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Financial Services Law Insights and Observations


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  • North Carolina Supreme Court upholds credit union’s right to enforce unilaterally inserted arbitration clause


    On May 23, the North Carolina Supreme Court ruled that a defendant credit union can enforce an arbitration clause added to a customer’s contract years after its inception. The case centered on a “Notice of Amendments” provision in the contract, which customers agreed to when opening accounts, allowing the credit union to unilaterally change contract terms with proper notice to the consumer.

    In January 2021, the credit union notified the plaintiff that it was updating its membership agreement to include an arbitration requirement for certain disputes and a waiver of class actions. In March 2021, the plaintiff filed a class action lawsuit against the credit union, alleging that it was improperly collecting overdraft fees on accounts that were never overdrawn. The trial court denied the credit union's motion to compel arbitration, but the appeals court reversed that decision and remanded the case with instructions to stay the case pending arbitration, holding that the addition of the arbitration provision was enforceable.

    The North Carolina Supreme Court addressed in its opinion whether the inclusion of the arbitration violated the implied covenant of good faith and fair dealing. The Court highlighted the economic necessity for companies to adapt contractual terms efficiently and found that amendments adhering to the original contract's subject matter met the covenant of good faith and fair dealing.

    The court then turned to the question of whether the original agreement “reasonably anticipated” the changes and whether the changes reasonably related to “subjects discussed” in the agreement. The court held that the inclusion of an arbitration clause was foreseeable due to the original contract's dispute resolution terms, which stated that the agreement was subject to the laws of North Carolina and set the venue for any dispute. Since the agreement’s changes addressed the forum for disputes, the court deemed this to be within the “same universe of terms.” Moreover, the court determined the contract was not illusory because the language included in the change to the contract limited its scope by stating “[e]xcept as prohibited by applicable law.”

    Finally, the court rejected the plaintiff’s argument that she did not accept the offer to arbitrate “through silence,” holding that there was an agreement between the credit union and the plaintiff that the credit union could change the terms upon proper notice, not with consent of the plaintiff. 

    Courts Credit Union North Carolina Arbitration Contracts

  • CFPB cautions against unenforceable contract terms and conditions

    Federal Issues

    On June 4, the CFPB issued Circular 2024-03, which cautioned covered persons under the CFPA against contracts for consumer financial products or services, including illegal or non-binding clauses. The Bureau said that such clauses may mislead consumers into thinking they have forfeited legal rights, which would violate the CFPA. Specifically, consumer contracts that falsely claim to restrict consumer rights (including liability waivers and mandatory arbitration clauses) can violate the prohibition on deceptive acts. CFPB Director, Rohit Chopra, said in an accompanying press release that the Bureau will address companies that “deceptively slip these terms into their fine print.” The Bureau reiterated prior guidance that disclaimers in a contract such as “subject to applicable law” do not cure misrepresentations caused by an unenforceable contract term. Past CFPB actions have addressed “deceptive contract terms” in various consumer finance areas, including mortgages, bank accounts, remittance transfers, and auto loans. The CFPB said it will continue to ensure fair consumer interactions with financial institutions, including efforts to regulate nonbank companies' contract terms and uphold the right to post honest online reviews. The Bureau also said it supported servicemembers' rights to challenge unlawful contract terms through legal action. 

    Federal Issues CFPB Compliance Contracts

  • California enacts several consumer financial protection measures

    State Issues

    Recently, the California governor enacted several state bills relating to consumer financial protection. On October 6, AB 790 was signed, which expands upon provisions of the Consumer Legal Remedies Act that relate to “home solicitations of a senior citizen where a loan encumbers the primary residence of the consumer for purposes of paying for home improvement.” Specifically, the bill extends the Act’s protections to cover loans for assessments under the Property Assessed Clean Energy (PACE) program, or certain provisions regulating PACE under the California Financing Law, such that violations would qualify as unfair methods of competition and unfair or deceptive acts or practices.

    On October 6, AB 424 was signed, which enacts the Private Student Loan Collections Reform Act. The bill prohibits a private education lender or loan collector from making a written statement to a debtor attempting to collect a private education loan unless the private education lender or private education loan collector has certain related information to the debt and provides it to the debtor. In addition, among other things, the bill: (i) prohibits a private education lender or private education loan collector from bringing certain legal proceeding to collect a private education loan if the statute of limitations expired; (ii) creates a state-mandated local program by expanding the scope of the crime of perjury; and (iii) makes other provisions related to settlement agreements and payment notification requirements. The bill is effective July 1, 2022.

