Sagal v. First Usa Bank, N.A.

• Decision Date: 30 August 1999
• Docket Number: No. Civ.A. 98-694-RRM.,Civ.A. 98-694-RRM.
• Parties: Stuart L. SAGAL, Individually and on behalf of himself and all others similarly situated, Plaintiff, v. FIRST USA BANK, N.A., Defendant.
• Court: U.S. District Court — District of Delaware

69 F.Supp.2d 627

Stuart L. SAGAL, Individually and on behalf of himself and all others similarly situated, Plaintiff, v. FIRST USA BANK, N.A., Defendant.

No. Civ.A. 98-694-RRM.

United States District Court, D. Delaware.

August 30, 1999.

Kevin Gross, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware, Kenneth A. Elan, New York, New York, Joseph P. Garland, New York City, for plaintiff.

Somers S. Price, Jr., Potter Anderson & Corroon LLP, Wilmington, Delaware; Mark A. Aronchick, and John P. Lavelle, Jr., Hangley Aronchick Segal & Pudlin, Philadelphia, Pennsylvania, for defendant.

OPINION

McKELVIE, District Judge.

This is a consumer deception case. Plaintiff is Stuart L. Sagal, a citizen and resident of the State of Maryland. He is suing on behalf of himself and all others similarly situated. Defendant is First USA Bank, N.A., a federally chartered banking association with its principal office in Wilmington, Delaware.

Sagal, a First USA credit card holder, transferred funds using a "Convenience Check" provided by First USA. After First USA assessed a $138 transaction fee, Sagal brought a class action suit asserting that First USA failed to clearly and conspicuously disclose its fee structure. Sagal bases his suit on numerous grounds, including on alleged violations of the federal Truth in Lending Act (TILA), 15 U.S.C. §§ 1632(a), 1637(c)(1)(B) (1994).

First USA filed a motion to dismiss Sagal's claim pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure. In the alternative, First USA moves to stay the claim pursuant to § 3 of the Federal Arbitration Act (FAA), 9 U.S.C. § 3 (1994). First USA argues that a mandatory arbitration clause in the cardholder agreement precludes Sagal from bringing his suit. Sagal opposes the motion, answering that arbitration is fundamentally inconsistent with the purposes of the TILA. This is the court's decision on First USA's motion.

I. FACTUAL BACKGROUND

The court draws the facts in this case from the complaint submitted by Sagal and from the affidavit of Donna Barrett submitted by First USA. This court considers the factual assertions raised by First USA because the allegations challenge the subject matter jurisdiction of this court. See Gotha v. United States, 115 F.3d 176, 179 (3d Cir.1997). Moreover, when such a motion attacks the existence of subject matter jurisdiction in fact, no presumption of truthfulness attaches to the plaintiff's allegations. See Mortensen v. First Federal Savings and Loan, 549 F.2d 884, 891 (3d Cir.1977).

The facts in this case are undisputed. Sagal states in his complaint that, in or about 1997, he received promotional material from First USA soliciting him to apply for a credit card. This solicitation offered a 3.9% interest rate for an introductory period, and highlighted the privilege of cardholders to write "Convenience Checks." Sagal states that in July 1997, after receiving the solicitation, he applied for and received a credit card issued by First USA. A Cardmember Agreement accompanied the card, explaining how First USA calculates finance charges for purchases, cash advances, and Convenience Checks. In particular, Sagal alleges that the Cardmember Agreement stated that First USA would impose a one-time Transaction Finance Charge for each use of a Convenience Check, with the charge amounting to 2% of the transaction amount.

The affidavit submitted by First USA states that the Cardholder Agreement contained an "Amendments" clause, providing:

Amendments: We can amend the terms of this Agreement at any time. We will notify you of what these amendments are. Subject to the requirements of applicable law, any amendment to this Agreement will become effective at the time stated in our notice to you, and unless we specify otherwise, the amended terms of this Agreement will apply to all outstanding unpaid indebtedness in your Account as well as new transactions.

The affidavit submitted by First USA states that in or about January 1998, First USA mailed to existing cardholders, including Sagal, an amendment to the Cardholder Agreement which added an arbitration clause to the contractual terms. As alleged by First USA, the arbitration provision applies by its terms to all claims then existing or that might arise in the future, except to claims filed by March 1, 1998 and to class actions certified by that date. The clause provides that:

Any claim, dispute or controversy ("Claim") by either you or us against the other, or against the employees, agents or assigns of the other, arising from or relating in any way to this Agreement or your Account, including Claims regarding the application of this arbitration clause or the validity of the entire agreement, shall be resolved by binding arbitration by the National Arbitration Forum.

