California Grocers Assn. v. Bank of America

• Decision Date: 04 February 1994
• Docket Number: A056217,Nos. A055112,s. A055112
• Citation: 27 Cal.Rptr.2d 396,22 Cal.App.4th 205
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA GROCERS ASSOCIATION, INC., Plaintiff and Appellant, v. BANK OF AMERICA, NATIONAL TRUST AND SAVINGS ASSOCIATION, Defendant and Appellant.

Page 396

27 Cal.Rptr.2d 396

22 Cal.App.4th 205

CALIFORNIA GROCERS ASSOCIATION, INC., Plaintiff and Appellant, v. BANK OF AMERICA, NATIONAL TRUST AND SAVINGS ASSOCIATION, Defendant and Appellant.

Nos. A055112, A056217.

Court of Appeal, First District, Division 2, California.

Feb. 4, 1994.

Review Denied June 9, 1994.

Law Office of Manuel Glenn Abascal, Manuel Glenn Abascal and Kathy Shull Abascal, Berkeley, Brad Seligman, Albany, for plaintiff and appellant.

Bank of America, Office of General Counsel, Michael J. Halloran, Winslow Christian and Arne D. Wagner, San Francisco, O'Melveny & Myers, William W. Vaughn, Abigail A. Jones, Robert M. Schwartz and Viola I. Canales, Los Angeles, for defendant and appellant.

Shearman & Sterling, William M. Burke, Richard B. Kendall and Wendy E. Ackerman, Los Angeles, Coffield Ungaretti & Harris, Howard A. Menell, J. Timothy Eaton and Theodore E. Harman, Chicago, IL, for amici curiae on behalf of defendant and appellant.

BENSON, Acting Presiding Justice.

I. INTRODUCTION

In this appeal we decide whether a $3 fee charged by Bank of America for one of its check-processing services is unconscionably high, and if so, whether the trial court erred in issuing an injunction limiting the fee to $1.73, which represents the bank's cost plus a 15 percent markup for profit. We conclude the fee is not unconscionable, and even if it were, that fact could not support affirmative injunctive relief.

II. BACKGROUND

A. The Prior Class Actions

The present litigation has its roots in class actions filed in 1977 against Bank of America, Wells Fargo Bank and Crocker National Bank. In those cases the plaintiffs challenged various fees imposed by the banks for checking and savings account services. Among these were fees charged to the writer of an NSF check--that is, a check for which there are not sufficient funds on deposit--and fees charged to the depositor of someone else's NSF check. In the language of the banking industry, the latter fee is for a "deposited item returned" or DIR.

After a lengthy period of extraordinarily complex litigation, the class actions were resolved through settlements, which were approved by the San Francisco Superior Court in 1987 and 1988 and were effective for two years. The settlements established various check processing policies and procedures intended to reduce the overall number of future NSF checks and related fees. Limited cash refunds were also provided to customers of Wells Fargo Bank and Crocker National Bank, but not to customers of Bank of America.

Various objectors appealed the orders approving the settlements, contending the settlements were the product of a collusive sellout between class counsel and the banks. One of the objector-appellants was California Grocers Association (CGA), a trade group of 3,500 retail and wholesale grocers whose membership ranges from small independent grocery stores to large chain operations.

We affirmed the orders approving the settlements, primarily on the ground the objectors lacked standing on appeal to assert their challenges to the propriety of the class certification and the fairness of the settlements because they did not suffer the purported harm of which they complained, but asserted it on behalf of others who had not appealed, and thus they were not aggrieved. (Rebney v. Wells Fargo Bank (1990) 220 Cal.App.3d 1117, 269 Cal.Rptr. 844.) We subsequently affirmed orders allocating attorney fees in the actions. (Rebney v. Wells Fargo Bank (1991) 232 Cal.App.3d 1344, 284 Cal.Rptr. 113; Rudolfi v. Bank of America (July 31, 1991) A051722.)

B. The Present Action

Following the approval of the settlements in the San Francisco class actions, CGA and one of its member grocers (who had opted out of the Bank of America settlement to the extent it did not include monetary relief) filed the present lawsuit in Alameda County. The action is solely against Bank of America and challenges only the assessment of DIR fees.

The case began as a class action. The court certified the class, but the bank challenged the certification by extraordinary writ petition. In an unpublished decision we ordered the court to vacate the certification order and deny class certification on the ground the plaintiffs were not proper class representatives. (Bank of America v. Superior Court (May 25, 1990) A046822.)

