July 29, 2011 Articles

Nothing Is Certain in Overdraft Fee Litigation

Even if one can argue that the financial crisis is now drawing to a close, the litigation that it spawned—including overdraft litigation—will likely be with us for some time.

By Amy L. Brown

In the wake of the mortgage meltdown and financial crisis, financial institutions have faced increased scrutiny of their business practices and policies. One area of particular interest has been financial institutions’ practices and policies associated with providing “overdraft” protection for their customers. In exchange for a fee, many financial institutions offer overdraft coverage in the event a customer does not have sufficient funds in his or her account to pay for a transaction. Since 2008, a slew of class actions have been filed across the country, challenging the method used by many financial institutions to post debit transactions and the resulting overdraft fees where there are insufficient funds in the customer’s account to cover the transactions. Specifically, these class actions assert that financial institutions enter charges debiting customer accounts from high to low, thereby overdrawing the accounts more quickly and maximizing the number of overdrawn transactions and the resulting overdraft fees charged to customers. Plaintiffs assert a host of claims based on these allegations, including breach of contract, breach of the covenant of good faith and fair dealing, unconscionability, conversion, unjust enrichment, and violation of state consumer protection statutes.

On June 10, 2009, the U.S. Judicial Panel on Multidistrict Litigation ordered that five of the overdraft class actions and “any later-filed related actions” should be transferred pursuant to 28 U.S.C. § 1407 to the U.S. District Court for the Southern District of Florida for coordinated pretrial proceedings. In re Checking Account Overdraft Litig., 626 F. Supp. 2d 1333 (JPML 2009). Since June 10, 2009, over 50 class actions have been transferred to this overdraft MDL. In re Checking Account Overdraft Litig., Case No. 1:09-MD-02036-JLK. The MDL court has divided the cases into four tranches. The institutions in the first tranche moved to dismiss the complaints against them, and those motions were denied (in large part) on March 11, 2010. In re Checking Account Overdraft Litig., 694 F. Supp. 2d 1302 (S.D. Fla. 2010).

However, there have been several developments since March 11, 2010, that could impact how these overdraft class actions ultimately play out, including two decisions (Hassler v. Sovereign Bank, No. 09-2982, 2010 U.S. App. LEXIS 5445 (3d Cir. Mar. 15, 2010) and Guiterrez v. Wells Fargo Bank, 730 F. Supp. 2d 1080 (N.D. Cal. 2010)) in cases filed before the onslaught of overdraft actions that were thus not coordinated with the overdraft MDL. In addition, the U.S. Supreme Court granted certiorari in an arbitration case, AT&T Mobility, LLC v. Concepcion, No. 09-893 (U.S. May 24, 2010), that could determine whether some of the overdraft cases proceed in individual arbitrations rather than as putative class actions in court. Finally, a number of overdraft class actions have settled—both within and outside the overdraft MDL.

In other words, the only thing that is certain for overdraft litigation in 2011 is that nothing is certain.

In an unpublished opinion filed just days after the MDL court denied the primary arguments in the financial institutions’ motion to dismiss, the Third Circuit in Hassler v. Sovereign Bank, No. 09-2982, 2010 U.S. App. LEXIS 5445 (3d Cir. Mar. 15, 2010), affirmed the dismissal of a putative class action that challenged the order by which the financial institution defendant posted transactions and charged overdraft fees. In Hassler, the plaintiffs claimed that the defendant financial institutions’ overdraft practices and policies violated the New Jersey Consumer Fraud Act, breached the account agreement by violating the duty of good faith and fair dealing, and unjustly enriched the bank defendant—many of the same claims made by the plaintiffs in the overdraft MDL. In affirming the dismissal of the plaintiffs’ claims, the Third Circuit stated that “[t]he Account Agreement explicitly provided for the reordering of charges of which [the plaintiff] complains.” Hassler, 2010 U.S. App. LEXIS 5445, at *7. Regarding the plaintiffs’ claim of breach of the duty of good faith and fair dealing, the Third Circuit held that the plaintiff did not allege any bad motive on the part of the financial institution, saying, “The Complaint repeatedly asserts the unlawful nature of the [financial institution’s] acts, but is silent on its intention in doing so—other than simply seeking profit.” Id. at *10.