First USA states that the amendment provided an opt-out procedure, whereby any cardmembers could reject the terms of the amendment by sending First USA written notification. First USA alleges that it did not receive such notice from Sagal.

Sagal states in his complaint that in the second half of 1998, he and numerous other cardholders received another written solicitation from First USA. The solicitation allegedly contained a number of Convenience Checks and repeatedly emphasized that the checks come with a 3.9% fixed annual percentage rate (APR). The solicitation also contained a postscript written in fine print. Sagal alleges that the postscript stated that "[t]he Transaction Finance Charge for these Convenience Checks is equal to the greater of $5 or 3% of the amount of the purchase or check."

Sagal states that on or about October 28, 1998, he wrote a Convenience Check for $4600. On or about November 22, 1998, Sagal allegedly received his monthly credit card statement from First USA. The statement disclosed a transaction fee charge of $138, representing 3% of the $4600 transferred.

On December 11, 1998, Sagal filed a complaint instituting a class action suit. He filed an amended complaint on February 5, 1999. The amended complaint sets out five legal claims. First, Sagal asserts that First USA has violated the federal Truth in Lending Act (TILA) and the regulations promulgated pursuant to it by the Board of Governors of the Federal Reserve System. In particular, section 1637(c)(1)(B) of the Act requires that lenders "shall disclose clearly and conspicuously ... [a]ny fee imposed for an extension of credit in the form of cash." 15 U.S.C. § 1637(c)(1)(B) (1994). Regulation Z, which implements the TILA, similarly provides that disclosures of finance charges and annual percentage rates must be clear and conspicuous. 12 C.F.R. § 226.5(a) (1999). Sagal argues that First USA's solicitation failed to disclose the terms of the transaction fee in a clear and conspicuous manner, and that he and similarly situated people have sustained damage as a result.

Sagal's second claim is similar to his first, but is based on section 1632(a) of the TILA. This provision, as implemented by Regulation Z, requires that certain information, including finance charges, be clearly and conspicuously disclosed. 15 U.S.C. § 1632(a) (1994); 12 C.F.R. § 226.5 (1999).

Sagal's remaining claims are for breach of implied covenant of good faith and fair dealing, breach of contract, and violation of the Delaware Consumer Fraud Act, 6 Del.C. § 2513(a).

On February 12, 1999, First USA filed a motion to dismiss the suit or, in the alternative, to stay the case in favor of mandatory arbitration. First USA asserts that the arbitration clause contained in the amendment to the Cardmember Agreement requires that the suit be submitted to arbitration. First USA argues that the arbitration clause deprives the court of jurisdiction over the present dispute, and that the court should dismiss the suit pursuant to Rule 12(b)(1).¹ Alternatively, First USA argues that the court should stay the case pursuant to section 3 of the Federal Arbitration Act (FAA) in favor of mandatory arbitration. 9 U.S.C. § 3 (1994).

Sagal, in his answering brief, argues that enforcement of the arbitration clause is improper. He asserts that mandatory arbitration will preclude his right to bring a class action suit. Sagal indicates that Congress, having recognized that individual claims under the TILA are often too small to litigate, depends on class actions as a means to enforce the Act. As such, Sagal asserts that there is a conflict between the Federal Arbitration Act and the TILA, requiring the court to deny enforcement of the arbitration clause of the Cardmember Agreement.

II. DISCUSSION

A. Validity and Enforceability of the Arbitration Clause

The first step in the present inquiry is to determine if the arbitration clause of the Cardmember Agreement is valid and enforceable. See Harris v. Green Tree Financial Corp., 183 F.3d 173, 179-80 (3d Cir.1999) ("If ... a court deems a controverted arbitration clause a valid and enforceable agreement, it must refer questions regarding the enforceability of the terms of the underlying contract to an arbitrator, pursuant to section four of the FAA."); Great Western Mortgage Corp. v. Peacock, 110 F.3d 222, 228 (3d Cir.1997) ("In conducting this inquiry the district court decides only whether there was an agreement to arbitrate, and if so, whether the agreement is valid."). The FAA requires the court to look to principles of contract law to determine if arbitration clauses are valid and enforceable. See 9 U.S.C. § 2 (1994).

1. Conflict between the TILA and the FAA

The sole argument raised by Sagal in his answering brief is that the mandatory arbitration clause is unenforceable because it frustrates the policies of the TILA. The Supreme Court has recognized that arbitration clauses may be unenforceable when Congress indicates that a federal law shall override the provisions of the FAA. See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). McMahon directs courts...