In Freeman v. Hawthorn Bank, a recent case out of the Circuit Court of Jackson County, Missouri, a Missouri bank was successful in obtaining a favorable ruling in a case that has significant implications for banks and other financial institutions subject to Missouri usury law. Lawyers from Stinson Leonard Street LLP argued on behalf of Hawthorn Bank and were instrumental in bringing about the favorable result.

The Plaintiffs’ Claims

This case involved a class action on behalf of Hawthorn Bank customers who alleged that a debit card or ATM transaction resulting in an overdraft of a customer’s checking account was a loan, and that any resulting overdraft fee was interest that violated Missouri usury law.

The Judge’s Ruling

Judge McKenzie, presiding over a bench trial, ruled that Hawthorn Bank’s overdraft fees arising from debit card and ATM transactions are not interest, and are not subject to Missouri usury law. He rejected the Plaintiffs’ claims, and ruled that overdrafts fees are “fees or service charges on deposit accounts” authorized under R.S. Mo. § 362.111. His decision is consistent with the Missouri Division of Finance’s interpretative letter issued in May 2011 and the General Assembly’s August 2015 amendment to Section 362.111.

In addition, Judge McKenzie rejected the Plaintiffs’ claim that an overdrawn checking account is a loan under Missouri usury law. He determined that an overdrawn checking account is not a loan, but is instead an imbalance of debits and credits on a checking account.

Finally, Judge McKenzie ruled that Hawthorn Bank’s overdraft program is a service provided to its customers and that the overdraft fee is not interest, but instead a charge for those services.

The decision is subject to an appeal to the Missouri Court of Appeals.

Positive Consequences

Judge McKenzie’s decision accurately characterizes the true nature of overdraft services as services offered for a fee, instead of loans in exchange for interest. Furthermore, it fulfills the General Assembly’s directive that Missouri-chartered banks be given the ability to compete with national banks with respect to offering overdraft services. Missouri banks and others subject to Missouri usury law will surely benefit from the added certainty this case provides.