Military veterans must arbitrate credit card rate disputes

The Servicemembers Civil Relief Act does not bar enforcement of an arbitration agreement concerning the terms of conditions of credit cards that former military members signed up for, the 4th U.S. Circuit Court of Appeals has held, reversing a ruling from the lower court.

The plaintiffs, military veterans who had left active-duty service, sued Citibank, the issuer of the cards, for increasing the interest rates to the standard civilian rates rather than the reduced ones they previously were allowed. The plaintiffs alleged that violated the SCRA and that the act intended to preclude enforcement of arbitration agreements.

But the 4th Circuit was not convinced.

“The language in [the SCRA] thus defines the action that the persons aggrieved may bring, but it does not indicate that the person must bring a class action or even must file an action in federal court,” Judge Paul V. Niemeyer wrote for the panel.

He further noted that the provision does not bar resolving a SCRA claim in another forum.

“Indeed, the statute does not even mention arbitration, much less prohibit the enforcement of agreements to arbitrate,” Niemeyer wrote.

The opinion is Espin v. Citibank NA (VLW 025-2-030). Senior Judge Henry F. Floyd Jr. and U.S. District Court Judge Kenneth D. Bell joined Niemeyer on the panel, the latter sitting by designation.

Petition for rehearing

Counsel for the appellee veterans filed a petition for rehearing on Feb. 10. The petition argues that the case “involves questions of exceptional importance and conflicts with decisions of the Supreme Court, [the 4th Circuit], and another Court of Appeals.”

“The panel’s novel interpretations revoke the only practical means for active duty servicemembers to combat large scale financial abuses and conflict with Congress’s intent to ensure servicemembers can join together and vindicate their rights in court,” the petition states.

We believe the panel’s interpretation of the SCRA provision is contrary to Congress’s clear intent to allow servicemembers’ claims to proceed on a classwide basis. The panel’s decision is also contrary to how the Supreme Court and the 4th Circuit have approached the question whether Congress intended to displace arbitration agreements.

— Leah M. Nicholls, Access to Justice Project

Washington, D.C.’s Leah M. Nicholls, director of the Access to Justice Project, represented the appellees.

“We believe the panel’s interpretation of the SCRA provision is contrary to Congress’s clear intent to allow servicemembers’ claims to proceed on a classwide basis,” Nicholls told Virginia Lawyers Weekly. “The panel’s decision is also contrary to how the Supreme Court and the 4th Circuit have approached the question whether Congress intended to displace arbitration agreements.”

D.C. attorney Andrew Pincus, who represented Citibank, declined to comment.

Background

Multiple servicemembers were issued credit cards by Citibank together with its terms and conditions, which included an agreement to arbitrate “‘any claim, dispute, or controversy’” on an individual, non-class basis.

The servicemembers apparently accrued substantial balances on the credit cards after they left active-duty service, at which point Citibank began charging them the standard civilian interest rates and fees on the balances.

While on active duty, the servicemembers were charged a lower interest of 6% or less on their credit card balances, as required by the SCRA. The servicemembers claimed the switch to the civilian rate was a “veteran penalty.”

The plaintiffs commenced a class action against Citibank in September 2022, alleging violations of the SCRA, the Military Lending Act, the Truth in Lending Act, and the Credit CARD Act of 2009, as well as state claims for breach of contract.

Citibank filed a motion under the Federal Arbitration Act to compel arbitration pursuant to the card terms and conditions. The District Court denied the motion, finding the SCRA authorizes plaintiffs to file their action in federal court as a class and that the SCRA “overrode the plaintiffs’ preexisting arbitration agreements.”

The trial court concluded that it did not have to consider application of the FAA, as Congress “evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.”

Citibank subsequently filed an interlocutory appeal to the 4th Circuit.

Reversal

Niemeyer said the court remains “sensitive to Congress’s solicitude for servicemembers,” noting the SCRA “is the product of ‘a long record of congressional concern for the domestic affairs of those in military service.’”

