During the last several years, law firms that specialize in consumer class action litigation have been suing banks and other financial institutions across the country about policies and practices on overdraft fees and returned item fees. In 2019, they arrived in Kentucky. Nine cases were filed in 2019 against Kentucky financial institutions. Eight of those were filed by the same trio of non-Kentucky lawyers, and the ninth by a national practice class action firm.
There has been controversy concerning overdraft fee policies on debit card transactions for more than ten years. In response, the Federal Reserve adopted substantial revisions to Reg E that took effect in 2010. Among other things, Reg E now bars financial institutions from charging an overdraft fee on ATM or debit cards transactions unless the customer has opted-in in writing to the institution’s overdraft program. Absent such opt-in, the institution’s alternatives are to either honor the overdraft and not charge a fee or decline each transaction that would result in an overdraft. Revised Reg E opened the dam to a flood of litigation over calculation methods, DDA agreement terms, and adequacy of disclosures.
In the Kentucky lawsuits, the overdraft claims are narrowly focused on overdraft fees that result from a point-of-sale signature transaction by debit card. The argument is this: (a) when the card issuing bank “authorizes” a POS signature transaction the bank has an obligation to pay the transaction; and (b) charging an overdraft fee on an authorized POS signature transaction if the settlement of the transaction causes the DDA balance to go negative (or more negative) breaches the contract between the bank and its customer.
It is true under a bank’s contracts with VISA and MasterCard that the issuing bank has an obligation to pay the authorized POS signature transaction to VISA and MasterCard, which in turn have an obligation to pay the bank that acquired the transaction from its customer – the merchant that accepted a debit card in a retail sale. The obligation to pay is not part of the issuing bank’s DDA agreement – it is completely independent.
The hope of the plaintiffs is twofold: first, they hope they can convince a judge and then a jury that the DDA agreement requires the bank to actually remove, set aside, hold, or “sequester” funds from the account at the moment of authorization and the bank’s failure to do so is a breach of the agreement. Second, if that doesn’t succeed, they hope they can convince a judge that the contract is ambiguous, thus forcing a jury trial. The plaintiffs argue that the DDA agreement does not specifically address debit card POS signature transactions and that the disclosures on overdraft policies are confusing to the consumer who cannot understand the terms “available balance”, “available funds,” and “insufficient funds.” There have been many cases around the country in which this obfuscation has been quite successful.
In one of the Kentucky cases, summary judgment dismissing the case was granted in December 2019. (The plaintiff has appealed.) MPM, on behalf of its client, successfully argued that not only did the bank’s DDA agreement not require any set aside of funds upon a POS authorization, there was nothing in the agreement that would permit the bank to do so. The court also found the bank’s disclosure, which stated that an overdraft fee would be imposed for each item that is paid at evening processing according to daily funds requested, to be unambiguous on its face.
In a second Kentucky case, MPM successfully obtained for its client an agreed order of dismissal with prejudice of claims regarding the bank’s current overdraft policies and disclosures (which had been in effect for many years). After review of the bank’s motion for summary judgment, the plaintiff’s counsel conceded that those claims were without merit. (The case is continuing on other issues.)
A second issue raised in cases around the country and in the Kentucky lawsuits concerns returned item fees. With no regulations on the subject, the allegations look to the terms of the DDA agreement and disclosures. A plaintiff may claim that the DDA agreement does not allow return item fees at all, or, more narrowly, that the agreement does not allow a second (or third, etc.) fee when a returned item is re-presented because it is the same item. The complaints typically allege that the bank does not actually return a dishonored item but holds on to it for a second or multiple representments.
Of course, a bank does not retain an item or initiate a representment on its own. Under both ACH rules and Reg CC dishonored items are in fact returned to the depository bank by reversals of each credit and each debit booked from deposit to presentment. If a second or further presentment occurs, it will be because the payee of the dishonored check or the vendor of the dishonored ACH debit previously authorized by the account holder decided to make the additional presentment.
In a typical DDA agreement the customer will promise to pay such fees as the bank may impose from time to time in accordance with the bank’s policies and its published fee schedule. As with the overdraft claims, the plaintiffs hope they can convince a judge and then a jury that absent an explicit disclosure that repeat presentments are individually treated as new items, the DDA agreement is, at best, ambiguous, thus forcing a jury trial.
With its experience in bank fee litigation and long-standing focus on banking law, Morgan Pottinger McGarvey is uniquely qualified to assist any financial institution with evaluation of overdraft and return item fees and policies.
By Thomas C. Fenton
Thomas C. Fenton’s practice includes banking and finance law, commercial litigation, employment law, municipal law and business planning and transactions.
