$203 Million Overdraft Restitution Overturned

Wells Fargo won reversal of a $203 million restitution order Wednesday over its practice of maximizing overdraft fees by posting the largest purchases first.  But that doesn’t mean the case is over.

The 9th U.S. Circuit Court of Appeals held that federal law preempts California regulation of the posting order of debits against consumer accounts.  Federal law also preempts states from requiring the bank to tell consumers about its practices.

But Judge Margaret McKeown said federal law does not preempt California consumer law with respect to allegedly  fraudulent or misleading statements concerning posting.

They sent the case back to U.S. District Judge William Alsup in San Francisco.

The bank posting process allows for debit items sent for payment against consumer accounts in a given day to be subtracted during the wee hours after midnight.  While consumers might think they are subtracted in the order received, that’s not what Wells Fargo did.

Before 2001, Wells Fargo used a low-to-high posting order, which would clear the largest number of items before creating an overdraft problem for consumers who spent more than they had in the bank.

But after April 2001, Wells Fargo began posting debit-card purchases in a highest-to-lowest dollar amount.  The immediate effect was to maximize the number of overdrafts and increase the fees collected by the bank.

Several consumers sued and after a two-week trial, before Alsup in San Francisco, he found 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 customer.”

In addition to an injunction against the practice, Alsup ordered the bank to pay $203 million in restitution.

The appeals court held that Alsup cannot dictate Wells Fargo’s choice of posting method.

In addition, the panel held that his injunction and restitution order under California’s Unfair Competition Law is preempted by federal bank regulation.

But the appeals court did save a small piece of the case, saying the state law barring statements that mislead the public is not preempted.

Other than the cost of changing its published materials, Wells Fargo could not articulate how abiding by the law’s requirement that it not mislead consumers would significantly interfere with its ability to engage in banking, according to the panel.

Sending the case back to Alsup, the panel said he could issue an injunction and restiturion order, but he cannot tell the bank to use a particular posting system or require it to make specific disclosures.

He can make the bank stop issuing misleading statements in the future.  As for restitution, Alsup will have to decide if it is justified given the new limitation on his authority and the evidence in the case.

Joining McKeown in the decision were Judges Sidney Thomas and William Fletcher.

Case: Gutierrez v. Wells Fargo Bank, No. 10-16959

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