Indiana Supreme Court Rules that a Credit Union Must Obtain Affirmative Consent of Members to Enforce Arbitration Clause

Henry Meier, The Law Office of Henry Meier

It just got harder for Indiana credit unions to enforce arbitration clauses against members suing them.

In Tonia Land vs. IU Credit Union, the Indiana Supreme Court ruled that a credit union could not enforce an arbitration clause because its members did not affirmatively consent to be bound to the provision in an amended account agreement. The decision has no binding effects outside of the Hoosier state but could provide persuasive authority for other courts analyzing the validity of arbitration clauses.

In 2019, the credit union sent its members a proposed modification to its account agreement, which authorized arbitration and prohibited class-action lawsuits. As is standard practice, the agreement gave members 30 days to opt out of the arbitration clause.

Land did not opt out. Nevertheless, Land subsequently commenced a class-action lawsuit against the credit union, claiming that its assessment of overdraft fees violated Indiana law and the account agreement terms. The trial court agreed with the credit union and ruled that the case should be arbitrated, but on appeal, an Indiana appellate court reversed the lower court ruling. This case was appealed to the Indiana Supreme Court, which ultimately agreed that the arbitration clause was not enforceable.

Many credit unions and banks give members and customers the opportunity to opt out of arbitration clauses before they take effect. What makes this case unique is that the court made this ruling despite finding that the credit union provided reasonable notice of the amended account agreement and the steps that members had to take to opt out of the arbitration clause. It nevertheless held that the plaintiff’s consent could not be inferred from her decision to remain with the credit union. It explained that “the mere fact that an offeror states that silence will constitute acceptance does not deprive the offeree of his privilege to remain silent without accepting.” Instead, for the arbitration clause to be effective, the credit union had to prove that the plaintiff intended to accept the offer by remaining silent, which the credit union could not do.

The court based this ruling on three primary conclusions. First, it said that nothing in the original account agreement signed by the plaintiff suggested that silence and continued use of the account would result in the acceptance of any future modification. Second, while the language permitted members to opt out of the credit union’s arbitration clause, nothing in the proposed amendments “conditioned continued use of the accounts on the acceptance” of these changes. Finally, the court held that the typical way the credit union dealt with members did not give the plaintiff any reason to think that silence would constitute acceptance. It pointed out, for example, that when she signed up for her online account, she had to affirmatively press an “accept” button.

Since the 1920s, the Federal Arbitration Act has mandated that states recognize the validity of arbitration clauses included in contracts, and the Supreme Court has ruled that this same protection extends to consumer contracts. But while federal law recognizes the validity of arbitration clauses, state law determines whether or not consumers have agreed to a contract containing an arbitration clause.

This case is the latest to invalidate an arbitration clause on the grounds that it was not agreed to by its members. For example, Sevier County Federal Credit Union v. Branch Banking & Tr. Co ruled that an arbitration clause containing a class-action ban was not enforceable because it did not give members the opportunity to opt out of the clause without giving up membership in the credit union. In October, in Pruett vs. Westconsin Credit Union, the court of appeals in Wisconsin ruled, “in certain circumstances, failure to opt out of an arbitration provision can constitute acceptance.” In this case, however, the opt-out offer was not sufficiently clear to reasonably convey what was required for members to demonstrate consent to or rejection of the modified terms.

For credit unions in Indiana, Tonia calls into question the validity of any arbitration clause that members had to affirmatively reject. For credit unions in other states, these decisions underscore that the validity of arbitration clauses will depend on the clause’s language and the procedures used to provide members notice of the proposed changes and a  demonstration that a member has agreed to new terms. These determinations can vary widely by state and for which your credit union should obtain legal assistance.

In the meantime, if Indiana’s ruling leaves you scratching your head, take comfort that you are not the only individual befuddled by the court’s ruling. As the dissenting judge explained when the credit union member won her appellate-level reversal, “[because] I am concerned that today's decision could upend long-accepted business practices of companies with large customer bases in Indiana — from Netflix to Citibank and thousands of smaller institutions in between — I respectfully dissent. The IU Credit Union provided Land an opportunity to opt out without losing her banking privileges; all she had to do was send written notice within 30 days. The option was neither burdensome nor unreasonable, but the consequences of our decision today may turn out to be both.”