SCONC: Canteen v. Charlotte Metro Credit Union: Unilateral Addition of Arbitration Provision and Waiver of Class Action

Summary:

Pamela Phillips opened a checking account with the Charlotte Metro Credit Union in 2013, agreeing to a membership agreement that included provisions for unilateral amendments by the Credit Union and specified governing laws. Following a class action lawsuit in 2020 (in which Ms. Phillips was not involved) Charlotte Metro, pursuant to its change-of-terms provision, amended the membership agreement to include an arbitration clause, notifying Ms. Phillips via email, but she did not opt out of the arbitration amendment  within the given 30-day window.  When  Ms.  Phillips filed a class action lawsuit in March of 2021 against the Charlotte Metro for illegal overdraft fees,  the trial court denied the motion by Charlotte Metro to compel arbitration.  While the Court of Appeals reversed the trial court's decision, ruling that the arbitration amendment was enforceable, a  dissent argued that the amendment violated the covenant of good faith and rendered the contract illusory.

The North Carolina Supreme Court held that while "a change-of-terms provision does not grant a party free rein to alter a valid agreement"  but  must comply with the implied covenant of good faith and fair dealing.  The Court agreed with the framework from other jurisdictions, see Badie v. Bank of Am, 79 Cal. Rptr. 2d 273 (Cal. Ct. App. 1998),  and the North Carolina Court of Appeals, see SearsRoebuck and Co. v. Avery, 163 N.C. App. 207 (2004), stating that changes to a contract must relate to the "universe of terms" included in the original agreement.  Since the original contract contained a "Governing Law" provision, which considered the allowable forums for resolving disputes, the arbitration amendment was within the reasonable contemplation of the parties. Change-of-terms provisions extend  “insofar as the new or modified terms relate to subjects already addressed in some fashion in the original agreement.” Badie at 220.

Further, the SCONC found both that the contract was not illusory because the Notice of Amendments provision was limited by law, requiring good faith and fair dealing in any modifications and that there was mutual assent as Phillips had agreed to the Notice of Amendments provision in 2014, which allowed unilateral changes by the Credit Union upon notice, thus binding her to the arbitration amendment.

Justices Riggs and Earls dissented and would have instead held that  the arbitration and class action waiver amendment should be void, as it breaches the implied covenant of good faith and fair dealing, renders the contract illusory, and unfairly deprives Ms.  Phillips of her rights. The dissent called for a more balanced approach that considers the realities of consumer contracts and the need to protect consumers from unfair unilateral amendments by corporations.

Commentary:

It seems an overreach to hold that the statement in the Governing Law provision  that "As permitted by applicable law, you agree that any legal action regarding this Agreement shall be brought in the county in which the credit union is located"  is sufficiently related to arbitration to allow the unilateral amendment of the contract,  when arbitration was not explicitly included in the 2014 member agreement,  despite being fairly well known as an conflict resolution options since at least 1925, when the Federal Arbitration Act became law. That the option of arbitration is unused and unmentioned in the agreement would seem so indicate that it is outside the "universe of terms."

It is not hard to imagine (as Justice Riggs does in her dissent)  that  if the members of a class action against Charlotte Metro Credit Union each individually sought to force arbitration over some issue  that Charlotte Metro, being forced to pay the fees and costs of all of those arbitrators,  would suddenly find a way out of arbitration.  (Probably by unilaterally changing  its  terms and agreements in the middle of litigation.)  See the recent White v. Title Max  where a creditor played similar arbitration games.

The majority opinion at least (?)  does say the quiet part out loud  in Footnote 6,  where it shows its servitude to capital by bemoaning the idea that it would be impossible for "products and services be efficiently delivered if, under such a limited view of the modern market, consumer contracts had to be canceled and renegotiated with every necessary update...."

And while these contracts absolutely never give the consumer any authority to unilaterally change the terms,  the ability to alter the rights and duties of both borrowers and lenders is,  to some extent, granted to a consumer who files a bankruptcy reorganization plan,  whether Chapter 13 or 11.  Perhaps it should not give pause to bankruptcy courts when  creditors fail,  just as Ms.  Phillips did with her 30-day opt out right,  to object to treatment in such their plans.  At the very least,  plan provisions that eliminate arbitration provisions and waivers of class action should be within the universe of terms.