Shortly after the Hassler decision was handed down, the U.S. District Court for the Northern District of California held a two-week bench trial in Gutierrez v. Wells Fargo involving the question of whether Wells Fargo’s high-to-low “resequencing” practices for debit-card transactions were “unfair” and “fraudulent” under Section 17200 of California’s Business & Professions Code. On August 10, 2010, the Gutierrez court—in lengthy findings of fact and conclusions of law—concluded that Wells Fargo’s “resequencing” practices were both unfair and fraudulent and ordered restitution, which is estimated to total approximately $203 million. Gutierrez v. Wells Fargo, 730 F. Supp. 2d 1080, 2010 U.S. Dist. LEXIS 85123 (N.D. Cal. 2010). Notably, unlike in Hassler,the Gutierrez court found that none of the customer agreements or other marketing material adequately disclosed Wells Fargo’s posting practices, and therefore Wells Fargo’s actions were “fraudulent.” Gutierrez, 2010 U.S. Dist. LEXIS 85123, at *90. In stark contrast to Hassler,the Gutierrez court also determined that Wells Fargo’s practices were “unfair” and not taken in good faith because the record was devoid of any evidence that Wells Fargo undertook “resequencing” for any other purpose than “profiteering.” Id. at *122.

The Gutierrez court expressly rejected that customers prefer high-to-low posting and that they benefit from such posting order to the extent that it assures that larger, nondiscretionary items are paid first before smaller, discretionary ones. Gutierrez, 2010 U.S. Dist. LEXIS 85123, at **64–86. Indeed, Wells Fargo pointed to a 2009 comment in the Federal Register that notes that the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration were not addressing transaction processing order as of January 2009 because “‘it would be difficult to set forth a bright-line rule that would clearly result in the best outcome for all or most consumers. For example, requiring institutions to pay small dollar items first may cause an institution to return unpaid a large dollar nondiscretionary item, such as a mortgage payment, if there is an insufficient amount of overdraft coverage remaining to cover the large dollar item after the smaller items have been paid.’” Id. at **71–72 (quoting 74 Fed. Reg. 5498, 5548 (Jan. 29, 2009)). The Gutierrez court dismissed this comment as providing the bank “superficial support.” Id. at *71. The Gutierrez court also rejected Wells Fargo’s argument that the plaintiffs’ allegations were preempted by federal law. Id. at **140–48. Wells Fargo has appealed the judgment. Gutierrez v. Wells Fargo, Case No. 10-16959 (9th Cir.).

Although there are some factual differences between the allegations in Hassler and the evidence in Gutierrez,and more significant legal differences between New Jersey and California law, the cases cannot be reconciled easily. At this point, it is too early to tell what impact, if any, Hassler or Gutierrez will have on the MDL court’s approach to the plaintiffs’ claims. The MDL court did deny the financial institutions’ motions to dismiss, but in doing so, the court made clear that it was only “determining whether the Complaints adequately state a cause of action, not whether those causes of action will ultimately succeed.” In re Checking Account Overdraft Litig., 694 F. Supp. 2d 1302, 1308 (S.D. Fla. 2010). As to many of the financial institutions, the case now proceeds forward with class certification briefing set for the spring of 2011 and the first trial scheduled for March 2012. In re Checking Account Overdraft Litig., Case No. 1:09-MD-02036-JLK [Dkt. No. 878].

For some financial institutions, whether the cases will proceed as putative class actions in court or in individual arbitrations is unresolved. A number of financial institutions in the overdraft MDL filed motions to compel individual arbitration. The MDL court denied nearly all of the motions on the grounds that the arbitration agreements were unconscionable under applicable state law because, in part, they required individual arbitrations and precluded the plaintiffs from pursuing their claims as part of a class action. See, e.g., In re Checking Account Overdraft Litig., 2010 U.S. Dist. LEXIS 96154 (S.D. Fla. May 10, 2010) (denying five motions to compel arbitration); In re Checking Account Overdraft Litig., 718 F. Supp. 2d 1352 (S.D. Fla. 2010) (denying one motion to compel arbitration); In re Checking Account Overdraft Litig., 2010 U.S. Dist. LEXIS 94532 (S.D. Fla. 2010) (denying one motion to compel arbitration). But see In re Checking Account Overdraft Litig., 2010 U.S. Dist. LEXIS 65672 (S.D. Fla. May 25, 2010) (granting motion to compel arbitration). However, as to these financial institutions, the MDL court stayed the litigation while the financial institutions pursue appeals in the Eleventh Circuit. See In re Checking Account Overdraft Litig., Case No. 1:09-MD-02036-JLK [Dkt. No. 590]. These appeals remain pending and could be impacted by the U.S. Supreme Court’s much-anticipated decision in Concepcion v. AT&T Mobility, No. 09-893, which was argued on November 9, 2010. The question in Concepcion is whether the Federal Arbitration Act preempts states from conditioning the enforceability of an arbitration agreement on the availability of particular procedures (i.e., class-wide arbitration) when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.

