Arbitration. Formation and Validity of Arbitration Agreements. District court holds that plaintiff is not required to arbitrate his claims against defendant because no agreement to arbitrate between the two parties had been formed.

Lipsett v. Banco Popular North America d/b/a/ Popular Community Bank, 22 Civ. 3901 (VM) (S.D.N.Y. Dec. 9, 2022) [click for opinion]

Defendant Banco Popular N.A. (d/b/a Popular Community Bank) ("BPNA") is a bank that provides retail banking services to consumers and is headquartered in New York, New York. Plaintiff Frankie Lipsett ("Lipsett") opened an account with BPNA in August 2004. Lipsett's use of his account was governed by BPNA's Personal Banking Disclosure and Agreement ("PBD&A").

The PBD&A in effect when Lipsett opened his account did not contain an arbitration clause, but included a change of terms provision that allowed BPNA to change the agreement at will, with or without notice. Pursuant to the change of terms provision, BPNA amended the PBD&A in 2008 without notice, which included the addition of an arbitration provision. The arbitration provision allowed new customers to reject the arbitration provision within 45 days after the customer's deposit account was opened.

BPNA amended the PBD&A again in 2014, with notice (the "2014 Notice"). The 2014 PBD&A included an amendment to the arbitration provision's opt-out clause, allowing existing customers, in addition to new customers, to opt out of the arbitration provision if BPNA was "asking [the customer] to enter into a new deposit agreement." BPNA again amended the PBD&A in 2021, though the arbitration provision remained substantively the same.

On May 13, 2022, Lipsett brought a putative class action against BPNA seeking monetary damages arising from BNPA's alleged assessment and collection of "overdraft fees" on accounts that were never actually overdrawn. In response, BPNA sought an order compelling Lipsett to arbitrate these claims on an individual basis. BPNA argued that Lipsett was subject to the arbitration provision because he could have rejected the arbitration provision in 2008, but did not do so, and again in 2014, but did not do so.

Lipsett argued that no contract was formed with respect to the arbitration provision because the 2008 PBD&A's arbitration provision exceeded the scope of the 2002 PBD&A's provision that allowed BPNA to change, but not add, terms to the PBD&A. Lipsett further argued that his ability to opt out of arbitration was illusory because none of the opt-out provisions applied to him.

In considering BPNA's motion, the court recognized that Valle v. ATM Nat'l, LLC, which dealt with the same change of terms and arbitration provisions included in BPNA's 2014 PBD&A, was binding precedent. However, the court found that Valle was factually distinct from the case before it. In Valle, the plaintiff had opened a savings account in 1999, but neither party could produce the contract in existence when the account was opened. As a result, the court in Valle had only the 2014 Notice and 2014 PBD&A to rely on, and concluded that these provided plaintiff a meaningful opportunity to opt out of the arbitration provision.

In contrast here, in addition to the 2014 Notice and 2014 PBD&A, the 2002 PBD&A, the 2008 PBD&A, and the 2021 PBD&A were before the court. The court concluded that the changing terms set forth in the documents materially impacted whether a binding agreement to arbitrate was formed with Lipsett.

The court first analyzed whether the addition of the arbitration provision to the 2008 PBD&A bound Lipsett to the arbitration provision.The court determined that the addition of the arbitration provision was unconscionable because Lipsett had no notice of the 2008 PBD&A, and no meaningful and reasonable opportunity to opt out because, unlike later versions of the PBD&A, the 2008 version of the opt-out provision was limited to new accounts. Accordingly, BPNA's addition of the arbitration provision was deemed invalid and not binding as to Lipsett. The court then analyzed whether the 2014 Notice and 2014 PBD&A provided Lipsett with meaningful and reasonable notice and opportunity to opt out. The court concluded it did not. The court's decision turned on whether, at the time the 2014 Notice and 2014 PBD&A was issued, BPNA was asking Lipsett to enter into a new deposit agreement, per the arbitration provision. The court concluded BPNA was not, explaining that the 2014 Notice makes clear that it merely amended or modified the 2008 PBD&A; for example, the title of the 2014 Notice included the subtitle "Amended Account Agreement." The 2014 PBD&A was titled the same.

Having found that no contract between BPNA and Lipsett to arbitrate claims under the PBD&A was formed in 2008, and that none of the agreements thereafter offered a new deposit agreement that would re-trigger Lipsett's ability to opt-out, the court concluded that Lipsett was not bound to arbitrate his claims with BPNA. The court accordingly denied BPNA's motion to compel arbitration.

Emily Brait of the New York office contributed to this summary.​