In a warning to the industry, a state judge in California has rejected Bank of America's bid to enforce a binding arbitration contract with a checking account holder.
Judge Patti S. Kitching of the state's second appellate district ruled that Bank of America forfeited its claim because it conducted pre-trial discovery and filed motions for more than a year before demanding arbitration.
"The bank waived its right to enforce the arbitration provision," Judge Kitching wrote Feb. 2 for an unanimous three-judge panel. "This is because the bank unreasonably delayed its demand for arbitration, engaged in litigation conduct inconsistent with intent to arbitrate, and prejudiced the plaintiffs by causing them to incur costs and attorney fees."
Banks, especially on the West Coast, are trying to reduce their legal costs by including binding arbitration agreements in contracts to open checking and savings accounts. Arbitration normally costs a fraction of the expense of a court battle because it requires fewer legal filings and results in an expedited decision.
But arbitration agreements are coming under increasing legal challenge, despite two recent Supreme Court decisions limiting the power of state courts to void them. For instance, a federal judge in Alabama recently limited the ability of banks to amend account contracts to include mandatory arbitration provisions. A coalition of banking groups is challenging that case before the federal appeals court in Atlanta.
Though Judge Kitching's decision is not binding on courts outside California, it provides further proof that judges do not automatically enforce arbitration agreements.
"The outcome is disappointing," said Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association. "But it provides a fairly clear guide for future conduct and that is important."
"The principle at work is that if a great deal of discovery has taken place already, the bank waives its right to arbitration," said Steven I. Zeisel, senior counsel at the Consumer Bankers Association. "It is not the amount of time but what happened in that time period that is relevant."
Russell Schrader, a senior vice president and senior counsel at Visa U.S.A., said the ruling makes sense. "This is something people knew," he said. "There comes a point where you have gone down one path and cannot say, 'Whoops, I want to go down another path.'"
The case centers on Rosario E. Sobremonte, whose family maintained a variety of joint accounts at Bank of America. In September 1994, Ms. Sobremonte's niece lost her checkbook and ATM card. Subsequently, nearly $9,500 in checks were deposited by "allegedly unknown persons." A $7,400 check made out to cash was then drawn against the account and $1,200 was withdrawn with the ATM card.
The deposited checks subsequently bounced, and the bank deducted $6,500 from other joint accounts held by the family to cover the losses. Ms. Sobremonte demanded the return of these funds.
The bank refused to return the money, arguing that it has a legal right to set aside funds to cover losses in joint accounts. This prompted Ms. Sobremonte to sue in May 1995. After trading briefs, the bank demanded arbitration. But it then filed a series of additional court documents.
Bank of America did not suggest arbitration again until March 1, 1996, when it argued that the dispute should be resolved out of court. A trial court judge granted the request in April 1996, setting up Ms. Sobremonte's appeal.
The case now returns to the trial court, where a judge must decide if Bank of America had the right to deduct the $6,500 from Ms. Sobremonte's account to cover the deficit the joint account with her niece.
A Bank of America spokesman declined to comment on the case.
