Wells Fargo & Co. has asked a federal appeals court to throw out a judge’s order requiring the bank to pay California customers $203 million for manipulating debit-card transactions to boost overdraft fees. Wells Fargo claimed that customers can’t sue under California law over how the bank deals with debit-card transactions because its practices are regulated by federal laws that allow Wells Fargo and other banks to determine their own methods for calculating fees. Wells Fargo argues that the claims in the lawsuit are “preempted by federal banking law.” Wells Fargo also argues that the claims should also “fail as a matter of state law.” A three-judge panel of the U.S. Court of Appeals in San Francisco held a hearing on the request in mid May.
Customers alleged in a 2007 complaint that San Francisco- based Wells Fargo changed the way it treated daily debit transactions and cash withdrawals in 1999 so that transactions with the highest dollar amount posted first, rather than in the order they occurred. The practice, which customers alleged was intended to boost revenue from overdraft fees, led to account holders overdrawing funds by small amounts multiple times a day.
Under the practice, customers could be charged as much as $34 each time they overdrew. It was alleged that the bank violated California’s unfair business practices law. Three Wells Fargo customers, suing on behalf of thousands of Californians, won their lawsuit in 2010 when U.S. District Judge William Alsup agreed that the policy was unfair, deceptive and fraudulent. Judge Alsup ordered Wells Fargo to end the practice and pay $203 million to customers who were charged multiple overdraft fees. The customers’ lawyer told the Appeals Court that Wells Fargo’s practice of reordering transactions was “engineered” for the “sole purpose of generating overdraft fees.”
The Office of the Comptroller of Currency, the federal agency that regulates national banks, has acknowledged that there are limits to its authority. Judge Sobol said in his ruling that in this case, those limits are subject to California law, and that he relied on that premise in his opinion. More than 30 banks have been sued over similar practices. Bank of America Corp. agreed to pay $410 million last year to settle customer claims and JPMorgan Chase & Co. reached a preliminary agreement in February to pay $110 million to resolve a lawsuit. A lawsuit against other banks is pending in federal court in Miami. In this case, Wells Fargo says that customers were warned about the practice, which was stated in account agreements and allowed by the Federal Reserve and other national bank regulators. The bank claims the customer account agreement “expressly authorizes high-to-low posting and specifically discloses that high-to-low posting can result in high overdraft fees.”
The customers contend that Wells Fargo misled customers about the policy, burying it in fine print and advertising that debit transactions would “automatically” be deducted from accounts. It was contended that this led customers to assume that withdrawals would be posted in chronological order. The bank’s contention that customers can’t sue Wells Fargo under California’s unfair business practices law was disputed by the customers. They say only claims that interfere with bank operations are preempted by federal regulation of banks. The Appeals Court didn’t say when it would rule.
Richard M. Heizman and Michael Sobol, lawyers with the California firm Lieff Cabraser Heimann & Bernstein, represent the customers. They have done very good work in this important case. The case is Gutierrez v. Wells Fargo, 10-16959, U.S. Court of Appeals for the Ninth Circuit.
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