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From Banking and Finance Law Daily, October 29, 2013

State law-based challenges to debit card posting order partly preempted

By Richard A. Roth, J.D.

Claims that a state bank’s use of a largest-to-smallest order when posting debit card charges violated California statutes and common law were partly, but not fully, preempted by federal law, a U.S. district judge for the Northern District of California has decided. In a decision that focused mainly on the state’s Unfair Competition Law, the judge relied on precedent developed in a comparable suit against a national bank to determine that the proposed class of consumers can proceed with their claims of fraud and unlawful practices. However, other causes of action were found to be preempted (Hawthorne v. Umpqua Bank, Oct. 25, 2013, Tigar, District Judge).

The consumers’ claims were similar to those raised in other class actions over posting order, but were perhaps complicated by the bank’s effort in its customer agreements to reserve the right to post items in the order of its choice. In fact, the terms and conditions set out in the account agreement noted the bank’s general policy was to pay debits in the order of largest to smallest. According to the account agreement, this would pay consumers’ most important bills, such as rent or mortgages, first, but could result in higher overdraft or nonsufficient fund fees.

Class complaints. Despite these disclosures, the consumers alleged that the bank’s practices violated a number of state laws. For example, the consumers claimed that the bank’s account agreement was inconsistent with its monthly statements, which listed transactions from smallest to largest, making it impossible for accountholders to discern why fees were imposed. They alleged that the bank not only posted items from largest to smallest but also occasionally grouped debit card transactions from several days in order to post larger transactions from later days ahead of smaller, earlier transactions.

Also, the bank knowingly gave consumers inaccurate account balance information by ignoring pending transactions, the consumers said. Finally, they complained that the bank assessed overdraft fees when an authorization hold pushed an account balance to less than $0 without disclosing that practice.

Preemption precedent. In late 2012, the U.S. Court of Appeals for the Ninth Circuit determined that many comparable California law claims arising from Wells Fargo Bank’s posting order practices were preempted by the National Bank Act. The decision in Gutierrez v. Wells Fargo Bank, N.A. examined claims under the state UCA and determined that unfair practice claims were preempted but fraud claims were not. The distinction made was that federal laws and regulations permitted the national bank to set its own posting order and fee practices and prohibited state laws from mandating specified disclosures, but did not permit the bank to make misleading statements about those practices.

Application to state banks. The first issue to be addressed was whether the Gutierrez reasoning about national banks also applied to state banks with interstate activities. Over the objections of the consumers, the judge decided that it did.

The bank argued that the Federal Deposit Insurance Act (FDI Act) extended preemption protection to state banks. Under 12 U.S.C. §1831a(j), branches of out-of-state banks enjoyed the same preemption from state laws whether the banks were national banks or state banks. The judge agreed with that argument.

The judge rejected the consumers’ argument, based on the specific language of the law, that a state law could be applicable to an out-of-state bank but not enforceable against that bank. Both the text and legislative history made clear that the law was intended to create parity between the interstate branches of national and state banks.

Statutory claims. The UCL prohibits any “unlawful, unfair or fraudulent business act or practice,” the judge noted. The consumers had raised all three of the potential causes of action—three prongs—and the effect of Gutierrez on each had to be considered.

There was no question as to preemption of the consumers’ claim under the fraudulent prong, the judge said. Gutierrez made clear that fraud claims under the UCL were not preempted.

The consumers’ claim that the bank had engaged in unlawful acts or practices was based on an alleged violation of the state’s Consumer Legal Remedies Act, which prohibits unfair competition and unfair or deceptive acts or practices in a transaction for the sale of goods or services. The bank asserted the CLRA did not apply because a debit card was neither a good nor a service.

The judge disagreed, deciding that debit cards constitute a service. The CLRA is to be construed liberally to protect consumers, California courts generally said that debits cards were covered by the CLRA, and considering debit cards to be a service was consistent with the benefits consumers actually received from them, the judge said. Thus, the consumers’ claim that the bank made misrepresentations that violated the CLRA survived.

However, the claim that the bank engaged in unfair acts or practices was preempted by the FDI Act, the judge decided. Gutierrez taught that complaints over transaction ordering practices were preempted if they were raised under the UCL’s unfairness prong, and the consumers had done nothing to distinguish their claims from those addressed in the earlier case.

Common law claims. The consumers also raised four claims under California common law that were dealt with in a less detailed fashion:

  • A claim that the bank breached the covenant of good faith and fair dealing was preempted, the judge said. Whether the law was directed specifically at banks was irrelevant; what mattered was that the law, as applied, would affect the bank’s activities under federal law. Federal law permitted the bank to set its own posting order and set the related fees, and state law could not impose a good faith requirement.
  • The consumers had not described any contract term the bank had breached, so no breach of contract claim was supported.
  • On the other hand, the consumers’ allegations that funds they had deposited had been taken by the bank to pay wrongful fees did describe conversion by the bank, permitting the consumers to proceed on that claim.
  • The claim that the bank had been unjustly enriched by its posting order was preempted, and California law did not permit an unjust enrichment claim based solely on the bank’s alleged misrepresentations.

The case is No. 11-cv-06700-JST.

Attorneys: Hassan Ali Zavareei (Tycko & Zavareei, LLP) for Amber Hawthorne.Scott H. Jacobs (Reed Smith LLP) for Umpqua Bank.

Companies: Umpqua Bank; Wells Fargo Bank, N.A.

MainStory: TopStory CreditDebitGiftCards Preemption CaliforniaNews

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