730 F.Supp.2d 1080 (N.D.Cal. 2010), C 07-05923 WHA, Gutierrez v. Wells Fargo Bank, N.A.

Docket Nº:C 07-05923 WHA.
Citation:730 F.Supp.2d 1080
Opinion Judge:WILLIAM ALSUP, District Judge.
Party Name:Veronica GUTIERREZ, Erin Walker, and William Smith, as individuals and on behalf of all others similarly situated, Plaintiffs, v. WELLS FARGO BANK, N.A., Defendant.
Attorney:Adam Kent Shea, Brian Joseph Panish, Panish Shea & Boyle LLP, Los Angeles, CA, Richard D. McCune, Jr., Jae Kook Kim, McCunewright LLP, Redlands, CA, Barry R. Himmelstein, Michael W. Sobol, Mikaela Bernstein, Richard Martin Heimann, Lieff Cabraser Heimann & Bernstein LLP, San Francisco, CA, Mitche...
Case Date:August 10, 2010
Court:United States District Courts, 9th Circuit, Northern District of California

Page 1080

730 F.Supp.2d 1080 (N.D.Cal. 2010)

Veronica GUTIERREZ, Erin Walker, and William Smith, as individuals and on behalf of all others similarly situated, Plaintiffs,


WELLS FARGO BANK, N.A., Defendant.

No. C 07-05923 WHA.

United States District Court, N.D. California.

August 10, 2010

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Adam Kent Shea, Brian Joseph Panish, Panish Shea & Boyle LLP, Los Angeles, CA, Richard D. McCune, Jr., Jae Kook Kim, McCunewright LLP, Redlands, CA, Barry R. Himmelstein, Michael W. Sobol, Mikaela Bernstein, Richard Martin Heimann, Lieff Cabraser Heimann & Bernstein LLP, San Francisco, CA, Mitchell M. Breit, Hanly Conroy Bierstein Sheridan

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Fisher & Hayes LLP, New York, NY, for Plaintiffs.

Sonya Diane Winner, Bryanne Jeanette Schmitt, David M. Jolley, Margaret G. May, Covington & Burling LLP, San Francisco, CA, Emily Johnson Henn, Covington & Burling LLP, Redwood Shores, CA, for Defendant.



WILLIAM ALSUP, District Judge.


This certified consumer class action challenges hundreds of millions of dollars in overdraft fees imposed on depositors of Wells Fargo Bank, N.A. through allegedly unfair and fraudulent business practices. This order is the decision of the Court following a two-week bench trial.


Overdraft fees are the second-largest source of revenue for Wells Fargo's consumer deposits group, the division of the bank dedicated to providing customers with checking accounts, savings accounts, and debit cards. The revenue generated from these fees has been massive. In California alone, Wells Fargo assessed over $1.4 billion in overdraft penalties between 2005 and 2007. Only spread income-money the bank generated using deposited funds-produced more revenue.

This action does not challenge the amount of a single overdraft fee (currently $35). That is accepted as a given. Rather, the essence of this case is that Wells Fargo has devised a bookkeeping device to turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract from a single mistake. The draconian impact of this bookkeeping device has then been exacerbated through closely allied practices specifically " engineered" -as the bank put it-to multiply the adverse impact of this bookkeeping device. These neat tricks generated colossal sums per year in additional overdraft fees, just as the internal bank memos had predicted. The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure. This order holds that these manipulations were and continue to be unfair and deceptive in violation of Section 17200 of the California Business and Professions Code. For the certified class of California depositors, the bookkeeping device will be enjoined and restitution ordered.


Plaintiffs commenced this action in November 2007, alleging violations of the " unfair" and " fraudulent" restrictions of Section 17200. Two of Wells Fargo's business practices were initially targeted: (1) a high-to-low " resequencing" practice, challenged herein, and (2) an " including and deleting" practice, which plaintiffs no longer challenge.1 Originally, the Court certified two classes corresponding to these separate practices: (1) a high-to-low " resequencing" class represented by plaintiff Veronica Gutierrez and (2) an " including and deleting" class represented by plaintiffs Erin Walker and William Smith (Dkt. No. 98). In early 2009, Wells Fargo moved for summary judgment against all of plaintiffs' claims, which-in addition to Section 17200 violations-included other state claims targeting the same business practices. The bank also moved for decertification

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of both classes (Dkt. Nos. 176, 199, 200). In a trio of orders, these motions were granted in part and denied in part (Dkt. Nos. 245-47). Most significantly, the " including and deleting" class was decertified (Dkt. No. 245). The last vestiges of plaintiffs' " including and deleting" claims were then abandoned at trial (Tr. 965-66).

