Gutierrez v. Wells Fargo Bank, NA

• Decision Date: 26 December 2012
• Docket Number: Nos. 10–16959,10–17689.,10–17468,s. 10–16959
• Citation: 704 F.3d 712
• Parties: Veronica GUTIERREZ; Erin Walker; William Smith, individually and on behalf of all others similarly situated, Plaintiffs–Appellees, v. WELLS FARGO BANK, NA, Defendant–Appellant. Veronica Gutierrez; Erin Walker; William Smith, individually and on behalf of all others similarly situated, Plaintiffs–Appellees, v. Wells Fargo Bank, NA, Defendant–Appellant. Veronica Gutierrez; Erin Walker, Plaintiffs–Appellants, and William Smith, individually and on behalf of all others similarly situated, Plaintiff, v. Wells Fargo Bank, NA, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

704 F.3d 712

Veronica GUTIERREZ; Erin Walker; William Smith, individually and on behalf of all others similarly situated, Plaintiffs–Appellees,

v.WELLS FARGO BANK, NA, Defendant–Appellant.

Veronica Gutierrez; Erin Walker; William Smith, individually and on behalf of all others similarly situated, Plaintiffs–Appellees,

v.Wells Fargo Bank, NA, Defendant–Appellant.

Veronica Gutierrez; Erin Walker, Plaintiffs–Appellants,

and

William Smith, individually and on behalf of all others similarly situated, Plaintiff,

v.Wells Fargo Bank, NA, Defendant–Appellee.

Nos. 10–16959, 10–17468, 10–17689.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted May 15, 2012.

Filed Dec. 26, 2012.

Limited on Preemption Grounds

West's Ann.Cal.Bus. & Prof.Code § 17200Jordan Elias, Richard M. Heimann, Roger N. Heller, Michael W. Sobol (argued), and Alison M. Stocking, Lieff Cabraser Heimann & Bernstein, LLP, San Francisco, CA; Jae K. Kim and Richard D. McCune, McCune & Wright, LLP, Redlands, CA, for Plaintiffs–Appellees.

Robert A. Long, Jr. (argued), Mark William Mosier, Keith A. Noreika, and Stuart C. Stock, Covington & Burling LLP, Washington, D.C.; David M. Jolley and Sonya D. Winner, Covington & Burling, LLP, San Francisco, CA; Emily Johnson Henn, Covington & Burling LLP, Redwood Shores, CA, for Defendant–Appellant.

Julia B. Strickland, Lisa M. Simonetti, and David W. Moon, Stroock & Stroock & Lavan LLP, Los Angeles, CA, for Amici Curiae American Bankers Association and California Bankers Association.

Nina F. Simon, Washington, D.C., for Amici Curiae Center for Responsible Lending, Consumer Federation of America, California Reinvestment Coalition, and Law Foundation of Silicon Valley.

Appeal from the United States District Court for the Northern District of California, William Alsup, District Judge, Presiding. 3:07–cv–05923–WHA.

Before: SIDNEY R. THOMAS, M. MARGARET McKEOWN, and WILLIAM A. FLETCHER, Circuit Judges.

OPINION

McKEOWN, Circuit Judge:

Bank fees, like taxes, are ubiquitous. And, like taxes, bank fees are unlikely to go away any time soon. The question we consider here is the extent to which overdraft fees imposed by a national bank are subject to state regulation.

At issue is a bookkeeping device, known as “high-to-low” posting, which has the potential to multiply overdraft fees, turning a single overdraft into many such overdrafts. The revenue from overdraft fees is massive. Between 2005 and 2007, Wells Fargo Bank (“Wells Fargo”) assessed over $1.4 billion in overdraft fees. Disturbed by the number of overdrafts caused by small, everyday debit-card purchases, Veronica Gutierrez and Erin Walker (collectively “Gutierrez”) sued Wells Fargo under California state law for engaging in unfair business practices by imposing overdraft fees based on the high-to-low posting order and for engaging in fraudulent business practices by misleading clients as to the actual posting order used by the bank.

The district court found that “the bank's dominant, indeed sole, motive” for choosing high-to-low posting “was to maximize the number of overdrafts and squeeze as much as possible out of what it called its ‘ODRI customers' (overdraft/returned item).” The district court also found that Wells Fargo had “affirmatively reinforced the expectation that transactions were covered in the sequence [the purchases were] made while obfuscating its contrary practice of posting transactions in high-to-low order to maximize the number of overdrafts assessed on customers.” The court issued a permanent injunction against “high-to-low” posting and ordered $203 million in restitution. On appeal, Wells Fargo seeks refuge from state law on the ground of federal preemption. It also challenges the district court's factual and legal findings. We conclude that federal law preempts state regulation of the posting order as well as any obligation to make specific, affirmative disclosures to bank customers. Federal law does not, however, preempt California consumer law with respect to fraudulent or misleading representations concerning posting. As a consequence, we affirm in part, reverse in part, and remand for further proceedings.

