In re Checking Account Overdraft Litigation

Brief Fact Summary.

the overdraft fees charged by the federally chartered banks (Banks) (D) on the accounts on debit card transactions was contended by the checking account customers on the ground that the charges were exorbitant. This was done by charging the fee to the customers’ account on a “largest to smallest” basis and this move resulted in increased revenue for the Banks (D). Among the several ground in which the Bank (D) to dismiss the case was federal preemption; which stipulates that the customers’ (P) contracts with the Banks (D) allowed the Banks (D) conduct and that unconscionability cannot be asserted as an affirmative claim, but on the other hand, unconscionability may be asserted only as a defense.

Synopsis of Rule of Law.

(1) the claims state laws have against federal chartered banks are not federally preempted where such claims are not regulatory in nature and only incidentally affect the exercise of the banks’ deposit taking powers.
(2) Where a claim does not seek to change the express terms of a contract but instead, seek to have the express terms carried out in good faith, and where the question of whether the terms are being carried out in good faith is one of fact, such a claim for a breach of the covenant of good faith and fair dealing can be maintained.
(3) An affirmative claim of unconscionability of a contract may be entertained by a court when it exercises its equitable powers and fashion a remedy for such a claim.
(4) In a situation where the plaintiffs have sufficiently pled that a contract is both procedurally and substantially unconscionable, an affirmative claim of unconscionability will not be dismissed.

Facts.

A suit was brought against the federally chartered banks (Banks) (D) and individual Banks (D) by their checking account customers from different states, for the exorbitant overdraft charges levied against their accounts on debit card transactions. These amounts were deducted by debiting the accounts of the customers from the “largest to the smallest”, resulting in the maximization of the overdraft revenue fees of the banks. Because of the spread of the litigations, it was consolidated in the federal district court as multi-district litigation.
The customers (P) alleged that the Banks (D) provided them with the debit cards for using funds in their account when they engage in “debit” or “point of sales” transactions and also by withdrawing from the automated teller machines. The Banks (D) also gave a limit to the overdraft facility which can be enjoyed by the customers (P). The Bank (D) developed a program which automatically monitored and deducted overdraft fees from the customers (P) account. The customers (P) also alleged that the banks (P) did not give them the option to opt out of the overdraft policy so as to avoid paying the overdraft fees and that the overdraft charges where deducted when the customers (P) had sufficient funds in their account.
This act of the banks (D) the customers alleged, caused them monetary losses and damages. The customers (P) therefore asserted state law claims for breach of contract, breach of the covenant of good faith and fair dealing, unconscionability, unjust enrichment, violations of various states’ consumer protection statutes and conversion.
The Banks (D) on the other hand prayed that the court should dismiss the petitions of the customers’ (P) based on several grounds which included the federal preemption and that unconscionability may be asserted ony as a defense not as an affirmative claim for the injury. The district court gave judgment in favor of the banks (D) by considering the motion.

Issue.

(1) are the claims which state laws have against federal chartered banks, not federally preempted where such claims are not regulatory in nature and only incidentally affect the exercise of the banks’ deposit taking powers?
(2) where a claim does not seek to change the express terms of a contract but instead, seek to have the express terms carried out in good faith, and where the question of whether the terms are being carried out in good faith is of one fact, can such a claim for a breach of covenant of good faith and fair dealing be maintained?
(3) Can an affirmative claim of unconscionability of a contract be entertained by a court when it exercises its equitable powers and fashions a remedy for such a claim?
(4) In a situation where the plaintiffs have sufficiently pled that a contract is procedurally and substantially unconscionable, will an affirmative claim of unconscionability be dismissed?

Held.

(King, J) (1) No. The claims state laws have against federal chartered banks are not federally preempted where such claims are not regulatory in nature and only accidentally affect the exercise of the banks’ deposit taking powers. The Banks asserted that their business activities is subjected exclusively to federal regulation and that any attempt by the state law to regulate, limit or condemn their activities is preempted. The plaintiffs however clarified that they were not challenging the rights of the Banks (D) to charge on overdrafts but they were challenging the manipulation of the overdraft fees to the benefits of the banks (D). It can therefore be deduced that the claims are not preempted and so, the motion to dismiss on this ground is dismissed.
(2)Yes. Where a claim does not seek to change the express terms of a contract but instead, seek to have the express terms carried out in good faith, and where the question of whether the terms are being carried out in good faith is one of fact, such a claim for a breach of the covenant of good faith and fair dealing can be maintained. The customers (P) are not asserting that the Banks (D) are not to charge overdraft fees or to teach them their business, but their bone of contention is that the Banks (D) are abusing the privilege of charging for overdrafts to their own benefits. Therefore, the question of the banks (D) acting in good faith must be answered and it is not ideal to resolve this issue on a motion to dismiss. For these reasons, the Banks (D) prayer for a dismissal of the breach of contract claims is denied.
(3) Yes. An affirmative claim of unconscionability of a contract may be entertained by a court when it exercises its equitable powers and fashion a remedy for such a claim. Although the banks (D) were right in their arguments that unconscionability may be asserted only as a defense to the enforcement of a contract, but the uniqueness of this case allows the application of unconscionability affirmatively to avoid injustice. For these reasons also, the Banks (D) motion on these grounds is dismissed.
(4) No. In a situation where the plaintiffs have sufficiently pled that a contract is both procedurally and substantially unconscionable, an affirmative claim of unconscionability will not be dismissed. The customers (P) alleged that the actions of the banks (D) were unconscionable, an allegation which the Banks (D) refuted. Unconscionability has two elements; procedural and substantive. The customers (P) were right to have alleged procedural unconscionability against the Banks (D) on the ground that the Banks (D) did not give them the option of opting out of the overdraft policy in order to maximize their revenue and also, the Banks (D) erred substantively because the fees charged on the customers’ (P) accounts did not correlate with the costs or risks of providing the overdraft in the first place. Hence, the motion to dismiss is denied.

Discussion.

this case showed that the customers (P) had alleged sufficient facts to proceed with their claim and it was because of this reason that judgment was given in their favor. Ordinarily, the court did not conclude that the challenged terms and practices were unconscionable. The doctrine of “unconscionability” is stipulated in U.C.C. S 2-302.  The formulation of this standard has been incorporated into the Restatement (Second) S 208 although it primarily applies to contracts for the sale of goods but this has now being applied to all types of contracts. The doctrine as being used affirmatively and defensively as shown in this case to avoid contract terms or contracts that represents grossly unfair bargains.