In light of the risks, costs, potential exposure, and uncertainty of litigation, financial institutions have also started to settle their overdraft class-action lawsuits. Significantly, two of the recent settlements have taken place outside of the MDL. In Schulte v. Fifth Third Bank, Case No. 09-cv-6655 (N.D. Ill. Sept. 10, 2010) [Dkt. No. 59], Fifth Third Bank and the plaintiffs in that case reached a class-action settlement in the late spring/early summer of 2010. Under the settlement, Fifth Third Bank would pay an all-in settlement of approximately $9.5 million (which represents about 32 percent of the potential recovery using the Gutierrez restitution formula). Id. at 2, 6 n.4. In light of the settlement, the Judicial Panel on Multidistrict Litigation vacated the order, transferring the case to the MDL. The plaintiffs in an overlapping class action against Fifth Third Bank, which is part of the overdraft MDL, filed objections to the parties’ request for preliminary approval. These objectors claimed that the parties had failed to present a reasonable estimate of class member damages against which the settlement could be evaluated, created an allocation of settlement proceeds that was unfair, failed to engage in sufficient discovery to determine the settlement value of the plaintiffs’ claims, and created a burdensome claims process. Over these objections, the Schultecourt granted preliminary approval of the class action settlement. Id. at 10–15. In doing so, the Schulte court stated that the inquiry at the preliminary approval stage was not a “fairness hearing,” but rather “whether the proposed settlement is within the range of possible approval.” Id. at 3–4.The final approval hearing—which is a fairness hearing—was set for March 11, 2011.

Similarly, in Trombley v. Nat. City Bank, 2011 U.S. Dist. LEXIS 2509 (D.D.C. Jan. 11, 2011), the parties reached a class-action settlement of an overdraft case in the summer of 2010. In addition to nonmonetary relief, under the settlement, the defendant financial institution agreed to pay an all-in settlement of approximately $12.5 million (which represents about 17–24 percent of the potential recovery using the Gutierrez restitution formula). Id. at **10–12. The transfer order to the overdraft MDL was vacated, and the parties sought preliminary approval. The plaintiffs in an overlapping case that was part of the MDL made objections similar to those in Schulte. The Trombley court overruled those objections and granted preliminary approval of the class-action settlement. In doing so, however, the Trombley court stated that “[a]t the Final Fairness Hearing, the parties should provide the Court with an independent analysis for reaching the agreed settlement amount and explain and defend their methodology to demonstrate that it is a fair, reasonable, and adequate settlement.” Id. at **15–16. The final approval hearing is set for June 13, 2011.

Finally, on February 4, 2011, Bank of America and the plaintiffs in the overdraft MDL notified the MDL court that they had executed a memorandum of understanding evidencing an agreement to settle the class-action lawsuits against Bank of America in exchange for a total payment of $410 million. In re Checking Account Overdraft Litig., Case No. 1:09-MD-02036-JLK [Dkt. No. 1135].

Although there is considerable uncertainty surrounding the overdraft litigation, there is less uncertainty in terms of financial institutions offering overdraft protection going forward. First, following the class-action lawsuits and associated publicity, some financial institutions voluntarily changed their overdraft programs. www.nytimes.com/2010/03/10/your-money/credit-and-debit-cards/10overdraft.html. In addition, Regulation E was changed. 12 C.F.R. part 205. As of July 1, 2010, for new accounts and August 15, 2010, for existing accounts, financial institutions are no longer allowed to add overdraft protection as an automatic feature for ATM and debit transactions. Id. This means that, if customers want overdraft coverage for their ATM and debit transactions, they will have to “opt in” to such coverage.

In summary, 2011 may prove to be an interesting year in terms of overdraft litigation. Courts outside of the overdraft MDL will determine whether to give final approval to the Fifth Third and National City class-action settlements (which could have an impact on other potential settlements), and the U.S. Supreme Court will likely provide guidance on whether some of the cases should proceed in individual arbitration versus a putative class action in court. But with the Gutierrez appeal pending in the Ninth Circuit and with briefing on class certification just getting underway in the overdraft MDL, overdraft litigation will not likely go away anytime soon. Thus, even if one can argue that the financial crisis is now drawing to a close, the litigation that it spawned—including overdraft litigation—will likely be with us for some time.

Keywords: litigation, class actions, derivative suits, overdraft fees

Amy L. Brown – July 29, 2011


Copyright © 2011, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).