Background¹

“Posting” is the procedure banks use 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 are typically debit-card transactions and checks. If the account balance is sufficient to cover all items presented for payment, there will be no overdrafts, regardless of the bookkeeping method used. If, however, the account balance is insufficient to cover every debit item, then the account 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 sum overdrawn will be exactly the same). The number of overdrafts drives the amount of overdraft fees.

Before April 2001, Wells Fargo used a low-to-high posting order. Under this system, the bank posted settlement items from lowest-to-highest dollar amount. Low-to-high posting paid as many items as the account balance could cover and thus minimized the number of overdrafts. Beginning in April of 2001, Wells Fargo did an about-face in California and began posting debit-card purchases in order of highest-to-lowestdollar amount. This system had the immediate effect of maximizing the number of overdrafts. The customer's account was now depleted more rapidly than would be the case if the bank posted transactions in low-to-high order or, in some cases, chronological order.

As an illustration, consider a customer with $100 in his account who 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 day. Under chronological posting or low-to-high posting, only one overdraft would occur because the ten small items totaling $99 would post first, leaving $1 in the account. The $100 charge would then post, causing the sole overdraft. Using high-to-low sequencing, however, these purchases would lead to ten overdraft events because the largest item, $100, would be posted first—depleting the entire account balance—followed by the ten transactions totaling $99. Overdraft fees are based on the number of withdrawals that exceed the balance in the account, not on the amount of the overdraft. When high-to-low sequencing is used, the fees charged by the bank for the overdrafts can dramatically exceed the amount by which the account was actually overdrawn. For example, Gutierrez incurred $143 in overdraft fees as a consequence of a $49 overdraft, and Erin Walker incurred $506 in overdraft fees for exceeding her account balance by $120.

Gutierrez claims that Wells Fargo made the switch to high-to-low processing in order to increase the amount of overdraft fees by maximizing the number of overdrafts. The bank amplified the effect of its fee maximization plan, which it named “Balance Sheet Engineering,” through several related practices that are not at issue here.

California's Unfair Competition Law allows individual plaintiffs to bring claims for unfair, unlawful, or fraudulent business practices. Cal. Bus. & Prof.Code § 17200.² Although remedies under the Unfair Competition Law are limited to injunctive relief and restitution, the law's scope is “sweeping.” Cel–Tech Commc'ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal.4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527 (1999). Gutierrez sued on behalf of a class, alleging independent violations of both the law's “unfair” and “fraudulent” prongs. Gutierrez alleged that Wells Fargo's “resequencing” practices are unfair because they contradict the legislative policy expressed in California Commercial Code § 4303(b) 1992 Amendment cmt. 7, which provides that “items may be accepted, paid, certified, or charged to the indicated account of its customer in any order” so long as the bank “act[s] in good faith” and not “for the sole purpose of increasing the amount of returned check fees charged to the customer.” ³Id.

The district court certified a class of “all 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.” After a two-week bench trial, the district court issued a comprehensive 90–page decision and found that Wells Fargo's “decision to post debit-card transactions in high-to-low order was made for the sole purpose of maximizing the number of overdrafts assessed on its customers.” The court also concluded that Wells Fargo led customers “to expect that the actual posting order of their debit-card purchases would mirror the order in which they were transacted” while hiding its actual practice of posting transactions in high-to-low order so that the bank could “maximiz[e] the number of overdrafts assessed on customers.”

The district court rejected Wells Fargo's numerous defenses—federal preemption pursuant to various statutes and regulations, Gutierrez's lack of standing, and the impropriety of class certification—and held Wells Fargo's actions to be both unfair and fraudulent under the Unfair Competition Law. As a remedy, the court entered a permanent injunction requiring Wells Fargo to “cease its practice of posting in high-to-low order for all debit-card transactions” and “either reinstate a low-to-high posting method or use a chronological posting method (or some combination of the two methods) for debit-card transactions.” It also imposed various related disclosure requirements. In addition to injunctive relief, the district court ordered Wells Fargo to pay $203 million in restitution. Both parties appealed. Wells Fargo's appeal focuses on its preemption argument and on the merits of...