Compliance Bulletin

Analysis of Gutierrez v. Wells Fargo Posting Order Decision
November 9, 2010

This Regulatory Compliance Bulletin was prepared by Ted Teruo Kitada [1], Senior Company Counsel at Wells Fargo and Chair of the CBA Legal Affairs Committee.

A federal District Court for the Northern District in San Francisco issued an order against a bank requiring it to change its posting order procedures on debit card transactions and to reimburse overdraft fees charged to a class of customers. The bank’s liability was based on violation of the “unfair” and “fraudulent” prongs of California Business and Professions Code Section 17200 et seq.

Facts. In 2001 the bank converted its practice of posting debit card transactions from low-to-high to high-to-low. A few months later, the bank also adopted a practice of commingling debit card transactions with check and ACH transactions for posting purposes. Prior to this change, the bank posted all debit card transactions before check transactions and all check transactions before ACH transactions.

Not long thereafter, the bank also adopted a practice it refers to as the “shadow line,” which is an informal line of credit to support debit card transactions. The amount of the shadow line is individually underwritten. Previously, the bank had declined debit card transactions when the account’s available balance was insufficient to cover the transaction amount. The bank did not provide notice of this new practice to its customers.

Defenses. The bank asserted as a defense that its customers largely wanted and benefited from a high-to-low posting order. The court was skeptical of this claim, noting that most debit card transactions are “must pay” transactions [2]. The bank must honor most of these transactions, even as overdrafts, as it will have authorized them in advance at the point of sale. Unlike check or ACH transactions, the bank is not able to dishonor these transactions. Thus, the court reasoned, the posting of debit card transactions confers no benefit on the customer.

The bank also asserted a preemption defense based on the OCC’s regulation at 12 C.F.R. § 7.4002 [3]. A provision in that regulation states that a national bank needs to “employ a decision-making process” in establishing non-interest charges and fees, and lists factors for the bank to consider. The court found that the bank did not address any of the factors before adopting the posting practices.

Disclosures and Marketing Materials. The court found that the bank’s consumer account agreement did not adequately disclose its posting practices. The relevant language referenced is:

We may pay Items presented against your account in any order we choose, unless a particular order is either legally required or prohibited. In particular, we may choose to pay Items in order of highest dollar amount to lowest dollar amount (unless such a practice is specifically prohibited by an applicable state or federal law, rule or regulation). We may change the order of posting Items to your account anytime without notice to you.

The court was particularly critical of the phrase “[w]e may choose to pay Items in the order of highest dollar amount to lowest dollar amount” for two reasons. The phrasing “we may choose” suggested to customers that the bank had not adopted the high-to-low posting order when, in fact, it had already been adopted. Further, the phrase suggests that the bank would exercise discretion on a case-by-case basis. No such discretion was exercised.

In October 2004, the bank supplemented the above language with additional language, as follows:

The Bank may post Items presented against the Account in any order the Bank chooses, unless the laws governing your Account either requires or prohibits a particular order. For example, the Bank may, if it chooses, post Items in order of highest dollar amount to lowest dollar amount. The Bank may change the order of posting Items to the Account at any time without notice to you. If more than one Item is presented to the Bank for payment on a day the Bank determines there are insufficient funds to pay one or more but not all of the Items, the number of Items paid and the overdraft and returned Item fee assessed may be affected by the order that the Bank chooses to pay those Items….For example, if the Bank pays Items in the order or highest-to-lowest dollar amount, the total number of overdraft and returned Item fees you are charged may be larger than if the Bank were to pay the Items in the order of lowest-to-highest dollar amount.

The court observed that this amended and additional language compounded the deception maintained by the bank because, again, it did not adequately disclose that the bank had already adopted the high-to-low posting order. A reasonable consumer would have been deceived by the bank’s representation that it “may, if it chooses, post Items in the order of highest dollar amount to lowest dollar amount.”

According to the court, the bank’s marketing materials (i.e., website, brochures, and welcome jacket) suggested that debit card transactions would be posted in chronological order. One of the bank’s marketing themes was that debit card purchase transactions would be “immediately” or “automatically” deducted from the account. Use of these terms, in view of the court, may lead consumers to believe that the funds would be deducted from their checking account in the order transacted, and that the purchase would not be approved if they lacked sufficient available funds to cover the transaction.