At issue in the case was a 2019 provision of the SCRA. The provision created a private right of action to state that any person aggrieved by an alleged SCRA violation “may in a civil action … be a representative party on behalf of members of a class or be a member of a class, in accordance with the Federal Rules of Civil Procedure, notwithstanding any previous agreement to the contrary.”

The District Court held that “notwithstanding any previous agreement to the contrary” meant the act “foreclosed enforcement of the arbitration agreements that precluded class proceedings.”

On appeal, Citibank argued that the lower court misread and misapplied the provision, noting that the SCRA does not mention arbitration and does not “in ‘express and unequivocal terms’” prohibit FAA-covered arbitration agreements.

The 4th Circuit disagreed with the lower court’s interpretation of the provision.

“We read that provision to authorize a person with a claim under the SCRA to file a civil action in federal court and to prosecute that action as a class action under the Federal Rules of Civil Procedure,” Niemeyer wrote. “We conclude that the clause ‘notwithstanding any previous agreement to the contrary’ confirms the authority of persons aggrieved to bring federal class actions despite any previous agreement to the contrary.”

Niemeyer noted that that conclusion “is comfortably consistent with the cases in which the Supreme Court has concluded that, unless they do so explicitly, federal statutory remedies do not override agreements to arbitrate.”

Specifically, Niemeyer referenced the U.S. Supreme Court’s 2012 decision in CompuCredit Corp. v. Greenwood as “particularly relevant and indeed controlling.”

In CompuCredit, the plaintiffs agreed to arbitrate, as the plaintiffs in Espin did. The Supreme Court eventually held that the because the Credit Repair Organizations Act was silent on whether claims can proceed in arbitration, the FAA requires the arbitration agreement enforced per its terms.

“Likewise, in this case, because the SCRA is silent on whether claims can proceed in an arbitral forum, the FAA requires that the plaintiffs’ arbitration agreements be enforced according to their terms, which include a term that arbitration be conducted on an individual basis,” Niemeyer wrote.

He went on to say that the legislative history of the act “confirms that Congress never intended to prohibit arbitration,” and that a provision that would have prohibited arbitration of SCRA claims without mutual consent was never enacted.

“Congress’s failure to enact this provision in both 2019 and 2021 signals an understanding that the amendment it enacted in 2019 – 50 U.S.C. § 4042(a)(3), which is at issue here – does not prohibit arbitration provisions with class waivers,” Niemeyer wrote.

The plaintiff veterans argued that the arbitration agreement’s requirement that claims be resolved individually conflicted with the SCRA’s statutory protection of class actions. That argument, Niemeyer said, “misinterprets the scope of the SCRA’s protection.”

The arbitration agreements’ “terms do not purport to address class actions in federal court in accordance with the Federal Rules of Civil Procedure,” Niemeyer wrote. “Rather, they address the nature and scope of the arbitration proceedings and the relief that the arbiter can provide.”

The 4th Circuit reversed and remanded the District Court’s judgment with instructions to compel arbitration.

Military Lending Act

The panel remanded the lower court to compel arbitration in accordance with all claims “except those brought under the MLA.”

The MLA claims were exempted, Niemeyer explained, because “it does indeed manifest a congressional intent to override arbitration.”

Niemeyer wrote that the plaintiffs “point out correctly that Congress did indeed explicitly override agreements to arbitrate.” In relevant part, the MLA states that “no agreement to arbitrate any dispute involving the extension of consumer credit shall be enforceable against any covered member or dependent of such a member, or any person who was a covered member or dependent of that member when the agreement was made.”

Citibank challenged by noting that the MLA did not cover credit card accounts until Oct. 3, 2017. As the plaintiffs opened their credit card accounts before then, Citibank argued that the MLA was not applicable.

The plaintiffs countered that the MLA did apply because purchases were made on their cards following that date, and that Citibank extended consumer credit with each purchase. Thus, the meaning of “extending consumer credit” was at issue.

“[W]e remand the plaintiffs’ MLA claims to enable the court to determine whether the MLA applies to this case and to address any other issues on those MLA claims that the parties might raise,” Niemeyer stated.