Playing the Grinch one day late, the U.S. Court of Appeals for the Ninth Circuit on Wednesday wiped out a $203 million restitution order for bank customers who’d been socked with big overdraft charges. But like the Whos in Whoville, the bank customers may eventually see a big chunk — or even all — of their $203 million returned to them.
The Ninth Circuit ruled that U.S. District Judge William Alsup erred when he enjoined Wells Fargo Bank from manipulating its processing of check and debit card overdrafts to maximize customer fees.
“The federal court cannot mandate the order in which Wells Fargo posts its transactions,” Judge M. Margaret McKeown wrote for a unanimous panel. “Therefore, we vacate the permanent injunction and the $203 million restitution award.”
But faster than one could say, “You’re a mean one, Circuit 9,” the court went on to affirm Alsup’s finding that Wells Fargo fraudulently misled customers about its procedures, and invited the judge to reconsider restitution anew. Given Alsup’s previous award, and his description of Wells Fargo’s communications about the overdrafts as “propaganda,” it’s easy to imagine another fat restitution order heading toward plaintiffs.
“Obviously, plaintiffs would like to win on every issue,” said Lieff Cabraser Heimann & Bernstein partner Michael Sobol, who argued the case to the Ninth Circuit. “But I think the bottom line here is the gravamen of the complaint was upheld on a classwide basis.”
Gutierrez v. Wells Fargo Bankfollow’s Alsup’s widely watched bench trial of 2010, which culminated in a 90-page decision that enjoined Wells Fargo’s practice of posting a customer’s largest checking or debit card overdraft first, followed by progressively lower overdrafts, at the end of each banking day. Before 2001, Wells Fargo processed the smallest overdrafts first, which minimized charges to customers. But the bank then reversed the order, with the “sole motive” — according to Alsup — of running up fees. The bank took in $1.4 billion in overdraft fees between 2005 and 2007, according to Alsup.
The judge ruled the posting order was an unfair business practice under California law and ordered $203 million in restitution. He also ruled that Wells Fargo committed fraud by “directing misleading propaganda” to customers that suggested checks and debits would be processed in the order they were received.
But the Ninth Circuit ruled that the National Banking Act, as interpreted by the Office of the Comptroller of the Currency, explicitly allows banks to choose the order in which they process overdrafts.
“In sum, federal law authorizes national banks to establish a posting order as part and parcel of setting fees, which is a pricing decision,” wrote McKeown, who was joined by Judges Sidney Thomas and William Fletcher.
“We are pleased with the decision that largely reaffirms Wells Fargo’s position and vacates the monetary award against us,” a Wells Fargo spokesman said in an email statement.
But it appeared to be a hollow victory for the bank, as the Ninth Circuit panel found pre-emption did not apply to the marketing materials. “California’s prohibition of misleading statements does not significantly interfere with the bank’s ability to offer checking account services, choose a posting method, or calculate fees,” McKeown wrote.
“Although the court cannot issue an injunction requiring the bank to use a particular system of posting or requiring the bank to make specific disclosures, it can enjoin the bank from making fraudulent or misleading representations about its system of posting in the future,” she continued. “Restitution is available for past misleading representations,” she added, leaving that amount up to Alsup.
Lieff Cabraser’s Sobol said he was still analyzing the opinion Wednesday, but he expects the plaintiffs to receive the same $203 million award on remand. That’s because Alsup had originally calculated restitution by figuring what customers would have been charged if the debts had been processed chronologically, as implied by the bank’s marketing materials. “So the measurement is exactly the same,” he said.
The Ninth Circuit also rejected Wells Fargo’s bid to compel arbitration of the case under AT&T Mobility v. Concepcion, saying the bank had waited too long to assert its contractual right to arbitrate.
Robert Long of Covington & Burling argued the case for Wells Fargo. Covington referred calls to Wells Fargo.
Scott Graham is a reporter for The Recorder, a Legal affiliate based in San Francisco.