A federal district court in Minneapolis has enforced the class action waiver in TCF National Bank's checking account arbitration provision and granted the bank's motion to compel individual arbitration of claims that the bank violated Minnesota law by charging excessive overdraft fees in debit card ATM and retail POS transactions. The court also held that Federal Arbitration Act (FAA) policy trumps that of the federal statute on multidistrict litigation.

Ballard Spahr attorneys Alan S. Kaplinsky and Mark J. Levin represented TCF in Pellett, et al. v. TCF Bank, N.A., et al., Civil Action No. 10-3943 (DSD/FLN), D. Minn. Nov. 24, 2010.   The plaintiffs asserted violations of the Minnesota Plain Language Contract Act, the Minnesota Deceptive Trade Practices and Consumer Fraud Act, and Minnesota common law.

Dozens of class actions have been filed against other banks around the country by depositors claiming that their banks' overdraft fee practices on debit card transactions are unfair, deceptive, or otherwise improper. Pre-trial proceedings in most of these cases have been centralized by the Judicial Panel on Multidistrict Litigation (JPML) before Judge James King in the Southern District of Florida. Judge King has previously denied all motions to compel arbitration—except one, which Ballard Spahr filed on behalf of another banking client, in which he enforced the arbitration provision.

The plaintiffs' counsel in Pellett sought to have the JPML send Pellett to Judge King, and the JPML had already issued a Conditional Order of Transfer, pending a hearing before the JPML in January 2011. The Magistrate Judge hearing the case refused to act on TCF's motion to compel arbitration, pending a JPML decision on whether to transfer the case. TCF objected to the stay of the case.  

U.S. District Judge David S. Doty first held that it was "clear error" for the Magistrate Judge to stay the case pending a transfer decision by the JPML instead of addressing the motion to compel arbitration. The court, relying on U.S. Supreme Court precedent, reasoned that the intent of the FAA is "to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible." Judge Doty contrasted this policy with the permissive language Congress used in 28 U.S.C. Section 1407(a) when enabling multidistrict litigation.

Next, Judge Doty rejected the plaintiffs' arguments that the class action waiver in the Bank’s arbitration provision is unconscionable under Minnesota law. In doing so, he relied heavily on two important features of the Bank's arbitration provision:   (1) language that gave the plaintiffs a 30-day unconditional right to opt out of the arbitration provision; and (2) contractual fee-shifting language, providing that the plaintiffs would be entitled to recover their reasonable attorneys' fees if they prevailed in arbitration. (Ballard Spahr strongly encourages clients to include these—and other consumer-friendly features—in their arbitration agreements.)

Finally, Judge Doty held that Section 2 of the FAA preempted plaintiffs' claims under the Minnesota Plain Language Contract Act because that statute applies only to consumer contracts, not all contracts. Section 2 of the FAA provides that arbitration agreements may be invalidated only on grounds that apply to "contracts generally."

Ballard Spahr lawyers have now prevailed in four such overdraft fee class actions (both on the merits and by successfully compelling individual arbitration), have persuaded two other plaintiffs to dismiss such actions, and are currently defending several banks in such actions in the JPML and state courts. We are also counseling clients on complying with the FDIC's Final Overdraft Payment Supervisory Guidance (Financial Institution Letter FIL-81-2010), which was the subject of a recent legal alert . The firm is further counseling them about the implications of an October 6, 2010, Consent Order for a Civil Money Penalty issued by the Office of the Comptroller of the Currency against Woodforest National Bank (see legal alert ), and an April 23, 2010, Order to Cease and Desist issued by the Office of Thrift Supervision (OTS) against Woodforest Bank and OTS Proposed Supplemental Guidance on Overdraft Protection Programs (see legal alert ).

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs), its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. For further information, please contact Alan S. Kaplinsky, Group Chair, at 215.864.8544 or kaplinsky@ballardspahr.com; or Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com.


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