A checking account that includes a debit card feature is a “service” under California’s Consumer Legal Remedies Act, according to a new federal court opinion allowing a consumer’s suit challenging the ordering of overdraft fees to continue.
Amber Hawthorne filed a putative class action against Umpqua Bank. She alleged that the bank processed transactions with larger amounts ahead of those with smaller amounts in an attempt to create more overdrafts and more revenue for the bank from overdraft fees.
Hawthorne claimed Umpqua violated California’s Unfair Competition Law, which prohibits three prongs of activity: “unlawful, unfair or fraudulent business act or practices.”
Umpqua sought to dismiss the suit, arguing that the National Bank Act preempted Hawthorne’s state law claims. Even though Umpqua is a state-chartered bank, NBA preemption applied through application of the Federal Deposit Insurance Act, the bank argued.
In his decision, U.S. District Court Judge Jon S. Tigar relied heavily upon a Ninth U.S. Circuit Court of Appeals decision, Gutierrez v. Wells Fargo Bank, 704 F.3d 712 (9th cir. 2012), where a plaintiff similarly challenged the alleged practice of reordering transactions to maximize overdraft fees. In that case, the Ninth Circuit found the NBA preempted the plaintiff’s claims under the “unfair” prong of the UCL but not the “fraudulent” prong.
Looking to Gutierrez, the judge found it foreclosed Hawthorne’s claims under the “unfair” prong but that she could move forward on the “fraudulent” prong claims. He then turned to an analysis of the plaintiff’s claims under the “unlawful” prong.
Hawthorne based her “unlawful” cause of action on Umpqua’s alleged violation of the state’s Consumer Legal Remedies Act, which prohibits unfair or deceptive acts involving a transaction “which results in the sale or lease of goods or services” to a customer.
Liberally construing the CLRA, which he said California courts “generally find financial transactions to be subject to,” Judge Tigar held that “debit cards are a ‘service’ for purposes of the CLRA.” Describing debit cards as a “service” is “consistent with the benefits consumers actually receive,” Judge Tigar wrote. “The relationship between Umpqua Bank and its customers is not simply a checking account relationship, and it certainly is not limited solely to the imposition of overdraft fees.
The court stated that, “Rather, the debit card relationship is best understood as encompassing convenience services that go beyond those associated with a simple checking account,” like cashless and checkless purchasing.
Therefore, Judge Tigar denied Umpqua’s motion to dismiss Hawthorne’s claims under the fraudulent and unlawful prongs of the UCL.
To read the court’s decision in Hawthorne v. Umpqua Bank, click here.
Why it matters: The Hawthorne decision opens the door to potential increased liability for banks, arguably allowing customers to bring class action suits alleging fraudulent or unlawful conduct on the part of financial institutions. The opinion appears to be the first to hold that a checking account with a debit card feature constitutes a “service” under California’s Consumer Legal Remedies Act. Banks can take some comfort in the court’s following of Gutierrez with respect to claims made under the “unfair” business practices prong of the Unfair Competition Law, as well as the judge’s express limitation of the decision to checking accounts with a debit card feature, explicitly declining to opine on whether a checking account without a debit card feature would fall under the purview of the CLRA.