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From Banking and Finance Law Daily, May 15, 2013

$200 Million Judgment Against Wells Fargo Posting Practices Reinstated

By Richard A. Roth, J.D.

Wells Fargo Bank, which has been fighting a consumer class action challenge to its transaction order posting practices since 2007, may have won the preemption battle but lost the liability war, as the U.S. District Court for the Northern District of California has reinstated a nearly $203 million judgment against the national bank. Despite a 2012 decision by the U.S. Court of Appeals for the Ninth Circuit that many of the consumers’ claims, and much of the injunctive relief they sought, were preempted by the National Bank Act, the district court determined that the full restitution award and some of the injunctive relief were supported by claims under California state law that were not preempted (Gutierrez v. Wells Fargo Bank, N.A., May 14, 2013, Alsup, United States District Judge).

The suit arose from the bank’s decision in 2001 to switch from a “low-to-high” posting order to the reverse, “high-to-low” order. Posting debits from the largest amount to the smallest on any given day draws the account balance down as quickly as possible. This means that while the amount by which an account is overdrawn at the end of the day stays the same, the number of overdrafts is maximized. Since overdraft fees were charged based on the number of overdrafts, the result was more fee income for the bank. In its original decision after a 2010 trial, the district court determined that the bank’s only motive for changing the posting order was to increase the revenue it generated from overdraft fees.

As a result of the change and resulting fees, several consumers brought a class action against the bank, asserting that the high-to-low method was both unfair and fraudulent under the California Unfair Competition Law. After the 2010 trial, the district court agreed. As a remedy, the court ordered the bank to: pay restitution; stop using the high-to-low posting method; use a low-to-high posting method, a chronological method or a combination of the two; and provide consumer disclosures that accurately described the method being used.

The bank appealed this judgment, asserting that the suit was preempted by the National Bank Act and Office of the Comptroller of the Currency regulations. The Ninth Circuit agreed, but only in part.

Appellate decision. According to the appellate court, the decision that the high-to-low posting order was an unfair practice under state law was preempted. Accepting and posting transactions was an essential part of the business of banking, and choosing a posting order was a necessary part of that activity. A state law that would interfere with the bank’s establishment of a posting order was preempted by the NBA, the appellate court said.

Also preempted were the district court orders regarding the posting order the bank could use and the disclosures the bank had to provide.

On the other hand, state law regarding whether the posting order was implemented fraudulently was not preempted, the appellate court decided. The district court had concluded that the bank did not tell consumers that frequent use of their debit cards for small transactions could “result in an avalanche of overdraft fees for each of those purchases” and that the bank used “propaganda” to lead consumers into believing that transactions would be posted in the order in which they occurred. Such claims were not preempted by federal laws and regulations, the appellate court said.

The appellate court also affirmed the district court’s decision that the bank had engaged in fraud, which meant that remedies for fraud could be ordered.

Reinstatement of judgment. The issue on remand was to what extent the fraud claim that had survived preemption supported the original remedies. The district court sided with the consumers on most points.

Wells Fargo argued that the restitution award could not be reinstated because the consumers had waived any claim for restitution before the trial began. The court drew a distinction between seeking damages and seeking restitution, noting that restitution was an equitable remedy under California law. The consumers had waived any claim for damages for the bank’s alleged fraud, the court agreed, but it was clear they had preserved their claim for an injunction against the fraud and for the ancillary remedy of restitution for previous fraud.

Similarly, while the consumers had conceded their expert witness’s evidence could not be used to establish damages, they had not waived their ability to use the testimony to support a restitution award, the court said.

The court also ordered the bank to pay the consumers interest on the judgment since it was entered in October 2010. However, the bank did have one success when it convinced the district judge not to change his previous order denying pre-judgment interest.

Attorneys: Adam Kent Shea (Panish Shea & Boyle LLP) for Erin Walker individually and on behalf of all others similarly situated. Sonya Diane Winner (Covington & Burling LLP) for Wells Fargo Bank, N.A.

Companies: Wells Fargo Bank, N.A.

MainStory: TopStory CreditDebitGiftCards Preemption StateBankingLaws UDAAP CaliforniaNews

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