Bankin’ Bits

Litigation over “high-to-low” (HTL) posting is revving up again.   Until recently,  the only reported decision on point held that HTL posting is okay because banks are expressly authorized by UCC 4-303(b) to pay items  in any order they want.  Smith v. First Union Nat’l Bank of Tennessee, 958 S.W.2d 113 (Tenn. App. 1997).    Moreover, in class action litigation around the country, the OCC has weighed in on behalf of bank defendants to argue that any state-law theory of recovery is preempted by the OCC regulation (12 CFR 7.4002) that gives banks great discretion in handling their deposit accounts.  As a result, litigation quieted down for awhile.  But recently two federal district courts—one from Georgia and the other from California—have re-ignited the fire by invalidating HTL posting in certain contexts.            

The Georgia case.  In White v. Wachovia Bank N.A., 563 F. Supp. 3d 1358 (N.D. Ga. 2008),  the plaintiffs opened a joint checking account with Wachovia in August 2007.  The deposit agreement they executed granted Wachovia the right either to refuse to pay any transaction that would create an overdraft, or to pay the overdraft and assess a service charge.  The deposit agreement also notified the plaintiffs that Wachovia could use HTL posting, stating:

[Wachovia] may pay checks or other items drawn upon your account . . .  in any order determined by us, even if (1) paying a particular check or item results in an insufficient balance in your account to pay one or more other checks or other items that otherwise could have been paid out of your account; or (2) using a particular order results in the payment of fewer checks or other items or the imposition of additional fees.  Although we generally pay larger items first, we are not obligated to do so and, without prior notice to you, we may change the order in which we generally pay items.

Despite the language in the deposit agreement, plaintiffs alleged that “Wachovia delays, reorders, or otherwise manipulates posting transactions to an account and imposes overdraft fees even where the account contains sufficient funds.”  Although the district court’s order is unclear on several details of the allegations, the gist of the plaintiffs’ attack seems to be that Wachovia not only used HTL posting, but it also waited “days after” debits were received to post them.  This purported delay allowed Wachovia to dump several items  into the posting “bucket” at once even though these items had accumulated over a period of several days.  With the bucket full, Wachovia then applied HTL posting, increasing the number of overdrafts (and overdraft fees). 

            Citing Wachovia’s alleged misconduct, the plaintiffs filed a class action in Georgia state court.  The complaint included claims for: (1) failure to perform contractual duties in good faith, (2) violations of Georgia Fair Business Practices Act (FBPA), (3) unconscionability, (4) conversion and (5) unjust enrichment.  Wachovia removed the case to federal court and filed a motion to dismiss. 

            Implied duty of good faith.  Without disputing that Georgia law imposes a duty of good faith and fair dealing upon all parties to a contract, Wachovia contended that Georgia law does not recognize a breach of the implied covenant of good faith where a party has done what the contract’s provisions give it the express right to do.  Since the deposit agreement expressly granted the right to use HTL posting and to charge overdraft fees, Wachovia argued that the plaintiffs could not state a claim for breach of the implied duty of good faith. 

In response, the plaintiffs cited an exception to the general rule relied upon Wachovia.  This exception applies where the manner of performance of the obligation is left “more or less” to the discretion of one party without being within the “absolute” discretion of that party.  While acknowledging that the language in the deposit agreement stated that Wachovia “may” post debits to an account in order form largest to smallest, the word “may” did not endow Wachovia with “absolute” discretion. 

Because the court found that Wachovia lacked absolute discretion under the deposit agreement, it held that the plaintiffs could establish a breach of the implied duty of good faith by showing that Wachovia manipulated and delayed the order of posting transactions against plaintiffs’ accounts.  However, the court concluded its discussion of the implied duty of good faith by noting that Wachovia could still prevail at the summary judgment stage by establishing that its posting orders were commercially reasonable. 

