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Eleventh Circuit Allows Bank to Rescind Waiver of Its Right to Arbitrate Borrower's Claims

Friday, September 16, 2011

Kate Hooker | Bloomberg Law Krinsk v. SunTrust Banks, Inc., No. 10-11912, 2011 BL 229079 (11th Cir. Sept. 7, 2011) On September 7, 2011, the U.S. Court of Appeal for the Eleventh Circuit ruled, as a matter of first impression, that a defendant's waiver of its contractual right to arbitrate may be rescinded upon the filing of amended complaint that dramatically alters the scope of the litigation. In December 2006, Sara Krinsk, a 92-year-old resident of Sarasota, Florida, applied for and obtained a home-equity loan from SunTrust Bank. Under the terms of the loan agreement, Krinsk could draw from a $500,000 home-equity line of credit (HELOC) which was secured by her $1.6 million house. The agreement also contained a clause that mandated arbitration whenever one of the parties elected to arbitrate and provided the other party with written notice. Thus, under the contract, one party's decision to arbitrate would necessarily preclude resolution of the claims by class action. In the fall of 2008, SunTrust sent Krinsk a letter asking for her updated financial information. After Krinsk responded with the requested information, SunTrust suspended her access to $400,000 of the HELOC, stating that it was concerned that she would be unable to meet her obligations under the loan agreement. On May 15, 2009, Krinsk filed a class action complaint against SunTrust in the U.S. District Court for the Middle District of Florida. According to the complaint, SunTrust suspended the HELOCs of Krinsk and other Florida residents "as part of a scheme SunTrust concocted to restore its capital reserves, which had become depleted in the fall of 2008." Krinsk argued that HELOCs sold between the late 1990s and early 2009 and collateralized by Florida real estate were particularly risky for SunTrust, and the bank was looking for reasons to liquidate the remaining credit balances and minimize its exposure. Thus, Krinsk asserted, SunTrust sent letters like the one she had received in order to try to establish a pretextual reason to suspend the HELOCs. Krinsk also contended that the bank specifically targeted elderly HELOC borrowers because it "anticipated little resistance" from them. The putative class, which Krinsk estimated would include hundreds of Florida residents, consisted of all Florida permanent or part-time residents that entered into an agreement with SunTrust entitled "Access 3 Equity Line Account Agreement and Disclosure" and who, after attaining the age of sixty-five (65), received a letter from SunTrust between July 1, 2008 and October 16, 2008, requesting updated financial information . . . and who were subsequently informed their collateralized credit line had been suspended or reduced during the draw period for purportedly failing to provide the information requested by SunTrust. SunTrust moved to dismiss the complaint with no mention of arbitration. The parties also filed a joint case management report in which SunTrust explicitly stated that it opposed arbitration of Krinsk's claims. SunTrust also established a schedule for discovery and pre-trial proceedings and vigorously opposed Krinsk's motion to certify the class. The district court eventually granted SunTrust's motion to dismiss in part, but granted leave for Krinsk to amend her complaint. Thus, on January 28, 2010, Krinsk filed an amended complaint asserting similar but slightly revised claims and a new proposed class definition, which dramatically expanded the potential class to include plaintiffs of any age whose HELOC access were suspended by SunTrust for any reason during a three-year class period. Krinsk guessed that the new proposed class would encompass thousands, or even tens of thousands, of people. On February 10, 2010, SunTrust filed an answer to the amended complaint in which it demanded arbitration of Krinsk's claims pursuant to the arbitration clause of the loan agreement. SunTrust also filed a motion to compel arbitration, which the district court denied on the ground that SunTrust had waived its right to require arbitration. Specifically, the district court found that SunTrust "invoked the judicial process in litigating this case without any indication that it was contemplating arbitration," and, in fact, explicitly opposed arbitration. The district court also held that allowing SunTrust to assert arbitration rights now would prejudice Krinsk, who had spent nine months on class-related motions and discovery because she reasonably assumed that SunTrust would not try to arbitrate the claims. The filing of the amended complaint was "immaterial" to its determination, the district court explained, because the claims were "based on the same operative facts" as the claims in the original complaint. SunTrust filed a timely appeal.

Waiver of Right to Arbitrate Rescinded

Whether the filing of an amended complaint "rejuvenates" a party's right to compel arbitration raised a question of first impression in the Eleventh Circuit. Normally, an amended complaint replaces the initial complaint and becomes the "operative pleading" in the litigation. However, the Court explained, if a defendant is allowed to file a new response to an amended complaint that "changes the theory or scope of the case," so too should he be permitted to rescind his waiver of arbitration rights under similar circumstances. In the Court's view, Krinsk's amended complaint was hardly "immaterial," and the district court's decision to the contrary "flatly ignored the significance of the new class definition in the Amended Complaint, which greatly broadened the potential scope of this litigation by opening the door to thousands—if not tens of thousands—of new class plaintiffs not contemplated in the original class definition." Thus, the Court held that SunTrust should have been permitted to rescind its waiver of its arbitration rights, despite its "prior invocations of the judicial process." Its participation in the litigation prior to the filing of the amended complaint was predicated on the assumption that it would have to defend itself in court against only the relatively small class that Krinsk defined in the original complaint. Given that there was no way SunTrust could have known that Krinsk would so dramatically alter the scope of the lawsuit nine months into the litigation, SunTrust's prompt motion to compel arbitration should have operated as a rescission of its earlier waiver of arbitration rights under the loan agreement.
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