Legal Conclusions. An unfair business practice claim under Section 17200 must be tethered to a legislatively declared policy. According to the court, this requirement is satisfied by reference to comment seven to California Uniform Commercial Code (“UCC”) Section 4303, which reads:

The only restraint on the discretion given to the payor bank under subsection (b) is that the bank act in good faith. For example, the bank could not properly follow an established practice of maximizing the number of returned checks for the sole purpose of increasing the amount of returned check fees charged to the customer.

The court found that the bank’s series of decisions made in 2001-2002 regarding posting order, together with the manner in which those practices were disclosed or not disclosed, were intended to increase the amount of fees generated in violation of this provision.

A “fraudulent” business practice claim requires a showing that members of the public are likely to be deceived by the practice. The court again observed that the consumer account agreement failed to disclose the posting order adequately. The misleading nature of the disclosures enhanced the likelihood that customers could be deceived.

Relief. The court granted both injunctive relief and restitution under the order.

Injunction. The court ordered the bank to comply with the following requirements:

  • By November 30, 2010 (the “Effective Date”) cease its practice of posting in high-to-low order on all its debit card transactions for all class members.
  • On or before the Effective Date, for all class members, either reinstate a low-to-high posting method or use a chronological method (or some combination of the two methods) for the posting of debit card transactions for class members.
  • Before implementing any posting system, file a declaration explaining the specifics of it, in order to allow plaintiffs’ counsel to review it. This filing of the declaration must be made at least 49 days before the Effective Date.
  • All agreements, disclosures, websites, online banking statements, and promotional material provided to class members must conform to the new posting system.

Restitution. The court concluded that a proper measure of restitution must be determined from a posting order that most closely tracks a chronological posting order for debit card transactions. The court believed that a chronological posting order most accurately reflects the expectation of class members. In short, restitution is based on the following sequence of transaction posting:

  • Credits.
  • Priority debit transactions, e.g., cash withdrawals and equivalents.
  • Debit card transactions with date/time information in chronological order.
  • Debit card transactions without date/time information in low-to-high order.
  • Checks and ACH transactions in high-to-low order.

Applying the posting sequence detailed above in place of the high-to-low system used during the litigation period, the amount of restitution is estimated to be approximately $203 million.

Observations. The decision leaves many unanswered questions. It is not clear how closely the decision was driven by the unique facts of the case. Does the order indicate that posting transactions high-to-low, in itself, subjects banks to liability? What if only checks are posted high-to-low? What if both checks and ACH transactions were posted high-to-low? What if a bank posted debit card transactions high-to-low but ceased using a “shadow line”? Is risk mitigated if a prominent disclosure is provided to customers indicating the posting order?

Further, comment seven to UCC § 4303 is unique to California. Only Texas has a comment to UCC § 4303 that is even remotely close. Does the failure of other jurisdictions to adopt a similar comment give greater license to a paying bank to post items in any order? Or does the general obligation of a paying bank to act in good faith under UCC § 1304 (as adopted in all states) impose a similar duty in other jurisdictions?

All of these questions remain open to some degree, and can only increase in relevance in the years to come. The opt-in rule for certain overdrafts under Regulation E and the heightened scrutiny currently given to overdraft protection programs point to the need for banks to exercise caution and constraint.

  1. Mr. Kitada can be reached at 415-396-5461 or
  2. The bank is only able to decline these debit card transactions in two instances: (a) if the merchant did not obtain authorization prior to presenting the transaction for settlement; or (b) the merchant fails to present the transaction for settlement within 30 days of authorization. Absent these two exceptions, due to the authorization granted to the merchant prior to the debit card purchase transaction, the bank is required to pay a customer’s debit card purchase whether or not the customer has sufficient funds in the account to cover the transaction.
  3. A national bank establishes non-interest charges and fees in accordance with safe and sound banking principles if the bank employs a decision-making process through which it considers the following factors, among others:
  • (i) The cost incurred by the bank in providing the service;
  • (ii) The deterrence of misuse by customers of banking services;
  • (iii) The enhancement of the competitive position of the bank in accordance with the bank’s business plan and marketing strategy; and
  • (iv) The maintenance of the safety and soundness of the institution.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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