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Eleventh Circuit: Fee provision severable from bank's arbitration agreement

By Jessica M. Karmasek | Jul 12, 2012


ATLANTA (Legal Newsline) - A federal appeals court, in a ruling last week, remanded a case over a bank's overdraft fees to a lower court for arbitration.

In its July 6 opinion, the U.S. Court of Appeals for the Eleventh Circuit reversed the decision of the U.S. District Court for the Southern District of Florida.

The district court had denied a motion by Branch Banking and Trust Company, otherwise known as BB&T, to compel arbitration in a putative class action brought by customer Lacy Barras.

Barras alleged, on behalf of herself and the class she is seeking to represent, that BB&T charges overdraft fees for payments from checking accounts even when the account contains sufficient funds to cover the payments.

In her suit, she also alleged that BB&T supplies inaccurate and misleading information about account balances, and fails to notify customers about changes to the bank's policies for processing checking account transactions, thus increasing overdraft charges assessed against customers.

BB&T had moved to compel arbitration of all of Barras' claims pursuant to an arbitration provision contained in its Bank Services Agreement, or BSA.

In a May 10, 2010 order, the district court denied the bank's motion, ruling that the arbitration agreement was "unconscionable" under South Carolina law and could not be enforced.

However, before the Eleventh Circuit decided BB&T's appeal from that order, the U.S. Supreme Court ruled in AT&T Mobility LLC v. Concepcion.

Last April, the nation's high court, in a 5-4 vote, said companies can enforce contracts that bar class action lawsuits.

In the Concepcion case, Vincent and Liza Concepcion attempted to sue AT&T over a 2002 cell phone purchase.

At the time, the cell phone company had advertised the phone as free, but then it charged customers for tax on the phone's normal price.

In response, the couple brought a class action on behalf of everyone who had taken advantage of the AT&T offer. However, the contract the couple signed said all disputes had to go to an arbitrator.

Parties may sometimes settle disputes through arbitration, rather than litigation. When the dispute involves numerous individuals in the same situation, a few individuals may conduct the arbitration on behalf of the larger groups, similar to a class action suit.

The question before the U.S. Supreme Court was whether the Federal Arbitration Act prohibits states from mandating that class arbitration be available as a part of every arbitration agreement.

The act, originally passed by Congress in 1925, says states must apply the same rules to arbitration as they do to normal court cases.

In light of the Court's ruling, the Eleventh Circuit remanded Barras' case to the district court for reconsideration.

BB&T then renewed its motion to compel arbitration. The district court again denied that motion.

BB&T again appealed the ruling to the Eleventh Circuit.

The bank argues: (1) that the question of whether the arbitration provision is enforceable must be resolved by the arbitrator; (2) that the cost-and-fee-shifting provision in the agreement that the district court held unconscionable does not apply to the arbitration provision; (3) that Concepcion prohibits application of South Carolina's unconscionability doctrine to the arbitration provision; (4) that the cost-and-fee-shifting provision, in any event, is not unconscionable; and (5) that the cost-and-fee-shifting provision is severable from the arbitration provision.

In its 26-page ruling, the Eleventh Circuit said the district court did not err in refusing to submit the question of unconscionability to the arbitrator.

It also found no error in the court's conclusion that the cost-and-fee-shifting provision is applicable to costs arising from arbitration.

The Eleventh Circuit also ruled that South Carolina's unconscionability doctrine does not interfere with "fundamental attributes of arbitration" as identified by the U.S. Supreme Court, and is therefore not preempted by the FAA in its application of arbitration agreements.

But as for whether the cost-and-fee-shifting provision in BB&T's arbitration agreement is unconscionable under South Carolina law, the court sided with Barras.

"The provision is particularly inconspicuous and surprising when it is considered in light of its consequences: entitling BB&T to unilaterally claim a right to payment for 'any loss, costs or expenses' incurred in 'any dispute' with Barras, regardless of the outcome of that dispute," Judge Rosemary Barkett noted.

"By making Barras responsible for BB&T's costs even if she prevails on her claim, the cost-and-fee-shifting provision contravenes basic expectations that attorney's fees and costs generally are not recoverable by a non-prevailing party."

However, the Eleventh Circuit concluded that the cost-and-fee-shifting provision is severable from the arbitration agreement.

Therefore, the "invalidity" of that provision does not affect the arbitration agreement, the court explained.

"The arbitration agreement contained in the BSA is capable of operating independently of the unconscionable cost-and-fee-shifting provision because the arbitration provision incorporates rules promulgated by the American Arbitration Association that govern all aspects of an arbitration proceeding, including the apportionment of costs," Barkett wrote.

"These rules operate wholly independently of the cost-and-fee-shifting provision and would not be impaired by invalidating the cost-and-fee-shifting provision."

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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