    On October 4, AB 1221 was signed, which specifies that service contract requirements must include certain elements and cancellation policies. Among other things, the bill: (i) requires a service contract to include a clear description and identification of the covered product; (ii) makes a violation of certain provisions of the Electronic and Appliance Repair Dealer Registration Law a misdemeanor; and (iii) specifies “that a service contract may be offered on a month-to-month or other periodic basis and continue until canceled by the buyer or the service contractor and would require a service contract that continues until canceled by the buyer or service contractor to, among other things, disclose to the buyer in a clear and conspicuous manner that the service contract shall continue until canceled by the buyer or service contractor and provide a toll-free number, email address, postal address, and, if one exists, internet website the buyer can use to cancel the service contract.” In addition, by expanding the scope of the crime in violation of the Electronic and Appliance Repair Dealer Registration Law, the bill imposes a state-mandated local program. The law is effective January 1, 2022.

    On October 4, AB 1405 was signed, which enacts the Fair Debt Settlement Practices Act. Among other things, the bill: (i) specifies that customers in a debt settlement plan have a window of three days to review disclosures prior to the contract taking effect; (ii) defines “debt settlement provider”; (iii) prohibits unfair, abusive, or deceptive acts or practices from a debt settlement provider and a payment processor when providing certain services; (iii) authorizes a consumer to terminate a contract for debt settlement services at any time without a fee or penalty of any sort by notifying the debt settlement provider; and (iv) authorizes a consumer to bring a civil action for violation.

    State Issues State Legislation California PACE Programs Consumer Finance UDAP Contracts Debt Collection Student Lending

  • New York requires clear and conspicuous consumer notice prior to auto-renewal of contracts

    State Issues

    On November 11, the New York governor signed S01475, which requires clear and conspicuous consumer notice and consent prior to an auto-renewal of any contract of any term for any subsequent term. Specifically, the act provides that a business will be deemed to have engaged in unlawful practices if it (i) fails to present the renewal offer terms or continuous service offer terms in a clear and conspicuous manner before the subscription or purchasing agreement is fulfilled; (ii) charges a consumer’s credit or debit card, or uses a third party to charge a consumer’s account, without first obtaining a consumer’s affirmative consent to the auto-renewal of a contract; (iii) fails to provide an acknowledgement to the consumer that includes the auto-renewal terms and cancellation policy; or (iv) fails to provide a disclosure following the offer of a free gift or service that allows the consumer to cancel before paying for the goods or services. Among other things, the act also provides that consumers who accept an auto-renewal “shall be allowed to terminate the automatic renewal or continuous service exclusively online.” The act further stipulates that a “knowing violation” will be punishable by a civil penalty of not more than $500 for a single violation and not more than $1,000 for multiple violations as a result of a single act or incident. The act also outlines exempt entities, which include entities regulated by NYDFS, and “banks, bank holding companies, or the subsidiary or affiliate of either, or credit unions or other financial institutions, licensed under state or federal law.” The act will take effect 90 days after it was signed.

    State Issues State Legislation Consumer Finance Contracts

  • Colorado reminds entities of retail credit seller UCCC notification requirements

    State Issues

    On December 27, the Colorado Department of Law issued an advisory stating that consumers may not be obligated to pay finance charges on consumer credit transactions that are purchased, acquired, or otherwise assigned to retail credit sellers that have not filed applicable notifications required by the Colorado Uniform Consumer Credit Code (UCCC). According to the advisory, in these situations, entities may be “required to re-apply all payments so that the consumer is not assessed any finance charges and issue refunds to the consumer of any resulting credit balance.” The UCCC regulates the terms and conditions of consumer credit in the state, including payday loans, automobile loans, second mortgages, state-issued credit cards, and signature loans. A current list of retail credit sellers that have notifications on file with the office can be accessed here.

    State Issues State Attorney General Contracts Consumer Finance Consumer Protection Credit Sellers

  • 3rd Circuit affirms dismissal of NFL season ticket class action


    On August 29, the U.S. Court of Appeals for the 3rd Circuit affirmed the dismissal of a putative class action alleging that an NFL team’s season ticket sales practices had violated the implied covenant of good faith and fair dealing and the New Jersey Consumer Fraud Act (CFA). As previously covered by InfoBytes, the case was centered on the plaintiff’s purchase of a personal seat license (PSL) that “both allows and obligates” him to buy season tickets for particular seats at the team’s home games. The team later began selling seats in the same seating section without requiring PSLs, which the plaintiff alleged made his PSL “valueless” and “‘unsellable’ because defendants are currently giving away for free what cost him $8,000.” The district court dismissed the plaintiff’s claims with prejudice because the plaintiff had received the “reasonably expected fruits under the contract.” 

    On appeal, the 3rd Circuit agreed with the district court that the plaintiff had “received the fruits of his contract” because “[n]othing in the complaint suggests [the plaintiff] has lost the exclusive right to purchase season tickets for these seats” and the fact that the team “might now sell adjacent seats to members of the general public does not implicate [the plaintiff’s] rights and certainly does not strip him of the benefit for which he bargained.” Regarding the value of his PSA, the appellate court noted that when purchasing the PSL, the plaintiff represented that he was not acquiring it as an investment and had no expectation of profit. Finally, with regard to the CFA claim, the appellate court held that “simply changing the terms on which defendants sell other seats in the stadium is not misleading.”

