to the unilateral addition of the arbitration provision in the BSA.

Accordingly, the Sixth Circuit held that there was no mutual assent to the arbitration provision, and so the BSA and its subsequent amendments were invalid to the extent that they materially changed the terms of the original agreement. Thus, the Court reversed the trial court’s grant of the defendant bank’s motion to dismiss and compel arbitration and remanded the case for further proceedings consistent with this opinion.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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