Bank’s Attempt To Arbitrate Claim Of Wrongful Setoff Barred By Dodd-Frank

A District Court in Maryland confronted a scenario where a bank depositor brought suit based on the setoff of deposit accounts following the depositor’s failure to make payments under a home equity loan. The borrower claimed the bank’s actions constituted a violation of the Truth in Lending Act (“TILA”). The bank sought to compel arbitration of the claim based upon an arbitration agreement embodied in the documents establishing the deposit accounts.

Confronting the court in Lyons v. PNC Bank, N.A. was the interplay between the deposit agreements and statutory prohibition of arbitration contained in the Dodd-Frank Wall Street Reform Act which applied to the TILA cause of action. The court framed the issue as follows:

“It is clear from the plain language that, at the very least, mortgage notes and other security instruments directly tied to a mortgage loan cannot contain arbitration clauses, but the prohibition’s reach beyond such clear cases remains unsettled. Against this backdrop, this Court must determine whether Plaintiff has carried his burden to show that Congress intended [Dodd-Frank] to preclude arbitration where the dispute arises under a mortgage agreement, but the lender seeks to invoke an arbitration clause in a separate contract purportedly empowering it to unilaterally use funds from the mortgagee’s deposit accounts to pay off the mortgage instrument.”

The court denied the motion to compel arbitration, holding that Dodd-Frank’s arbitration prohibition was sufficiently broad to encompass separate and ostensibly discrete deposit accounts.

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