Earlier this year, Balch & Bingham reported on the dismissal of one of the first class actions challenging financial institutions for charging multiple “overdraft” or not sufficient funds (“NSF”) fees for the same transaction or “item.” In these cases, Plaintiffs allege financial institutions may only charge an overdraft fee once for each “item” – be it a debit, check, draft, withdrawal, ACH payment request, etc. – no matter how many times merchants represent the transaction or item to the bank for payment. Last week, the Tennessee Court of Appeals became the first appellate court to affirm the dismissal of one of these cases.

In Saunders v. Y-12 Federal Credit Union, Plaintiff Daphne Saunders filed a complaint against Y-12 Federal Credit Union in Tennessee state court alleging Y-12 breached the parties’ deposit agreement by impermissibly charging her account a $32 overdraft fee each time a previously-rejected transaction was represented for payment. For example, if Plaintiff tried to pay a bill through her Y-12 account and the transaction was returned for insufficient funds, she was charged an NSF fee. If the merchant then resubmitted the request for payment and it was again returned for insufficient funds, Y-12 charged Plaintiff another NSF fee. Plaintiff claimed the deposit agreement only authorized Y-12 to charge one fee per “single item,” and that each resubmission of a previously-returned transaction should still be considered a single “item.”

The trial court dismissed Plaintiff’s lawsuit, holding that the deposit agreement clearly allowed Y-12 to charge a fee for “each overdraft” – regardless of how many times the same “item” or transaction was processed. The trial court cited Lambert v. Navy Fed. Credit Union, a federal case from Virginia, which Balch & Bingham previously reported was the first to dismiss a NSF fees class action, as directly on point concerning this issue.

The Tennessee Court of Appeals affirmed the dismissal, holding that the deposit agreement clearly and unambiguously gave Y-12 the right to charge a fee for each overdraft. The court held that under the deposit agreement, an overdraft occurred whenever a “check, draft, transaction, or other item . . . plus any applicable fee” posted to an account with insufficient funds. The court further held that the deposit agreement allowed Y-12 “to charge for each overdraft.” (emphasis added). Thus, the court reasoned it could not be a breach of contract to charge Plaintiff’s account each time an item was submitted for payment and returned for insufficient funds, even if the same item was resubmitted multiple times. In so doing, it became the first appellate court in the country to uphold the dismissal of a multiple NSF fee class action.

There have been at least 25 trial court decisions on motions to dismiss in multiple NSF fee class actions – mostly in state trial courts. Because state trial courts often prefer a factual record before ruling on a complaint, the plaintiffs have won most of these early decisions. However, the tide may be turning even on early motion to dismiss rulings. At least five courts have now granted motions to dismiss. In addition to the Tennessee courts and Virginia federal court, a federal court in Illinois and two state courts in the last two weeks (Oregon and Washington State) have dismissed similar cases. In the Illinois case (Page v. Alliant Credit Union), the agreement provided: “If the amount of the item presented for payment exceeds the total available overdraft sources, the item will be returned as non-sufficient funds and you will be charged applicable fees.” The Illinois federal court reasoned this language did not promise customers the financial institution would charge “just one overdraft fee per transaction.” Similarly, the deposit agreement in the Oregon case (Winamaki v. Umpqua Bank) gave the financial institution the right to “charge . . . a fee of $35 each time” it payed or returned a transaction that overdrew the checking account. However, this deposit agreement also capped overdraft fees at $175 per day regardless of how many transactions were paid or returned. In the Washington State case (Haines v. Washington Trust Bank), the deposit agreement specified customers would be charged a “Returned Item Fee” each time “items presented are returned unpaid.” Thus, the court held the financial institution “did precisely what [it] said [it] would do – [it] charged a $30 NSF fee each time a third-party made a[] . . . withdrawal request when insufficient funds existed.” We expect these cases will be appealed. If they are, we will report further on their outcomes.

While the tide of decisions in the multiple NSF fee class actions might be turning in the financial institutions’ favor, financial institutions should nevertheless remain vigilant. Each case turns on the language of the applicable deposit agreement and whether it authorizes an NSF fee for each overdraft rather than for each individual item. Financial institutions should continue to review their deposit agreements and marketing with this in mind. Results may vary depending upon the wording of the deposit agreements. Recent regulatory guidance suggests “[g]enerally, a bank may attempt to deposit the check two or three times when there are insufficient funds in [an] account. However, there are no laws that determine how many times a check may be resubmitted, and there is no guarantee that the check will be resubmitted at all.  Overdraft or insufficient funds fees can be assessed each time the check is submitted. Review your bank’s deposit account agreement for its policies regarding overdrafts and the presentment of checks.” Regulatory guidance also suggests senders should not send any item to the ACH Network for processing when the “bank on which the item is drawn has declined to pay the item two or more times.”

Please contact Gregory C. Cook if you have questions.