The action proceeded solely in CGA's name, on behalf of itself and the general public. (See Bus. & Prof.Code, § 17204.) CGA's primary theories were unfair competition (Bus. & Prof.Code, § 17200 et seq.) due to unconscionability of the DIR fee and breach of the implied covenant of good faith and fair dealing.

C. The DIR Fee

Bank of America's DIR procedures and the DIR fee are described in pamphlets setting forth the terms and conditions to which a customer agrees when opening a business or personal deposit account. The pamphlets state: "If a check or other item you deposit to your account is returned to us for any reason, we charge your account for the amount of the item plus any interest you earned on the item. If a check or other item we cash for you is returned to us for any reason, we charge your account for the amount of the item. We also charge you $3 for each returned item and notify you that the item was returned."

Most DIRs result from lack of sufficient funds in the check writer's account. However, they are also caused by other factors such as a stop payment order or closure of the account.

There are two types of DIRs, "on-us" and "transit." An on-us DIR is a check that is written and deposited by customers of the same bank. A transit DIR is a check that is written and deposited by customers of different banks. Approximately 30 percent of Bank of America's DIRs are on-us; the rest are transit. CGA contends not only that a $3 DIR fee is excessive, but that no fee at all should be permitted for an on-us DIR because its cost is covered by the fee the bank charges to the writer of the NSF check.

The majority of DIR fees are imposed on high-volume depositors such as government entities, utility companies and merchants. Grocers are a major source of these fees, as consumers often pay for groceries by personal check. Most customers pay Bank of America's full $3 DIR fee. A few of the largest retailers, however, have negotiated DIR fees as low as $1.50.

Some other financial institutions in California charge more than Bank of America for DIRs, as much as $4 or $5 at some major banks and up to $10 at a few institutions. Fees under $3, however, are charged at only one smaller bank ($2.50) and two credit unions ($2).

Bank of America's total number of DIRs is huge. In 1991 the bank processed approximately 200 million checks per month. Of these, the bank claims some 584,000 were DIRs. The true number of monthly DIRs is possibly much higher; it is generally accepted in the banking industry that about 1 percent of deposited checks become DIRs. Yearly DIR fees may well exceed $20 million.

D. The Judgment

After a nonjury trial, the court rendered judgment for CGA, ruling as follows: The specification of the $3 DIR fee in the pamphlets setting forth the terms and conditions of the deposit agreement is adhesive in nature, except as to some large businesses that can negotiate lower fees. The bank's overall current profit margin is 15 percent, which is generally consistent with the banking industry. The bank's cost of processing a DIR is approximately $1.50. The sum of this cost plus a 15 percent markup for profit is $1.73, which is a reasonable fee. The extent to which the bank's $3 fee exceeds $1.73--a 73 percent additional markup--is unconscionably high and a violation of the covenant of good faith and fair dealing, and thus is an unfair business practice under Business and Professions Code section 17200.

The court also ruled it is lawful for the bank to charge a fee for on-us DIRs.

The court declined to award restitution exceeding nominal damages of $1 to CGA. Instead, noting that the bank had been overcharging for at least 10 years, the court issued an injunction requiring Bank of America to lower its DIR fee to not more than $1.73 for a 10-year period ending July 31, 2001. The injunction is subject to modification upon a showing of good cause by any affected party at any time during the 10-year period. The court expressly stayed enforcement of the injunction during the pendency of an appeal. (See Agricultural Labor Relations Bd. v. Superior Court (1983) 149 Cal.App.3d 709, 716-717, 196 Cal.Rptr. 920 [mandatory injunction is automatically stayed by appeal].) However, the court reserved jurisdiction to award restitution of excessive charges imposed after the rendition of judgment.

Bank of America filed a timely appeal from the judgment, and CGA filed a timely cross-appeal.

E. The Attorney Fee Award

In postjudgment proceedings, the court awarded attorney fees of $2,000,605, plus costs of $53,227, to CGA's counsel pursuant to Code of Civil Procedure section 1021.5, commonly known as the private attorney general statute. The court employed a multiplier of two for work on the merits of the case, based on the finding that the case "involved a significant public benefit resulting in the saving of tens of millions of dollars to consumers, ... involved contingent risks and required substantial attorney's skill."

Bank of America filed a timely appeal from the fee order. The appeals from the judgment and the fee order have been consolidated.

III. DISCUSSION

A. Bank of America's Appeal From the Judgment

In its appeal from the judgment, Bank of America challenges the findings of unconscionability and breach of the implied covenant of good faith and fair dealing, as well as the propriety of the injunctive relief granted.

1. Unconscionability

We begin with an overview of unconscionability, which is the cornerstone of the judgment.

The doctrine of unconscionability--that a court can refuse to enforce an unconscionable provision in a...