Friday, October 31, 2014

Vathana v. EverBank (9th Cir. - Oct. 31, 2014)

Plaintiff --- like a lot of other customers -- buys a certificate of deposit from EverBank.  It's not a regular CD, however.  It's essentially an Iceland CD.  Whereas a normal (American) CD is denominated in dollars, this one was denominated in Icelandic krona.

That interjects some risk. As well as some potential benefit.  If the krona goes up compared to the dollar, American investors make money.  But if it goes the other way, the depositor loses money.

Fair deal.

Unfortunately for plaintiff, she invested in mid-2008.  Right before Iceland got hit by the financial crisis.  In a way that devastated Iceland's economy.

So the krona plummets.  So does the value of plaintiff's CD.

So far, there's nothing awry about that.  Lots of people got hit during that era.  Plaintiff's one of them.

The troubles begin -- the legal troubles, anyway -- once the CD matures.

The agreement with EverBank says that absent instructions from the client, the CD automatically renews, at whatever interest rate then prevails.  Plaintiff is fine with that.  She thinks Iceland's going to come back.  At the very least, she thinks it can't get worse than it already is.  So she sends EverBank an e-mail telling it to make sure they renew the CD.

But these products aren't so fun for EverBank anymore.  It's not like customers are psyched about buying Icelandic CDs anymore.  It would just as soon be out of the business entirely.

But there's that pesky agreement.  Plus the customer's express instructions.

But let's be clear.  EverBank shouldn't care.  If it had done its business like a normal bank, it didn't stand to lose on the transaction.  Normally, what you'd think would happen on these deals is that the customer would give EverBank dollars for the CD (say, $40,000), EverBank would exchange those dollars into krona (say, 3,500 ISK), and then the 3500 ISK just sits there earning whatever interest banks in Iceland would pay on 3,500 ISK.  EverBank wouldn't lose.  Instead, it'd gain.  Not a ton; just the administrative fees it charges on the account.  But hey.  It's a bank.  That's how these things work.

The rub, however, is that EverBank didn't do it the normal way.  Instead, it took some risk.  It didn't actually buy the 3,500 krona.  Instead, it entered into forward contracts.  That way it was largely hedged in exposure to fluctuations in krona valuations.  Plus maybe it would make a bit more money on the deal itself.

Which works.  Unless the krona collapses.  Which -- as we now know -- it did.

Once the krona collapsed, EverBank couldn't find anyone willing to write new forward contracts for it.  A situation that wouldn't be a problem -- at all -- if it had actually exchanged the dollars for krona.  Since then EverBank would just sit on the krona it had.  But since it didn't, now EverBank is in trouble.  It has promised to allow its customers to renew their CDs.  That's also what one of its customers expressly wants.  But to do so now would create risk for EverBank, since it can't find a new hedge.

So EverBank reneges.  Closing the CD.  And paying plaintiff in dollars instead of in krona.  Dollars that were a third of what plaintiff put into the CD three months ago.

Plaintiff's not psyched.  So sues.  Including class action allegations as well.

EverBank's principal defense is paragraph 1.17 of the relevant agreement.  Drafted, of course, by EverBank.  Which says that "if we [EverBank] believe that it is necessary to close your account immediately in order to limit losses by you or us, we may close your account prior to providing notice to you.”

The Ninth Circuit concludes that this defense succeeds.

I'm not a monster fan of this conclusion.  Though I certainly see how Judge Murguia reaches it.  To me, the closing of the CD doesn't legitimately protect the customer because the customer's expressly on board for taking the risk.  She wants the CD to remain open.  Plus, as it turns out, she's absolutely right.  The krona does indeed substantially rebound.  When I buy Apple stock, you can't sell my stock in the guise of limiting my losses if I'm constantly telling you that I still like the thing.  To interpret the clause otherwise makes no sense.  I wouldn't have agreed to it.  You wouldn't have required it.  Sure, for silent customers, maybe the provision authorizes a sale.  But not in situations where the plaintiff's screaming "Hold, hold, hold!"

I'm not really sure the Ninth Circuit would disagree with what I just said.  Although it's not explicit about this point.  Instead, I think that Judge Murguia is hanging her hat on the fact that EverBank could permissibly close the account in order to limit its losses.

Paragraph 1.17 does indeed provide for that.  But remember that EverBank wouldn't have had any losses if it had done what we expect banks to normally do and actually put plaintiff's money into kronas.  Instead, the bank did something that it thought would make the bank more money -- it bought forward contracts.  A risk that turned out to be a problem once forward contracts became unavailable and/or extraordinarily expensive.

The Ninth Circuits says that closing the account limits EverBank's risk.  True enough.  But it was EverBank's decision that created that risk.  I'm exceptionally unsympathetic to an interpretation of 1.17 that would relieve it from the consequences of that unilateral decision.  To me, the Ninth Circuit reads 1.17 as if it said:  "When you open this account, if we decide to take a risk that might make us more money, and if that risk turns out to benefit us, we keep the extra money, but if it turns out to harm us, we get to close your account and harm you, even though this problem wouldn't have even exist had we done what you almost certainly think we're going to do when you use dollars to buy krona."  I doubt that a reasonable customer would agree to such a provision.  Nor do I think that's what 1.17 says.  If you create a risk, you've got to live with it.  And that's just what EverBank did.

But the Ninth Circuit lets it off the hook.

The only saving grace of the opinion, in my view, is how it ends.  Remember that plaintiff tells EverBank to renew the CD, and also says that, if it nonetheless terminates the thing, to pay her in krona, not dollars.  An e-mail that makes sense because, as you recall, plaintiff thinks the krona will bounce back.

EverBank doesn't do that either.  It pays in dollars.  Because, among other things, it doesn't have any krona, since it didn't actually buy any when plaintiff opened her CD.

The Ninth Circuit says that maybe that decision was impermissible. But with enough caveats so it's a big maybe.  Something that has to be sorted out on remand.

For me, if the plaintiff gets paid in krona, then I don't care that much.  She wanted exposure to the krona.  She paid for it.  Even if her CD gets (illegally) terminated, if she's paid in krona, she retains that exposure.  If she's right that it's going to bounce back, then she'll indeed bounce back.  And I think the Ninth Circuit is largely right in the way it parses through the terms of the EverBank agreement on this point.

My only concern is that it's not at all clear that's what's going to happen on remand.  The Ninth Circuit is not strong on this point.  A point that, in my view, is the opinion's only saving grace.  The too-generous view of 1.17 might not matter much if the plaintiff was entitled to get paid in krona.  But matters a ton -- indeed, in a dispositive fashion -- if EverBank can terminate her account and pay her in dollars.  Then she's screwed.

To reiterate:  When a bank takes a risk, it should be held to that risk.  Not the customer.  If I put dollars into an account and the bank's supposed to buy krona and hold it for me, that's what they need to do.  And if the bank doesn't don't do it and something goes awry, those consequences should be on the bank, not me.

Give me my damn krona.