Appeals Court Ruling on Overdrafts Leaves Wells Fargo Vulnerable

Wells Fargo (WFC) has won a partial victory in its appeal of a closely watched, $203 million overdraft lawsuit, but both sides of the case are gearing up for another round of fighting over the bank's consumer practices.

A panel of judges in the U.S. Court of Appeals for the 9th Circuit ruled that Wells could not be held liable for manipulating the order in which customers' debit charges were processed to maximize overdraft fees. The Office of the Comptroller of the Currency had sanctioned Wells' practices, the panel found, preempting such a challenge under state law.

But the panel upheld a finding that Wells made "fraudulent or misleading representations" about its practices, giving the original judge in the class action a second chance to force Wells to pay restitution.

So-called "high-to-low posting" allows banks to charge more in fees when customers overdraft their accounts. By reordering customers' daily transactions so that the largest purchases are subtracted from consumer checking balances first, Wells and many other banks increased the number of overdrafts charged to a customer within a single day.

Because federal preemption shielded Wells from second-guessing of its posting order, the appealscourt panel threw out an order from federal district court in northern California that Wells return $203 million in overdraft fees to California customers.

Wells is "pleased with the decision that largely reaffirms Wells Fargo's position and vacates the monetary award against us," Wells Fargo spokesman Ancel Martinez wrote in an email. "We look forward to resolving the remaining issues, and we will continue to serve the financial needs of our customers."

But the appealscourt panel upheld U.S. District Judge William Alsup's determination in the case,  Gutierrez v. Wells Fargo, that Wells had misled its customers about its practices, potentially allowing him to hit Wells with a similar fine on the second go around.

"On remand, the district court will be in a position to determine whether, subject to the limitations in this opinion, restitution is justified," the appeals court panel found.

"It's a split decision on the preemption," said Michael Sobol, an attorney for Lieff Cabraser Heimann & Bernstein who represents the plaintiffs. "We're confident that, on remand, that the district court will award monetary relief in an amount equal to that which it ruled was applicable to the deceptive trade practices."

In his original ruling, Judge Alsup slammed Wells for instituting high-to-low processing over the objections of some of its own employees.

"The only impact of the bank's posting practices was and remains to multiply the number of overdraft fees assessed on its customers," he wrote.  "This is surely because high-to-low posting is not a customer plus. Rather, it was used and is still being used by Wells Fargo as a snare for the unwary."

Alsup had ruled that the bank's processing practices violated California laws barring unfair competition. But the appealscourt panel found that the district judge had inappropriately applied California laws mandating that Wells act in good faith, because the OCC's tolerance of the practice trumped state law.

"Wells Fargo's decision to resequence the posting order falls within the OCC's definition of a pricing decision authorized by federal law," the panel found. "The district court is not free to disregard the OCC's determinations of what constitutes a legitimate pricing decision."

The panel rejected Wells' arguments that preemption should also defend it against claims that it misled its customers, however. Alsup's original decision said that Wells had deliberately avoided explaining its choice of posting order and its significance. "Although the court cannot issue an injunction requiring the bank to use a particular system of posting or requiring the bank to make specific disclosures, it can enjoin the bank from making fraudulent or misleading representations," the panel said.

The Gutierrez case is on a separate track from all of the other major class actions filed on high-to-low overdraft issues; those other cases have been consolidated in the court of Lawrence King, a federal judge in the southern district of Florida. Alsup's ruling in the Gutierrez case has been repeatedly cited by King, however.