Zachman v. Hudson Valley Federal Credit Union

Background

Nichole Zachman brought a proposed class action against Hudson Valley Federal Credit Union (HVCU). She alleged that HVCU assessed and collected overdraft fees and insufficient-funds fees on checking accounts that were not actually overdrawn. Her claims included breach of contract, breach of the duty of good faith and fair dealing, violation of Section 349 of New York’s General Business Law, and violations of the Electronic Fund Transfer Act and its implementing regulation, Regulation E.

Zachman opened her HVCU account in 2012 and agreed to a Truth-in-Savings Standard Disclosure and Account Agreement. That agreement did not contain mandatory arbitration or a class-action waiver. HVCU revised the agreement in 2014 to add those provisions and posted the revised version on its website. HVCU later required online-banking users to agree to an Internet Banking Disclosure and Agreement that referred to other account agreements, including amended versions.

Zachman stated that she was unaware of the 2014 changes and had never searched for or viewed the Account Agreement on HVCU’s website. HVCU’s compliance officer testified that HVCU did not know whether it had mailed or emailed Zachman the revised agreement, had not otherwise provided her written notice of the added provisions, and had no evidence that she accessed the agreement online.

Motion and legal standard

HVCU moved to dismiss the complaint or, alternatively, stay the case in favor of arbitration under the Federal Arbitration Act. Because HVCU argued that Zachman’s claims had to be arbitrated and used the standards for compelling arbitration, the court construed the motion as a motion to compel arbitration.

The court explained that it first had to decide whether the parties made a valid agreement to arbitrate. Under New York contract law, contract formation and contract modifications require mutual assent. A party seeking arbitration must show that the other party had actual notice of the arbitration provision or was given sufficiently clear circumstances to put her on inquiry notice and then engaged in conduct that reasonably showed assent.

Court’s analysis

The court rejected HVCU’s argument that an arbitrator should decide whether the arbitration agreement existed. Because Zachman challenged the existence of the agreement containing the arbitration clause, the court—not an arbitrator—had to resolve that issue first.

The court found that HVCU had not shown actual notice. HVCU provided no evidence that it gave Zachman notice before or after adding the arbitration and class-action-waiver provisions. The evidence also did not show that Zachman accessed the Account Agreement through HVCU’s website.

The court also found no inquiry notice from the online-banking registration process. HVCU did not provide a visual aid or sufficient description of the registration webpages. It did not explain whether users had to scroll, how the relevant language and hyperlink appeared, or whether they were distinguished by color, font, bolding, or underlining. The court concluded that the references to the Account Agreement appeared buried in the Internet Banking Agreement and would not have made a reasonably prudent user understand that clicking “I agree” would accept arbitration and waive participation in a class action.

Posting the revised agreement on HVCU’s website likewise did not provide inquiry notice. The original agreement did not expressly authorize modification merely by website publication. The Account Agreement was not linked from the homepage, and HVCU provided no banner or other notice that the agreement had been posted or changed. The court therefore concluded that a reasonably prudent user could not easily have found and read the revised terms without specific knowledge of their location.

Finally, the court held that Zachman’s continued use of her checking account and debit card did not establish assent. Continued use can accept revised terms when the user has notice of those terms, but HVCU had not shown that Zachman received actual or inquiry notice. The age of the added provisions, by itself, was also insufficient.

Disposition

Judge Vincent L. Briccetti denied the motion to compel arbitration. The court did not order arbitration or decide the merits of Zachman’s claims about the fees. HVCU was ordered to file an answer by April 5, 2021, and the clerk was instructed to terminate the motion.