Everybody, it’s said, hates the other guy’s attorney – but they love their own.
That’s especially true of bankers; they love their legions of lawyers (although perhaps not their bills). Who else is going to write so many words in so much small type that are going to end up saving the bank’s bacon?
Last month, Citizens Bank agreed to settle a class-action overdraft case for $137 million. The pact followed a $110 million settlement by JPMorgan Chase in February, and Bank of America’s $410 million agreement last year.
Those guys didn’t have very good lawyers.
Regions Bank, on the hand, has exceptional attorneys. And their winning ways are instructive, both in terms of what other banks are likely to start doing, and in why voters think the Consumer Financial Protection Bureau ought to be coming down on lenders like a ton of bricks.
Regions is headquartered in Birmingham, Ala., and it operates in 16 states. One of those states is Georgia, where Lawrence and Pamela Hough live. The Houghs are trying desperately to sue Regions for their policies of clearing large checks before small ones, in a scheme that rigs it so the bank gets lots of overdraft fees. It’s the same basic charge that Citizens, et al, settled over.
The Houghs have spent a lot of money in court over Regions, but not about their overdraft policies. They’ve been in court over paragraph 34 of their deposit agreement, which stipulates that either party in the dispute can choose binding arbitration rather than court. Regions chooses that, the Houghs don’t.
But the Houghs keep losing.
It’s not that the Houghs can’t find sympathetic judges. They’ve found plenty of those, black-robed and bilious over Regions’ heavy-handed approach to the law. It’s more that the Houghs can’t find sympathetic appellate judges. Because those guys keep overruling the lower court judges who can’t stomach what Regions is doing.
The Sanity Clause
Binding arbitration, as a concept, is a fine thing. It can lower costs for everyone, and it can move much quicker than the court system. But it can destroy the balance of power in a contract.
The Houghs argue that the binding arbitration clause is unconscionable because it takes away too many of their rights, and is too lopsided toward Regions. It lets the bank force arbitration on them. If they ever do get to court, it prohibits them from being part of a class action. And it says that if they win, Regions only owes them $125 to cover legal fees. But if Regions wins, the Houghs are on the hook for all of Regions’ litigation costs – and Regions can just go into their account and take out the money, without notice.
Twice now, the federal 11th Circuit Court of Appeals has said Regions is right. The first was when a lower court threw out the arbitration clause because of the class-action waiver. The 11th Circuit said there was nothing wrong with that. And now the 11th Circuit just ruled in Regions’ favor again, when the lower court tried to say that there was a disproportionate allocation of risk to the Houghs. Tough noogies, said the 11th Circuit. It may not be fair, but it’s legal. It’s just business, the justices concluded.
What’s the tipping point when these one-way deals are too much? The appellate court found that to be unconscionable, a contract must be so one-sided that "no sane man not acting under a delusion would make and that no honest man would participate in the transaction." The court found that the arbitration clause in the Houghs’ agreement fell "well short" of that standard.
These decisions aren’t binding on courts in Massachusetts, and elsewhere in the nation, but they do set federal precedent, and are likely to be relied upon in similar cases here. That’s why bankers across the country are suddenly turning to their lawyers, squinting one evil eye at them, and muttering, "Put those big words into tiny type. Pronto."
It should be noted, however, that none of the judges involved in this debate so far have been fans of the strong-arm legal language. Agreements like these are called "contracts of adhesion," because they’re not a true "meeting of the minds" of the parties. The bank says, "Here, sign this. Or get lost," and that’s all there is to it. That kind of deal aggregates power to one side, and leaves the other powerless. Judges don’t like that kind of thing, even when it’s legal.
And that’s why the Dodd-Frank Act requires the Consumer Financial Protection Bureau to study mandatory arbitration, and provides the agency with the authority to issue rules that prohibit or restrict these agreements. Would the Regions Bank clause seem less bullying if it treated both sides equally, and wasn’t so lopsided in the bank’s favor?
Bankers have been vocal that they believe the CFPB has too much power to interfere with free-market commerce. But consumers, consumer advocates and even lower court judges say it’s plain that bankers and consumers aren’t playing on a level field. That’s why they need a referee who can see which way the game is tilted.
Vincent Valvo is president of Agility Resources Group. He can be reached at vvalvo@agilityresourcesgroup.com.
