February 4, 1998
Consumers Union West Coast Office
Court Rules That Benefits of Arbitration Cannot Be “Illusory”
SAN FRANCISCO, CA – A state court of appeal has ruled that Bank of America cannot force two of its customers into arbitration over a dispute after the bank had first actively litigated the case. The case involves two elderly bank customers who had charged that Bank of America wrongfully took $6,500 of their retirement and SSI benefits from their bank accounts.
The court ruled that the bank “unreasonably delayed” asking for arbitration and “prejudiced the plaintiffs by causing them to incur costs and attorney fees and lose the benefits of arbitration.” Because of the bank’s delay and the costs incurred by the consumers, the court ruled that the benefits of arbitration had “become illusory.” The court ruling supports the arguments Consumers Union made in its amicus brief in the case. The ruling by the Second Appellate District in Los Angeles, filed January 30, is in the case Sobremonte v. Bank of America, No. B102106.
“This ruling says that a business can’t use arbitration to benefit only itself,” commented Gail Hillebrand, Senior Attorney for Consumers Union. “The court ruled that the bank can’t take advantage of consumers by keeping them in the dark about arbitration, litigating, then surprising them with a request to arbitrate on the eve of trial.”
The appeals court refused to enforce the arbitration clause because Bank of America actively litigated the case in court for ten months. Then a mere six weeks before trial was set to begin, the bank reversed course and asked the trial court to send the case to arbitration. The trial court agreed with the bank and ordered arbitration. The appeals court, however, found that the “bank’s conduct. . . was inconsistent with an intent to arbitrate.” During the 10 months of litigation, the parties conducted written discovery and depositions and a trial date was set without the bank ever mentioning arbitration. The plaintiffs stated that they were unaware of the arbitration clause Bank of America had inserted into their account agreements.
The appeals court found that the bank used the litigation process “to limit its own liability and narrow the case brought” by the plaintiffs. The 10 months of litigation also forced the plaintiffs to incur over 200 hours of attorneys’ fees and other costs preparing for trial. The court found that these costs and the lengthy delay harmed the plaintiffs by depriving them of the benefits of the arbitration system.
The bank and other corporations have claimed that arbitration offers a speedy, inexpensive method of resolving disputes. In this case, however, plaintiffs lost any such benefits because of the bank’s behavior.
In conclusion, the court found that parties relying on an arbitration clause must “(1) timely raise the defense [of arbitration] and take affirmative steps to implement the process and (2) participate in conduct consistent with the intent to arbitrate.” Otherwise, according to the court, the benefits of arbitration “become illusory.”
The plaintiffs in this case, Rosario Sobremonte and her 84-year older mother, Amparo Esperidion, are two Bank of America customers who claimed the bank wrongfully confiscated funds from their accounts. When the plaintiffs demanded return of their money, the bank refused, forcing them to file suit. At the time the two women opened their accounts at the bank, their account agreements did not contain an arbitration clause. However, several years later, the bank allegedly mailed a 3″ x 6″ fine print notice in customers’ monthly statements modifying the account agreements to include an arbitration clause. The customers in this case never recalled receiving that notice.
In September 1994, the bank debited Sobremonte’s and Esperidion’s accounts without notice, claiming a right of offset because another account on which Sobremonte was a signatory was overdrawn. Sobremonte was a signatory on the Esperidion account as well. In October 1994, Sobremonte wrote to the bank demanding return of the funds in her and her mother’s accounts. The bank ignored the letter. In December, the two customers hired a lawyer who wrote another letter to the bank demanding the funds. The bank took three months to respond with a letter denying the request. This letter never mentioned the existence of the arbitration clause in the account agreements.
The plaintiffs then filed suit against the bank in May 1995. In July, the bank responded to the complaint, and asserted the existence of an arbitration clause. However, the bank did nothing more to request arbitration of the dispute until 10 months later.
Consumers Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization, serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.