Wells Fargo Gets Day in Court on Overdraft

SAN FRANCISCO — Plaintiffs' attorneys have sued scores of banks over the manipulation of overdraft fees. But they've never enjoyed a more complete victory than in Gutierrez v. Wells Fargo (WFC).

A district court judge awarded plaintiffs "full damages" of $203 million in 2010 for the case, which charged that the San Francisco bank quietly reordered debit transactions so that its customers racked up more overdraft fees. On Tuesday, Wells took its shot at overturning that judgment, appearing before appellate judges of the U.S. 9th Circuit Court of Appeals to argue that the earlier verdict was unjustified.

"The judgment should be reversed for two main reasons. Plaintiffs' claims are preempted by federal banking law, and second, plaintiffs' claims fail as a matter of state law," Wells Fargo attorney Robert Long told a three-judge panel. He further argued that Wells' contract disclosures precluded the possibility of defrauding its customers.

The appeal drew briefs from the American Bankers Association and the Center for Responsible Lending, in a reflection of its significance as a foundational case for subsequent overdraft litigation. The 2010 decision marked the first time plaintiffs' attorneys drew blood on overdraft fees, as U.S. District Court Judge William Alsup of California's Northern District framed Wells' behavior in flagrant terms and dismissed bank officials' testimony about Wells' good intentions as "not credible."

"Gouging and profiteering were Wells Fargo's true motivations," Alsup wrote in a blistering 2010 opinion.

While Wells protested some of Alsup's harsher wording in its briefs, the bank focused its arguments on Tuesday on preemption and the wording of its disclosures. The Office of the Comptroller of the Currency's past endorsement of high-to-low posting of checking account charges should preclude lawsuits brought under California law, Long argued.

But members of the three-judge panel questioned whether preemption could get the bank off the hook, and repeatedly raised doubts about whether Wells Fargo adequately disclosed its practices to customers. Federal regulators had warned banks about this sort of issue, Judge Margaret McKeown said, because "unfair competition laws might come back to bite you."

Judges William Fletcher and Sidney Thomas, meanwhile, grilled Long about a law in neighboring Nevada that prohibits high-to-low processing, asking whether Wells was suggesting that that statute should be preempted. Wells' attorney responded that he believes the statute should be preempted, but that the bank had chosen to live with it.

"So Wells Fargo's position is that we don't have to abide by Nevada law, but we choose to treat our Nevada customers differently from our California customers?" Fletcher asked. "It's hard to see how that furthers a national purpose."

Judge Sidney Thomas jumped in a moment later, asking, "Has any bank challenged the Nevada law?"

"Not to my knowledge," Long said.

Setting aside the preemption issue, the judges turned their attention to the quality of Wells Fargo's disclosures. When Long argued that the bank's disclosure of its high-to-low processing practices was done in good faith, Judge Fletcher interrupted.

"I don't know if you really think that's a fair disclosure," Fletcher said. "You got such a wave of complaints from consumers …. The evidence is the consumers did not understand it, and you did not tell them otherwise."

When it was the plaintiffs' attorneys' turn to speak, the judges maintained their focus on Well's contractual disclosure that it "may" reorder overdraft charges from largest to smallest.

"Why is 'may' a fatally misleading term?" Judge Thomas asked, noting that Wells raised the possibility that it would process charges from high to low. A few minutes later, he asked whether the plaintiffs believed that the inadequacy of Wells' disclosure was fairly determined by the lower court to be a matter of fact.

"I'm trying to figure out our standard of review," he said.