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Overdraft Fees Suit Stays Alive in Federal Court |
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Date: March 15, 2010
By Julie Kay
Miami federal judge has denied requests by the nation’s biggest banks to dismiss a class-action suit by checking account customers who claim they are being charged abusive overdraft fees on debit cards.
Senior U.S. District Judge James Lawrence King’s 50-page ruling Thursday keeps alive a closely watched consumer lawsuit that could be worth hundreds of millions of dollars and is shining a national spotlight on what plaintiff lawyers say are egregious bank practices.
“It’s a really important decision because these banks fought long and hard to get this knocked out at the dismissal stage,” said Bobby Gilbert, a partner at Alters Law Firm in Miami and co-lead counsel on the case with Bruce Rogow, “The entire order is a major step forward for us ... allowing us to proceed to the discovery stage.”
Miami attorney Barry Davidson of Hunton & Williams, who represents Wachovia, declined comment, as did Aaron Schur of Aaron & Porter in San Francisco, who represents Bank of America.
King’s order granted some of the banks’ motions to dismiss in some cases, such as claims brought under consumer protection laws in Massachusetts, New Mexico, California, Oregon, Montana, Ohio, Texas and Wisconsin. But some of the rulings were without prejudice, allowing customers to re-file their claims.
“The few areas where the court granted their motion without prejudice, they pale in comparison to the overall tenor of the order,” Gilbert said.
Five class-action suits alleging excessive overdraft fees were transferred last June to King. The multidistrict litigation has grown to include cases in nearly every state involving most of the nation’s largest banks, Gilbert said.
Defendants including Bank of America, Citibank, Wells Fargo, Wachovia, JPMorgan Chase and SunTrust are accused of deliberately manipulating the order of transactions on debit cards through special computer software — and in some cases sitting on transactions for days — to maximize overdraft fees.
A similar suit against BankAtlantic is pending in Broward Circuit Court before Judge Jeffrey Streitfeld. That bank was sued in state court because all its customers are in Florida, Gilbert said.
If the suits are successful, he said damages could run into the hundreds of millions of dollars, pointing to a recent report by the Center for Responsible Lending indicating U.S. banks generated $24 billion in overdraft fees in 2008. Studies have shown the amount of a transaction that causes an overdraft is typically lower than the bank’s fee for permitting the transaction when customers have insufficient funds in their accounts. The typical fee has been running $35, but some banks have lowered the fee in recent years as more attention was paid to their practices.
The controversy over overdraft fees has already produced some changes. Bank of America announced last week that it would stop charging overdraft fees on debit cards this summer. Instead, customers will be able to use the cards only if they have enough money in their accounts. It’s unclear if other institutions will follow the banking giant’s lead.
The banks filed a 100-page omnibus motion to dismiss last December, arguing private citizens don’t have standing to bring such claims and federal pre-emption bars consumers from suing banks based on federal banking regulations, among other arguments.
Oral arguments were held two weeks ago. King set aside most of the banks’ arguments, ruling federal law does not pre-empt state law in overdraft cases.
“Plaintiffs do not ask the court to tell the banks how to order transactions but simply that the ordering must be carried out as contemplated by the covenant of good faith and fair dealing,” King stated in his order. “There are a number of cases supporting the proposition that when one party is given discretion to act under a contract, said discretion must be exercised in good faith.”
King also disregarded defense arguments that customers voluntarily entered into a contract with banks and agreed to overdraft protection terms, including the fees. He sided with plaintiffs in their view that the disparity in sophistication and bargaining power between customers and their banks “is obvious,” and customers did not know they had the option to decline the overdraft protection service.
If the litigation is successful, it would accomplish for consumer groups what Congress could not. A House bill that died in 2007 would have increased regulation of overdraft programs.
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