Preemption of other state law claims.  Wachovia asserted that the balance of plaintiffs’ claims were preempted by the National Bank Act (NBA) and its implementing regulations—specifically, 12 C.F.R. §§ 7.4002 & 7.4007– and OCC Interpretive Letter No. 916 (May 22, 2001).  The key federal regulation, 12 CFR 7.4002, allows national banks to establish non-interest charges and fees, which the court interpreted as applying only to legitimate overdraft fees, not fees imposed for overdrafts that result from a bank’s illegitimate posting methods.  Accordingly, the court found no conflict between the plaintiffs’ claims and § 7.4002. 

Nor did the court find the other OCC regulation, § 7.4007,  preempted  plaintiffs claims.  While § 7.4007 preempts any state law that impairs a national bank’s ability to exercise its deposit-taking powers, it also contains a carve-out for state “contract” and “tort” law.  Because the court concluded that the plaintiffs’ complaints “sound in tort and contracts,” § 7.4007′s preemption power was inapplicable. 

In a similar manner, the Georgia court found that OCC Interpretive Letter No. 916 (May 22, 2001) did not justify preemption of plaintiffs’ claims.  As Wachovia correctly pointed out, the OCC letter concludes that a national bank’s decision to use HTL posting constitutes “a pricing decision” authorized by federal law.   The court acknowledged the letter’s authoritativeness, but found it inapplicable.  Instead of contesting the propriety of applying HTL posting to debits received during a 24-hour period, the plaintiffs in this case were alleging that Wachovia was applying HTL posting to a bucket of transactions collected over a period of several days. 

State-law claims survive Wachovia’s motion to dismiss.  In addition to refusing to dismiss the plaintiffs’ claim for breach of the implied duty of good faith, the court also permitted the plaintiffs’ claims for violating Georgia’s FBPA and for conversion.  Because the FBPA applies to any unfair or deceptive business practice, and the plaintiffs claimed Wachovia had systematically charged overdraft fees where the overdraft was caused by Wachovia’s manipulation of the sequence and timing for debits posted to the account, the court allowed the claim to proceed.  On that same note, the court allowed the conversion claims to proceed because the plaintiffs had demanded a return of the fees and Wachovia refused.  The court dismissed the other claims.

The lesson in the Georgia case is clear:  in the absence of a strictly enforced 24-hour time limit for posting transactions to an account, use of HTL posting is like sending up the “Bat Signal” for the plaintiff’s bar.  Although banks need fee-generated income more than ever, they should closely monitor the use of HTL posting (or any other program) that increases overdraft fee revenue.  

The Georgia case settled soon after the court issued its order on the 12(b)(6) motion.  But another class action has been filed in the same district on virtually the same grounds.  This time, Wachovia filed a motion with the Judicial Panel on Multidistrict Litigation to consolidate the new action with similar actions throughout the country.  That motion is still pending.  We will keep you updated as events unfold.

The California case.  The second recent high-to-low case comes from California.  In Gutierrez v. Wells Fargo Bank, N.A., 2008 WL 4279550 (N.D. Cal. Sept. 11, 2008),

In that case, the putative class plaintiffs not only challenged Wells Fargo’s use of HTL posting, but they also challenged Wells Fargo’s procedures for posting account debits online.  Both challenges were based on alleged violations of California law.  (The court’s order does not specify which law).  Wells Fargo moved for summary judgment, arguing that federal preemption under the OCC regulations shielded it from the claims of the purported class.   The plaintiffs brought essentially the same HTL argument as the plaintiffs in the Georgia case.  However, if the Georgia court viewed HTL posting with measured skepticism, the California court viewed it with open disdain.  Consider the language used in the opening sentence of the decision:  ”This action challenges the practice of Wells Fargo Bank, N.A., to post multiple daily debits against a checking account in a revised sequence that maximizes overdraft penalties against the customer rather than in the actual sequence in which the charges were incurred.”  Despite the difference in the tone of the two decisions, many of the legal issues involve the same analysis.  In fact, Wells Fargo presented the same preemption arguments that failed in Georgia. 

