U.S. Supreme Court Issues Ruling Concerning Class Action Arbitrations

A divided U.S. Supreme Court failed to resolve whether class action arbitrations are permitted when not expressly authorized by an arbitration clause. In remanding a decision of the South Carolina Supreme Court that held that class arbitrations are permitted under South Carolina law, the U.S. Supreme Court held that the arbitration clause at issue was ambiguous and that whether it permitted class arbitration should have been resolved by the arbitrator rather than the state court. Accordingly, the plurality opinion did not address the merits of the South Carolina Supreme Court’s decision. The dissent, in contrast, concluded that because the arbitration clause explicitly authorized arbitration only between Green Tree Financial Corporation and the customer executing its contract, the agreement did not permit class arbitrations. The dissent would have enforced that prohibition, despite apparent South Carolina law to the contrary, because the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., requires that an arbitration agreement be enforced in accordance with its terms. Thus, after Bazzle, it is clear that the best way to avoid class arbitration is to prohibit it explicitly in an arbitration clause governed by the FAA. What remains unresolved is whether such a clause would be enforceable in the face of authority in some states that considers such clauses unconscionable. Green Tree Financial Corp. v. Bazzle, 2003 WL 21433403 (June 23, 2003).

The OCC issued an interpretive letter ("Letter #965") in which it concluded that a national bank (the "Bank") (through its operating subsidiary (the "Subsidiary")) could purchase a minority interest in the shares (the "Shares") of a Bermuda-chartered reinsurance company as a means of obtaining professional liability insurance for the Subsidiary’s insurance agents. Purchasing insurance for the Bank’s and the Subsidiary’s own risk control needs is an incidental power of a national bank under 12.U.S.C.§24(Seventh). Even though a national bank is generally precluded from purchasing s hares of stock for investment purposes, where, as here, the purchase is useful to the operation of the Bank and there is no investment or speculative motive for the acquisition, the purchase is permissible. In Letter #965, in order to obtain the professional liability insurance it desired in the most cost-effective manner, the Subsidiary was required to purchase the Shares. Letter #965 noted that the investment in the Shares is "nominal," represents less than 1% of the Bank’s capital and less than 1% of the outstanding shares of the Bermuda reinsurance company, and concluded that the purchase of the Shares was permissible. Letter #965 pointed out, however, that since the reinsurance company is located outside of the U.S., the Bank needs to determine whether FRB approval is required for the purchase of the Shares under Regulation K.

The FDIC issued a financial institution letter (FIL-52-2003, the "FIL") in which it discusses revisions to its approach in examining state nonmember banks ("Banks") for compliance with consumer protection laws and regulations. In general, the FDIC’s revised examination process combines its current risk-based examination process with "an in-depth evaluation of a [Bank’s] compliance management system resulting, stated the FIL, "in a top-down, risk-focused approach to examinations." The revised examination process will start to be used for on-site examinations on or after June 30, 2003. However, the current risk-based approach rather than the new, combined approach will continue to be used for fair lending compliance and Community Reinvestment Act compliance examinations. The FIL describes the 3 key elements of a compliance management system as: (1) board and management oversight; (2) compliance program (policy and procedures, monitoring, training and response to customer complaints); and (3) audit. The FDIC states that it expects that the revised examination process will, over time, allow its examiners to spend more of their time and resources examining Banks with weak compliance management systems. The FIL includes two new chapters of the FDIC Compliance Examination Manual that cover respectively an "overview of the compliance examination" and a description of a "compliance management system."

The OCC issued an interpretive letter ("Letter #966") in which it concluded that a national bank’s (the "Bank") subsidiary (the "Subsidiary") that provides relocation-related services for corporate customers’ relocating employees, may, subject to certain limitations, acquire title to the relocating employees’ residential real estate. The Subsidiary’s primary business functions involve the permissible activities of acting as a finder and as a lender. The Subsidiary uses its authority to act as a finder to bring together unaffiliated companies (e.g. movers, realtors) with relocating employees of the Bank’s corporate customers. The Subsidiary exercises its lending authority by providing advances to the relocating employees based upon independent valuations of their homes provided by third party appraisers. The Subsidiary proposes in Letter #966 to begin to use a federal tax-favored procedure (utilized by its competitors) whereby the relocating employee would deed title to the real estate to the Subsidiary and the Subsidiary would actually hold title to the real estate for a period until the property was sold to a purchaser. Letter #966 concludes that, subject to the limitations described below, this activity is permissible for a national bank and does not violate the restrictions against holding real estate under 12 U.S.C.§29. The 4 conditions imposed by the OCC were that the Subsidiary: (1) use an unrelated third party as nominee to acquire and hold title to the property; (2) refrain from using the property; (3) have an unrelated third party manage the property; and (4) refrain from holding the property for more than 90 days and have procedures for the immediate disposition of the property after the expiration of the 90 day period.

FDIC Chairman Powell discussed regulatory and supervisory issues regarding Industrial Loan Companies ("ILCs"), and the debate that has arisen as a result of pending federal legislation that would give them powers more nearly equivalent to other state-chartered banks. (ILCs are a type of full-service state bank charter, principally chartered in California and Utah, the parents of which are not deemed bank holding companies ("BHCs") subject to FRB supervision or activities limitations). Chairman Powell noted that ILCs have existed for over 100 years, that approximately 50 have FDIC insurance, and that they only comprise about 1.4% of the nation’s banking assets. He asserted that the ILC charter, per se, is no riskier than other charter types, as it is subject to the same regulation as other state chartered nonmember banks, the FDIC does v isit parent companies of ILCs in connection with its examination process and the firewalls safeguarding ILCs from misuse by their parents are in many cases more stringent than the firewalls that exist with BHC affiliates. As to the issue of whether ILCs, which are owned by car manufacturers and others, represent an improper mixing of banking and commerce (as FRB Chairman Greenspan has declared), Chairman Powell stated that the FDIC has not yet taken a position on that, but will once the agency holds its symposium on banking and commerce this summer and completes its Future of Banking study.

The Maryland Court of Appeals (the "Court"), Maryland’s highest court, held that a bank may require a non-customer to submit to thumbprint identification before the non-customer may cash a check. In the case, an individual who was not a Bank of America accountholder attempted to cash a check made out to him at a Bank of America branch. The check was on the account of a Bank of America customer. The customer gave the teller a driver’s license and a credit card as identification, but refused to place a "thumbprint signature" on the check, as required by Bank of America policy, and Bank of America refused to cash the check. The Court noted that the thumbprint ID procedure had been effective in combating check fraud and held that Bank of America had acted properly in refusing to cash the check. Messing v. Bank of America, Md. Court of Apps., No. 27 (Apr. 7, 2003).

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