California Bill Would Ban Arbitration in Fraudulent Bank Contracts

Financial Services Law

In the wake of a scandal involving a national bank that allegedly opened millions of accounts without the consent of consumers, the California legislature has passed a bill that would prohibit the application of mandatory arbitration clauses to bank accounts that were created fraudulently.

What happened

Last year, it was discovered that the employees of a national bank fraudulently created millions of consumer accounts. The most recent audit of the California-based institution found that as many as 3.5 million of the 165 million consumer and small-business accounts opened between 2009 and 2016 were fraudulent.

The bank—which admitted that branch staff created the fake accounts to achieve performance targets and earn bonuses—was hit with a $185 million fine from the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Los Angeles City Attorney’s Office.

In addition, dozens of class actions were filed against the bank, alleging that the fake accounts resulted in improper fines and caused a negative impact on consumer credit scores. The bank reached a deal that would provide payment of $142 million to compensate consumers dating back to 2002 for such damages.

One of the wrinkles in the litigation was the bank’s argument that the actions were subject to arbitration pursuant to clauses found in accounts that consumers had knowingly signed up for. Judges in both state and federal courts agreed with the bank that customers’ contracts for legitimate accounts applied to all disputes with the bank—even those over unauthorized accounts.

In response, the California legislature passed Senate Bill 33.

When two parties have agreed to arbitration, existing law requires that a court order them to arbitrate, the measure explained, absent certain determinations that provide exceptions to arbitration.

“This bill would add to these determinations instances in which a state or federal chartered depository institution is seeking to apply a written agreement to arbitrate, contained in a contract consented to by a respondent consumer, to a purported contractual relationship with that consumer that was created by the petitioner fraudulently without the consumer’s consent and by unlawfully using the consumer’s personal identifying information,” according to the legislation.

If signed by the governor, Senate Bill 33 would take effect on Jan. 1, 2018.

The Senate passed the measure by a vote of 26 to 13 in May; the Assembly followed suit in September (46 to 23) and the bill was sent to Gov. Jerry Brown’s desk for signature on Sept. 11.

“Allowing victims to access our public courts helps them recover and can prevent more victims by putting an end to illegal business practices,” co-sponsor Sen. Bill Dodd (D-Napa) said in a statement. “The idea that consumers can be blocked from our public courts when their bank commits fraud and identity theft against them is simply un-American. Had my bill been in place before the scandal, [the bank] would have been held publicly accountable years ago, and the fraud could have been prevented from spreading.”

To read Senate Bill 33, click here.

Why it matters

Gov. Brown has not indicated his position on the legislation. If he elects to sign the bill, it likely faces challenges under the Federal Arbitration Act. Although the bill states that it is narrowly tailored to avoid FAA pre-emption, it would still discriminate against arbitration agreements, a position the Supreme Court has not hesitated to strike down in multiple cases involving California courts, ruling that the FAA requires states to treat arbitration agreements the same way that other types of agreements are treated.



pursuant to New York DR 2-101(f)

© 2024 Manatt, Phelps & Phillips, LLP.

All rights reserved