Lipsett v. Banco Popular North America

Background

Frankie Lipsett sued Banco Popular North America, doing business as Popular Community Bank, in a proposed class action. He sought monetary damages based on allegations that the bank assessed and collected overdraft fees on accounts that were never actually overdrawn. The bank moved to compel arbitration, meaning it asked the court to require Lipsett to resolve his claims through arbitration rather than in court and on an individual basis.

Lipsett opened his bank account around August 9, 2004. The account was initially governed by a 2002 account agreement that did not contain an arbitration provision but allowed the bank to change the agreement. The bank’s 2008 agreement added an arbitration provision and allowed rejection of that provision only within 45 days after the bank opened the customer’s account. The opinion states that Lipsett did not receive notice of the 2008 amendments and that his account had been opened nearly four years before those terms became effective.

In 2014, the bank sent Lipsett a notice and an updated account agreement containing an arbitration provision and a class-action waiver. The notice allowed him to reject the entire amended agreement by closing his account and withdrawing his funds within 60 days. The updated agreement also allowed an existing customer to reject arbitration within 45 days if the bank was asking the customer to enter into a new deposit agreement. Lipsett did not close his account or send a rejection letter. The bank later issued another agreement in 2021. In January 2022, Lipsett’s attorney sent a letter attempting to opt out of arbitration, but the bank rejected that opt-out and elected to arbitrate Lipsett’s claims.

Parties’ Arguments

The bank argued that Lipsett was bound by the arbitration provision because he could have rejected it in 2008, did not reject it after receiving the 2014 notice, and continued using his account. The bank also argued that the claims fell within the provision and that an arbitrator, rather than the court, should decide questions about whether the claims were arbitrable.

Lipsett argued that the arbitration provision was never part of a valid contract. He contended that the 2002 agreement allowed the bank to change existing terms but not unilaterally add a new arbitration requirement. He also argued that the opt-out procedures did not apply to him because his account had already been opened when the bank added the arbitration provision.

Court’s Analysis

The court applied the Federal Arbitration Act and New York contract-formation principles. Although federal law generally favors arbitration, a person cannot be required to arbitrate a dispute without agreeing to do so. Contract formation requires mutual assent, which can be shown through words, actions, or conduct.

The court focused on whether Lipsett had a meaningful and reasonable opportunity to opt out of arbitration. It concluded that the addition of arbitration in 2008 was unconscionable. Unconscionability is a contract doctrine that can invalidate an unfair agreement; under New York law, it generally involves both unfairness in how the agreement was made and unfairness in its terms.

The court identified two problems with the 2008 arbitration provision. First, Lipsett did not receive notice of the 2008 agreement, and the bank did not directly dispute that point. Second, the 2008 opt-out clause allowed rejection only within 45 days after the account was opened, a period that had expired years earlier. Thus, the clause gave Lipsett no opportunity to reject arbitration, much less a meaningful one.

The court rejected the bank’s argument that the 2014 agreement supplied a new opportunity to opt out. Although the 2014 notice said that the updated agreement replaced prior agreements, it repeatedly described the document as an amended or modified agreement. The court concluded that it was not a “new deposit agreement” under the agreement’s opt-out language. Because Lipsett could not use either opt-out provision, the 2014 agreement also did not provide a meaningful opportunity to reject arbitration.

The court further concluded that closing the account under the 2014 notice would not necessarily have protected Lipsett from the 2008 arbitration provision, because that provision stated that arbitration would survive closure of the account. The court therefore found that the 2014 notice did not provide a meaningful opportunity to opt out either.

Because no arbitration contract was formed when arbitration was first added in 2008, the court held that Lipsett was not required to opt out again when the bank later amended its agreements. The court also stated that the arbitration provisions were substantively unconscionable to the extent that finding was necessary, citing “loser pays” provisions that it found unreasonably favored the bank.

Ruling and Effect

Judge Victor Marrero denied Banco Popular North America’s motion to compel arbitration. The order did not decide the parties’ remaining arguments about the scope of the arbitration provision or whether an arbitrator should decide arbitrability. The clerk was directed to terminate the motion, and the bank was directed to answer or otherwise respond to the complaint within 21 days of the order.