Presenting a live 90-minute webinar with interactive Q&A Bank Overdraft Fee Litigation and Regulatory Developments Lessons Learned from Recent Litigation and Settlements, Preparing for Increased Regulatory Scrutiny, and Minimizing Liability Exposure WEDNESDAY, JULY 18, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Kenneth C. Johnston, Director, Kane Russell Coleman & Logan , Dallas Austin K. Brown, Associate, Skadden Arps Slate Meagher & Flom , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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"I warn you, Sir! The discourtesy of this bank is beyond all limits. One word more and I — I withdraw my overdraft! ” Punch Magazine, Volume 152, June 27, 1917 Overdraft Update Litigation and Regulatory Developments July 18, 2012 Kenneth C. Johnston 3700 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 (214) 777-4200 kjohnston@krcl.com
6 Roadmap 1. Overview of challenged high-to-low posting practices 2. Recent developments in the In re Checking Account Overdraft Litigation (MDL 2036) 3. Recent regulatory developments • Brief mention — Mr. Barloon will more comprehensively address the regulatory environment 4. What happens next?
7 The core issue: High to low posting This means that when a bank receives multiple items for payment on a customer's account, the bank will pay the largest-sum items first and the smallest-sum items last. Historically, many banks and regulators supported this practice to ensure that the most important items (and typically most expensive), such as a mortgage or rent payment, would be paid. In practice, "high-to-low" posting may lead to more overdraft fees than would otherwise be assessed if the bank had followed a "low-to-high" or chronological posting order.
8 High to low posting: related challenged practices Commingling: Commingling debits entails a bank's aggregation of various debit transactions into a single batch versus posting in a pre- specified order (i.e., payment of all checks, then payment of all debit-card transactions, etc.). The shadow line or credit matrix: A "shadow line" refers to a credit available to cover insufficient funds availability on a checking account.
9 Plaintiffs ’ allegations High-to-low posting is per se “ unfair ” or “ unconscionable ” Consumer opt-out rights Inadequate notice Misleading advertising
10 Plaintiffs ’ legal theories of recovery Breach of Contract Based on Implied Covenant of Good Faith and Fair Dealing Unjust Enrichment Conversion State Statutory Claims Unconscionability
11 The first case: Gutierrez v. Wells Fargo Bank (N.D. Cal.) Plaintiffs commenced class-action litigation in November, 2007. On August 10, 2010, following a two-week bench trial, the United States District Court for the Northern District of California found Wells Fargo ’ s posting practices were unfair and deceptive, in violation of section 17200 of the California Business and Professions Code. Gutierrez v. Wells Fargo Bank, N.A. , 730 F. Supp. 2d 1080 (N.D. Cal. 2010).
12 Gutierrez v. Wells Fargo Bank (N.D. Cal.) (con’t) Critical issue: Court found that Wells Fargo promoted chronological posting, contrary to disclosures in its deposit agreements. • For more information on the promoted/non-promoted distinction, refer to the 2005 Joint Guidance on Overdraft Protection Programs, available at: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050 218/attachment.pdf Court endorsed plaintiff’s expert ’ s calculation of close to $203 million in damages.
13 Current status of Gutierrez Appeal pending before the Ninth Circuit Court of Appeals. Arguments on appeal: • Preemption under National Bank Act and OCC regulations. • Posting practices not unfair or fraudulent under California law. • District Court overstated amount of damages due to plaintiffs. Ninth Circuit heard oral argument on May 15, 2012. • Oral argument available at: http://www.ca9.uscourts.gov/media/view_subpage.php?pk_id=0000 009188
In re Checking Account 14 Overdraft Litigation, MDL No. 2036 (S.D. Fla.) During pendency of Gutierrez , plaintiffs began bringing numerous parallel class actions against other banks. In June of 2009, the Judicial Panel on Multidistrict Litigation ( “ JPML ” ) began consolidating overdraft class actions in the Southern District of Florida, for pre-trial proceedings before Judge James Lawrence King. The JPML found that “ while there will be some unique questions of fact from bank-to-bank, these actions share sufficient factual questions relating to industry-wide bank posting policies and procedures to warrant centralization of all actions in one MDL docket. ” MDL 2036, Doc. No. 1.
15 Significant Developments in MDL 2036 Ruling on federal preemption Rulings on arbitration clauses Rulings on class certification Rulings on Daubert motions to strike experts Settlements Issues deferred: summary judgment motions Remand and trial
16 Federal Conflict Preemption Defendants ’ Argument: Activities of national banks in conducting the "business of banking" are subject to exclusive federal regulation. Defendants rely on OCC Regulations § 7.4002 and § 7.4007 and OCC Interpretative Letter 997. Plaintiffs ’ Argument: Plaintiffs are not challenging the banks' right to charge overdraft fees but rather are challenging the banks' practice of reordering transactions to maximize overdraft fees. Kane Russell Coleman & Logan PC
17 MDL 2036 Preemption Ruling State laws of general applicability are not preempted. Plaintiffs are not challenging a bank's fundamental right to impose overdraft fees. As alleged, the Plaintiffs' contract and tort claims do not more than "incidentally affect the exercise of national banks' deposit taking powers. ” Section 7.4002 gives banks the right to charge overdraft fees, but it does not authorize banks to ignore general contract or tort law. Motion to Dismiss on federal preemption grounds DENIED. Kane Russell Coleman & Logan PC
18 Open Regulatory Issues Field preemption, e.g. Homeowner’s Loan Act: 12 U.S.C. 1461 Truth in Savings Act : 12 U.S.C. 4301 (implemented by Reg DD, 12 C.F.R. 230) • TISA prohibits institutions from making any advertisement, announcement, or solicitation relating to a deposit account that is inaccurate or misleading or that misrepresents their deposit contracts. • Congress repealed the private right of action under TISA Kane Russell Coleman & Logan PC
19 MDL 2036 Class Certification Rulings The MDL Court has granted every motion for class certification presented thus far. The MDL Court has relied heavily on the injury and damages calculations of plaintiffs ’ expert, Arthur Olsen. The MDL Court has rejected arguments that certification deprives the banks of the opportunity to present case- specific defenses, such as waiver or statute of limitations. The MDL Court has indicated that such case-specific defenses can merely “ be dealt with, if need be, during the claims process. ” MDL Doc. No. 2697. Kane Russell Coleman & Logan PC
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