In rejecting federal preemption, the California court was unwilling to concede that the OCC regulations authorize the use of HTL posting.  In the court’s view, preemption “would likely apply” if Wells Fargo’s right to assess an overdraft fee were being challenged, but was unwilling to extend preemption where “Wells Fargo has been manipulating” or “even downright altering” transaction records to maximize overdraft penalties (i.e. using HTL posting).  Accordingly, as in the Georgia case, the California court concluded that the plaintiffs’ claims sounded in “tort and contract” and were therefore not preempted by federal regulation.  Whereas the Georgia court focused not only on the defendant’s use of HTL posting, but also on Wachovia’s allegedly purposeful delays in posting transactions in order to boost the odds that HTL posting would result in an overdraft, the California court seems concerned with HTL posting even where all items are posted on the day received. 

Wells Fargo drafted an airtight deposit agreement, but not airtight enough.

The California court concluded that the plaintiffs’ deposit agreements neither provided for federal preemption of California law nor established HTL posting as a  routine practice.  The agreement states: “[T]he bank may, at its option, pay or refuse to pay any Item if it would create an overdraft . . . without regard to whether the Bank may have previously established a pattern or honoring or dishonoring such an Item.”  It also stipulates: “The Bank may post items presented against the Account in any order the Bank chooses, unless the laws governing your Account either require or prohibit a particular order. For example, the Bank may, if it chooses, post items in the order of the highest dollar amount to the lowest dollar amount.”  The Wells Fargo agreement also notifies the accountholder that HTL posting will likely cause an increase in the number of overdrafts. 

The court construed the phrase “unless the laws governing your Account either require or prohibit a different order” to mean that California state law would govern the order of posting items.  Wells Fargo pointed out that OCC Interpretive Letters 916 and 1083 explicitly and unequivocally state that a national bank may use HTL posting in California without violating state or federal law.  The court dismissed those arguments on the ground that “the [OCC letter] did not have the force of law.  It is merely interpretive rather than legislative.”  Notably, the court did not address California UCC 4303(b), which allows banks to post items “in any order.”

Next, the court pointed out that the disclosure language in the deposit agreements “is arguable inadequate” because (1) it “is buried deep within a lengthy statement” and (2) the disclosure language states only that the bank “may” use HTL posting.  The court found that use of the word “may” rather than “will” led customers to believe HTL posting is “not automatic but merely an exception.” 

Available balance disclosures and the problem of “debit holds”.  The second practice at issue in the California case  centered on “available balance” information that Wells Fargo provided online.  Although every Wells Fargo customer received a monthly account statement, those who signedd up for online banking also received access to more up-to-date information on recent account activity, pending transactions and Wells Fargo’s current calculation of the customer’s available balance.  Wells Fargo’s website defined “available balance” as:

The most current picture of funds you have available for withdrawal. It reflects the latest balance based on transactions recorded to your account today including deposited funds, paid checks, withdrawals and point-of-sale purchases. (Please note that some transaction activity may not be immediately recorded to your account and will then not be reflected in the available balance. . . .  [T]he remaining funds will be added as items are processed and any holds are removed. . . .  [C]omplete details on funds availability are reflected in our Funds Availability Policy.)

According to the plaintiffs’ complaint, the available balance information is potentially misleading because certain items are at first reflected in a customer’s available-balance information (to lower the balance) but then deleted (to increase the balance), misleading customers into overestimating their account balance and inducing them to incur overdraft penalties.  The experience of a putative class member, William Smith, is instructive.   

Smith maintained that he monitored his available-balance information online every day.  According to Smith, on July 3, 2007, his available balance, as reflected in the on-line report, was approximately $300.  He then spent $68.65 on fireworks, using his debit card.  The transaction was posted shortly thereafter as a pending transaction online and deducted from his available balance.  On July 12, he checked his available balance online and noted that he had about fifty dollars.  At the time, he thought all of his debit card transactions had posted to his account and were reflected in his available-balance information.  