    Courts Appellate Third Circuit Class Action State Issues Contracts

  • District Court dismisses NFL season ticket class action because plaintiff received the “reasonably expected fruits under the contract”


    On August 30, the U.S. District Court for the District of New Jersey dismissed with prejudice a putative class action alleging that an NFL team’s season ticket sales practices had violated the implied covenant of good faith and fair dealing and the New Jersey Consumer Fraud Act (CFA). The case was centered on the named plaintiff’s claim that the team made representations to him that his purchase of a personal seat license (PSL) would give him an exclusive right to purchase season tickets in a particular seating area in the team’s stadium. The plaintiff alleged that the team ran afoul of the CFA when, counter to its alleged representations, it opened up sales for season tickets in that area to people who had not purchased a personal seat license, thus rendering worthless the license plaintiff had purchased.

    The Court dismissed the plaintiff’s claims with prejudice because the plaintiff had received the “reasonably expected fruits under the contract.” The PSL agreement did not promise an exclusive right to purchase seats in a particular area of the team’s stadium, nor did it “purport to extend licensing or equity rights to [p]laintiff to control the ticketing policy for other” seats in that area. Rather, the PSL simply promised the plaintiff the right to purchase two seats in the area he chose, and that right had not been interfered with.

    Courts Class Action Fraud Contracts

  • District Court dismisses breach of contract suit against Connecticut firm


    On May 1, the U.S. District Court for the District of Connecticut dismissed a malpractice suit brought against a Connecticut-based law firm for allegedly inducing a Boston-based mortgage/mezzanine lender and its Delaware-based trustee (plaintiffs) to enter into a contract resulting in a loss of approximately $13 million. The lender alleged that it entered into a $12 million mezzanine loan agreement in 2012 with a company that owned commercial property located in Connecticut (borrower). The plaintiffs asserted that the firm acted as counsel to various entities associated with the borrower, and issued an opinion letter to the lender concerning agreements memorializing the loan transaction and establishing borrower’s interest in the loan collateral. When the borrower defaulted on the loan due to allegedly misrepresenting ownership percentages, the plaintiffs filed suit against the firm claiming, among other things, (i) breach of contract for rendering an opinion letter, which the firm and borrower intended the lender to rely upon as part of the transaction; (ii) breach of the covenant of good faith and fair dealing; and (iii) negligent misrepresentation.

    The firm, however, argued that the lender’s claims lacked standing because (i) it was never a client of the firm and the opinion letter was not a contract; (ii) “a third-party beneficiary of a written contract [between the borrower and the firm] cannot recover for a breach of implied covenant of good faith and fair dealing; and (iii) claims of negligent misrepresentation were barred by the statute of limitations.

    The court agreed with the firm and ruled that the opinion letter was not a contract that created a contractual obligation the firm could breach. Because the lender and related entities were “neither a party to a contract with [the firm] nor the intended third-party beneficiary of a contract between the borrower and [the firm] ... their breach of contract claim against [the firm] must be dismissed,” the judge stated. The court also dismissed the remaining allegations, stating the lender had not sufficiently alleged that it reasonably relied on the advice of the firm’s advice to make the loan to the borrower.

    Courts Lending Contracts

  • Second Circuit Reverses Decision Concerning Online Contract Formation


    On August 17, 2017, the Second Circuit Court of Appeals vacated and remanded a district court order denying a defendant's motion to compel arbitration where the plaintiff had accepted an arbitration agreement through a smart phone application. See Meyer v. Uber Technologies Inc., et al., 2017 WL 3526682, (2d Cir. 2017). There, the plaintiff had created an account with the defendant by entering personal and payment information into a mobile application. On the final account creation screen, the application presented a button marked “REGISTER,” below which was black text advising users that “[b]y creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.” The capitalized language was a hyperlink, which led to a copy of an agreement containing an arbitration clause. The trial court held that this notice was not “reasonably conspicuous” and, therefore, the plaintiff did not—unambiguously—manifest assent to the arbitration provision by registering an account. On appeal, the Second Circuit reversed, finding that a “reasonably prudent smartphone user” would have been on “reasonably conspicuous notice” of the terms and conditions of service and that the text beneath the registration button put the plaintiff on notice that clicking “REGISTER” meant acceptance of those terms—regardless of whether he actually reviewed them. Relevant to the court’s analysis were proximity of the hyperlink to the “REGISTER” button and the absence of clutter, which might have otherwise impaired the plaintiff’s ability to locate the hyperlink.

    Courts Second Circuit Appellate Arbitration Contracts

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