The " resequencing" class, however, survived for trial. This class was defined as (Dkt. No. 98):

[A]ll Wells Fargo customers from November 15, 2004 to June 30, 2008, who incurred overdraft fees on debit card transactions as a result of the bank's practice of sequencing transactions from highest to lowest.

Plaintiffs were allowed to conduct a new restitution study covering Wells Fargo transaction data for the entire " resequencing" class period. Following the completion of this study, Wells Fargo again moved for summary judgment and class decertification (Dkt. No. 292). These motions were denied.

The instant order follows a two-week bench trial that commenced on Monday, April 26, 2010, and concluded on Friday, May 7. Following the close of evidence, both sides submitted lengthy proposed findings of fact and conclusions of law, followed by responses (Dkt. Nos. 452-55). The undersigned also denied without prejudice a motion for judgment on partial findings submitted by Wells Fargo during trial and allowed the bank to reargue its points in its proposed findings of fact (Dkt. Nos. 417, 446). Closing arguments were heard on the morning of July 9.

Rather than merely vet each and every finding and conclusion proposed by the parties, this order has navigated its own course through the evidence and arguments, although many of the proposals have found their way into this order. Any proposal that has been expressly agreed to by the opposing side, however, shall be deemed adopted (to the extent agreed upon) even if not expressly adopted herein. It is unnecessary for this order to cite the record for all of the findings herein. Citations will only be provided as to particulars that may assist the court of appeals. In the findings, the phrase " this order finds ..." is occasionally used to emphasize a point. The absence of this phrase, however, does not mean (and should not be construed to mean) that a statement is not a finding. All declarative statements set forth in the findings of fact are factual findings.


1. The core of this controversy is a bookkeeping device adopted by the bank called " high-to-low resequencing" that transforms one overdraft into as many as ten overdrafts-ten being the voluntary limit the bank imposed on what could otherwise be an almost limitless prospect. The bank instituted this device for California accounts in April 2001 and then soon magnified its impact through closely allied practices. What now follows is an explanation of the bookkeeping device and how it changed overdrafting at Wells Fargo.


2. " Posting" is the procedure followed by all banks to process debit items presented for payment against accounts. During the wee hours after midnight, the posting process takes all debit items presented for payment during the preceding business day and subtracts them from the account balance. These items will typically be debit-card transactions and checks (plus a few other occasional items described below). If the account balance is sufficient to cover all such debit items, there will be no overdrafts regardless of the bookkeeping method used. If, however, the account balance is insufficient to cover all such debit items, then the account

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will be overdrawn. When an account is overdrawn, the posting sequence can have a dramatic effect on the number of overdrafts incurred by the account (even though the total overdraw will be exactly the same). In turn, the number of overdrafts drives the number of overdraft fees.

3. Prior to April 2001, Wells Fargo used a low-to-high posting order, as did most banks (then and now). Low-to-high posting meant that the bank posted settlement items from lowest-to-highest dollar amount. Low-to-high posting paid as many items as the account balance could possibly cover and thus minimized the number of overdrafts. This was because the smallest purchases were always deducted from the customer's checking account first and the balance was used up as slowly as possible.

4. This changed in April 2001. Then, Wells Fargo did an about-face in California and began posting debit-card purchases in highest-to-lowest order. The reversal of the bank's previous low-to-high posting order had the immediate effect of maximizing the number of overdraft fees imposed on customers. This was exactly the reason that the bank made the switch.

5. To illustrate, assume that a customer has $100 in his account and uses his debit card to buy ten small items totaling $99 followed by one large item for $100, all of which are presented to the bank for payment on the same business day. Using a low-to-high posting order, there would be only be one overdraft-the one triggered by the $100 purchase. Using high-to-low resequencing, however, there would be ten overdrafts-because the largest $100 item would be posted first and thus would use up the balance as quickly as possible. Scenarios very much like this happened to plaintiffs Veronica Gutierrez and Erin Walker, as will be shown momentarily.


6. The switch in April 2001 to high-to-low posting in California was followed by two closely allied practices, both intentionally " engineered" -to use the bank's own term at the time-to amplify the overdraft-multiplying effect of high-to-low ordering: (1) a switch to commingling of debit-card purchases with checks and automated clearing house (" ACH" ) transactions in December 2001, and (2) the deployment of a secret " shadow line" in May 2002 to authorize debit-card purchases into overdrafts.2


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