Choice of Law Clauses in CMAs (credit card agreements)

CONTRACTUAL CHOICE OF LAW – THE CASE OF CREDIT CARD AGREEMENTS (CMAs) 

Choice of law provisions are a universal feature of credit card agreements issued by major banks. They typically state that federal law controls, and that a specified state’s law controls to the extent that state law applies. The relevant state is typically the home state of the issuer.

The actual language varies, but they are typically much shorter than the arbitration agreements that most cardmember agreements also contain.

An arbitration clause is a particular form of a forum-selection clause. Choice-of-law clauses, by contrast, apply in any forum, whether a court (in Texas, justice court, county court, or district court) or an arbitral forum. They only pertain to substantive law, not the procedures of the particular forum in which the dispute is pending. Sometimes, the characterization of an issue as procedural or substantive (such as the statute of limitations defense) itself becomes an issue in litigation.

VARIATION IN THE FORM OF CHOICE OF LAW PROVISIONS 

Most choice of law clauses identity the chosen jurisdiction by name. If the choice-of-law provision or paragraph does not do so, it will at least identity the state by reference to some other document, such a separate terms document, a letter of approval. It may, for example, refer to the applicable state as the “LPO state”, which refers to the state in which the Loan Production Office (“LPO”) that originated the loan is located. The address of the LPO will be printed on the promissory note, additional terms document, or on some other related loan document.

WHICH STATE?

Typically the chosen state will be the home state of the bank that issues the card, but there may be confusion in that regard. Washington Mutual Bank, for example, which is now defunct, had a Nevada choice of law clause in its agreements, rather than one stipulating Washington State law as applicable to the account.

Citibank is generally thought to be New York bank. It originated there, and still has its headquarters there. But Citibank broadly speaking (Citigroup Inc.) is a bank holding company, and the credit card operations are conducted through a subsidiary. Citibank set up its credit card arm as Citibank (South Dakota), N.A. in South Dakota, as indicated by the bank's name. It has been succeeded by Citibank, N.A..

American Express Travel Related Services is a New York corporation, but both of its affiliated banks, American Express Centurion Bank, and American Express Bank, FSB, call Utah their home state. Centurion is a state bank organized under Utah law, and American Express Bank, FSB, is a federal savings bank, as indicated by the acronym appended as a suffix to its name.

Sample choice of law provision in cardmember agreement for Optima Card
issued by American Express Centurion Bank 

CONTRACTUAL CHOICE OF LAW AS AN ISSUE IN DEBT LITIGATION 

Few credit card debt plaintiffs make an issue of the choice of law. The same is true of the relatively small percentage cardholders who retain counsel when they are sued. Even if the choice-of-law issue is raised, it generally requires a motion for judicial notice of the law of the other state, accompanied by copies of applicable provisions.

Among high-volume litigators who file motions for judicial notice of foreign law are the following: Michael J Adams (Delaware law in suits by FIA on Bank of America accounts, and Utah law in Amex suits); and Allen L. Adkins (in debt collection suits filed on behalf of Citibank). Donald DeGrasse also discusses the contract formation issue under Utah law in his motions for summary judgment in Amex suits, but does not expressly move for summary judgment under Utah law, presumably because that might undercut the effort to obtain a summary judgment under Texas law under the alternative theory of account stated, which he also invokes as a legal basis of recovery.

A motion for judicial notice of foreign law would be unwarranted if the law of the other state does not differ in material ways, i.e. in a way that has a bearing on the issue in the case. The burden is on the proponent of the application of the foreign law. If the party raising the issue or requesting application of foreign law does not meet the substantive or procedural requirements, the trial court may presume the other state’s law is no different from Texas law.

HOW DOES OTHER STATES’ LAW DIFFER IN MATERIAL RESPECTS? 

With respect credit cards, the most important difference among states concerns interest rate regime. Some states have statutory limits on rates; others do not (or only in the sense that the rate must have been agreed to by the bank and the customer, and is thus “fixed” by contract, but with no upper limit on how it may be). States may also regulate other finance charges, such as late fees, overlimit fees, and other fees, and differ in their respective restrictiveness.

States also differ with respect to whether or not credit card agreements are subject to statute of frauds, or special exceptions thereto that take them out of the statute of frauds.

In Texas, the statute of frauds only applies to loans above a certain amount, and even in that scenario, credit cards are exempted from its reach.

In Utah, however, all loan contracts are covered by the statute of frauds as a general rule, and the bank must have complied with the credit card exception written into the Utah statute of frauds to be able to enforce a credit card agreement that is not signed by the party to be charged.

If the statute of frauds applies, alternative theories should not be available for as a legal basis for debt collection suits, at least not to the extent they authorize recovery without proof of the underlying contract and its terms. Account Stated is such a theory in Texas.

Since the statute of frauds does not even bar an oral loan contract, the absence of the cardmember agreement is immaterial, which makes the theory attractive to debt buyers and their attorneys, especially when they have trouble locating the applicable card agreement from the original creditor.

