Overdraft Class Action Litigation Trend Continues
NAFCU continues to hear from credit unions who have either received a demand letter or notice of a complaint filed relative to overdraft and insufficient funds fees (NSF). We have blogged about this issue before and addressed it in a past Compliance Monitor article (member-only), but wanted to provide some high level information that may help credit unions who are continuing to analyze the risks here.
For several years, financial institutions, including credit unions, have faced class action claims in this area. The claims often had a few elements:
- Violations of Regulation E even where a credit union utilized the rule’s model form;
- Assertions that the account agreement was violated when the account balance was calculated inappropriately and fees were assessed; and
- Multiple state law claims
More recently, the Regulation E claims are not as frequently seen in these cases. This may be in part because the Electronic Funds Transfer Act, which is implemented by Regulation E, only allows one year for bringing a claim to court. It may also be that Regulation E claims are not necessary if a Plaintiff is not trying to justify bring a case in federal court, since federal courts can only hear certain types of cases, such as those involving a federal law or those involving parties who are from different states.
Sometimes credit unions ask how someone can make a claim if the Regulation E model form is used. This form meets a federal disclosure requirement, but this is often a secondary issue. The establishment and operation of accounts are established by agreements as well making contract law the center of most overdraft/NSF fee lawsuits. So, these cases generally revolve around state law issues. Depending on the kinds of lawsuits recognized under a particular state’s laws, claims often include:
- Breach of contract;
- Unjust enrichment;
- Breach of implied covenant of good faith and fair dealing;
- Money had and received; and
- State consumer protection laws.
Cases often assert that the agreement only allows for fees to be assessed when there is not enough money in the account and, by the member’s understanding, the account had sufficient funds at the time a fee was charged. For example, claims asserting improper assessment of fees may include but are not limited to:
- Transactions that authorize positive but settle negative – sometimes multiple items are pending on an account and/or checks a member wrote have not yet posted. A member could use their account, such as at a point of sale terminal or gas pump, and have a positive balance at the time but by the time all the pending items post, the account has a negative balance.
- Multiple NSF fees charged on the “same transaction” – some plaintiffs’ attorneys are now arguing that when a third party re-presents a previously declined transaction, this constitutes a single item and charging multiple NSF fees is a contractual violation. As an example, a consumer may have preauthorized their car insurance company to automatically debit their checking account for a monthly premium. If such debit is returned for insufficient funds, the consumer’s agreement with the insurer may permit the insurer to attempt the debit again at a later date. Plaintiffs’ attorneys are arguing that these are all one transaction despite the fact that this appears as a new transaction and is usually due to a member’s contractual relationship with that third party.
Members have asked what is going on with some of the pending lawsuits against credit unions. There are some CUs who have asked courts to dismiss claims. In the early stages of a lawsuit, defendants can file a motion to dismiss. There can be different arguments asserted here, but one seen frequently in these cases is a “failure to state a claim.” This is essentially an argument that the plaintiff’s compliant is flawed and does not present facts indicating a violation of law or entitlement to a remedy.
What about the success rate of these motions? At least in federal court, when considering a motion to dismiss courts view the allegations in the light most favorable to the plaintiff. Many states have similar standards for reviewing a motion to dismiss. Viewing a case in the light most favorable to the plaintiff, multiple courts have determined an agreement was not clear about fees being assessed or was ambiguous as to how a member’s available balance is calculated (e.g. actual balance versus ledger balance). As a result, in most cases, credit unions have not won their motions to dismiss, or only won on some of the issues in play. When a claim survives a motion to dismiss, the next phases of a lawsuit involve preparation for trial and can become quite expensive, especially discovery, a process where both parties have an opportunity to seek evidence for their case or defense. Rather than continue to litigate the issues, credit unions may decide that it may be more cost-effective to settle the case even if they believe they are legally in the right. In other words, the merits of plaintiffs’ claims in these cases are not necessarily fully analyzed by a court before the case is settled.
While many cases settle rather early on, other cases are still being litigated. For example, one credit union won its motion to dismiss, only to lose on appeal back in August 2019. At this time, it seems the credit union is continuing to litigate the case. Other credit unions are also continuing to litigate some of these cases, either with motions to dismiss pending before courts or continuing to the next phase of a suit after having a motion to dismiss be denied.
Overall, when reviewing motions to dismiss in the light most favorable to the plaintiff, courts in multiple states have found some merit to claims that account agreements are ambiguous as to when overdraft or NSF fees will be assessed. To mitigate future risk, many credit unions have already reviewed their account agreements and overdraft opt-in agreements with outside counsel, considering various court outcomes in the jurisdictions where they operate. This may include: ensuring information is consistent across various mediums (account and overdraft opt-in agreements, disclosures, the CU’s website, and marketing materials); explaining how both credits and debits are posted; providing detail on how the account balance is determined; and considering arbitration clauses. Similarly, some forms vendors have taken steps to change account agreements based on the changing landscape. Keep on mind though, these kinds of steps are forward-looking – lawsuits can be filed for past damages within the applicable state’s statute of limitations and this is an ever-changing area of law.