Smith then purchased groceries for $24.76, unaware that Wells Fargo had removed the fireworks transaction from his available balance appearing online.  Thus, he had less money available than he thought.  The online number indicated Smith had $50,  but his actual account balance was really a negative number because the fireworks purchase was deleted three days after it posted.  Smith was then charged two overdraft charges: one for the groceries and one for the fireworks.  

Wells Fargo admitted to reversing debit “holds” after three business days, stating:

For “signature-based” transactions, the Bank’s policy is to keep the memo hold in place until the earlier of (1) receipt and posting of the final settlement information for the transaction or (2) three business days.  The Bank must limit a memo hold to three business days to comply with VISA rules, which recognize that after three business days there is an increased possibility that either (a) the transaction will never be submitted for settlement or (b) the transaction has been submitted and posted but has not “matched” with the memo hold (for example, because of a difference in the final transaction amount).  

Wells Fargo, however, did not formally disclose its debit holds policy to customers.  According to Smith, had he known the fireworks transaction was no longer reflected in his available balance, he would have transferred funds into his account to pay for his groceries.

Because of the confusion surrounding this practice, the plaintiffs claim that Wells Fargo had a duty to provide notice that a transaction had been deleted from the online register.  The court agreed with the plaintiffs, finding it “likely that this practice will regularly mislead customers into overdraft situations (and more penalty fees) by leading them to believe they have more money available than they really do.”  

It appears that Wells Fargo attempted to explain the removal of debit holds as a requirement for participating in the VISA Network.  In a footnote, the court explains that “Wells Fargo claims that it is required to delete certain transactions after they have already posted because of ‘VISA rules.’  Wells Fargo, however, provides no such rule. Nor does it provide any adequate justification why VISA would have such a rule.  Nor does it explain how a private organization like VISA could force Wells Fargo to engage in a misleading practice.”

Unsatisfied with the VISA rationale, the court found that Wells Fargo had not adequately explained the practice or why it went undisclosed.  As a result, the court declined to “categorically bless these seemingly predatory practices without a complete record of how they work, their justification, and how they square with the reasonable expectations of consumers.”  Thus, Wells Fargo’s motion for summary judgment was denied, and the court certified plaintiffs as a class.

Concluding Thoughts

• The Georgia court seemed to acknowledge HTL posting as a valid banking practice, provided that HTL is not used in conjunction with any other misleading practices.  However, the California court refused to acknowledge the legitimacy of HTL posting, regardless of the OCC’s Interpretive Letters condoning the practice in California.  It will be interesting to see how the California court’s analysis fares on appeal.
• Both cases suggest that, by informing the customer that the bank “may” use HTL posting, the banks were not reserving complete discretion to do so.  The California court concludes that the term “may” suggests that HTL would only be used occasionally.  But the word “may” seems appropriate,   since it allows the bank to diverge from a default of HTL posting if the circumstances require.  
• Will the California cases lead to a new line of “available balance” litigation?  The court reacted incredulously to Wells Fargo’s claim that it was required by its agreement with VISA to release debit holds within a few days of the authorization request.  But the obligation is actually a standard provision in all VISA agreements and is designed to make a consumer’s funds available for use.  Why did the court not understand this?  

Bottom line.  With potential class actions litigation on the horizon, banks would be wise to review their deposit agreements to make sure that consumers understand the nature of HTL Posting.  Further, if a dispute arises with a customer, banks would be wise to consider waiving any overdraft fees if there is any possibility that the banks’ online balance information was not clear.  In any event, given the complexion of the current Congress, it would not be surprising to see a strong push for a legislative solution.   

A Different Version of this Article First Appeared in Clarks’ Bank Deposits and Payments Monthly.