But original creditors such as Citibank invoke it too. Indeed, a highly prolific litigator for Citibank  – Allen L. Adkins -- promoted the account stated theory for credit card debt collection in the first instance, and convinced a number of Texas courts of appeals to approve it, and thereby alter the applicable case law precedents.

SAMPLE "GOVERNING LAW" CLAUSES IN CREDIT CARD CONTRACTS 

U.S. Bank National Association, ND

American Express Centurion Bank (a Utah state bank)

Arbitration Provisions in Credit Card Agreements and in Related Litigation

ARBITRATION AGREEMENTS IN CREDIT CARD DISPUTES 

Which credit card issuers have contracts with arbitration clauses? 

All but a few of the major issuers of credit cards draft cardmember or account agreements with arbitration clauses. Typically, they take up several paragraphs and have their own subheadings.

If a credit card agreement has a table of contents (such as a typical CARDMEMBER AGREEMENT of Discover Bank), "Arbitration of Dispute" or "Dispute Resolution" will be one of the items on it, with a reference to the corresponding page on which the relevant paragraphs are located. Typically, the arbitration agreement extends over several paragraphs, which makes the terms arbitration "clause" technically incorrect.

Sometimes, the arbitration agreement is a separate document that is referenced by the card member agreement. Capital One Customer Agreements pre-dating 2010, for example, consist of two pages, with the last paragraph on the second page referring to an arbitration agreement and incorporating it by reference. The arbitration agreement itself consist of a single page of fine print.

When Capital One sues, it typically produces both documents. Agreements from 2010 and later, however, will likely not contain any arbitration provisions, and do not reference any in the form of a separate document either. For older accounts, this raises an intriguing issue: Can a new version of a cardmember agreement that omits any reference to arbitration eliminate an arbitration agreement that was part and parcel of the prior agreement, the one that was in effect when the superseding one was issued?  

Stand-alone arbitration agreements 

The reason some creditors have separate arbitration agreements may be the absence of an arbitration clause in the original cardmember agreement. Some accounts may have been established long before the insertion of arbitration clauses into cardmember agreements became widespread industry practice.

Credit card banks may, of course, change the terms of the account agreements. They do so with change of terms notices, and sometimes such a notice is utilized to add arbitration clauses to existing agreements.

But a stand-alone arbitration agreement must be supported by consideration different from the existing agreement. Therefore, such stand-alone agreements must be reciprocal, i.e. subject both parties to mandatory arbitration if one party elects to arbitrate.

In rare cases, a consumer may even have elected to reject arbitration if they were given that option at the time the bank announced its plan to add arbitration provisions to the terms of accounts held by existing customers. See-- > Opt-out from arbitration.

Many Discover Bank Cardmember Agreements, for example, contain language in the first paragraph of the cover page informing the card holder of the right to reject arbitration, and the procedure for doing so. Change of terms notices from Citibank have similar opt-out provisions.

Credit card issuers that eschew arbitration clauses 

One major card issuer whose credit card agreements are silent on arbitration is Target National Bank. It files its own lawsuits on defaulted account (some of which were originated by Retailers National Bank, a predecessor).

In such suits, arbitration is not an issue, because the right to arbitrate is a creature of contract, and as such requires an underlying arbitration agreement.

BLOG POSTS ON RELATED TOPICS:

Benefits and Drawbacks of arbitration of debt claims as opposed to litigation
Arbitration Clause as a defense in a credit card collection suit
Waiver of the Right to Arbitrate in credit card suit
Motion to Compel Arbitration and Motion to Abate the Lawsuit Pending Arbitration
Implications of Seeking Order to Compel Arbitration in a credit card debt suit
Motion to Dismiss based on Arbitration Clause vs Motion to Abate
Interlocutory appeal of order denying arbitration in the trial court
Judicial confirmation of arbitration award
Motion or suit to set aside arbitration award

EXAMPLES OF ARBITRATION AGREEMENTS EMBEDDED WITHIN CARD AGREEMENTS: 

US Bank NA ND: North Dakota Arbitration clauses from 2008 Agreement 

Wells Fargo Bank N.A. Arb provisions in customer agreement 

WAIVER OF RIGHT TO ARBITRATION IN A CREDIT CARD CASE 

Like any other contract right, the right to arbitrate under a valid arbitration agreement may be waived. It happens routinely, even though arbitration offers certain benefits over litigation. Typically, waiver does not result from a conscious tactical choice, not to mention an express statement in a pleading.

For the plaintiff, the decision to file suit constitutes a choice in favor of litigation rather than arbitration, which makes it likely that the plaintiff would oppose litigation if the defendant wanted to go that route.

But most defendants do not make an issue of arbitration. They waive the right to arbitrate that they may possess, by failing to take any action to enforce it. This can be done in a number of ways: By asserting the existence of an arbitration clause as an affirmative defense; by filing a motion to dismiss based on arbitrability of the claim, or by filing a motion to compel arbitration.

Each option is the subject of a separate blog post.