NBT Bank, N.A. ("NBT") scored a major victory in May 2012 when the Supreme Court of the State of New York, County of Delaware, granted in its entirety NBT's motion to dismiss a class action alleging that its policies relating to overdraft fees were unlawful, deceptive and unconscionable.  In so ruling, the Hon. John F. Lambert parted ways with other courts across the country that have ruled against other banks in similar cases.  The ruling is noteworthy because it is one of the few cases in which a class action concerning overdraft fees has been dismissed on a pre-trial motion.

Overdraft Litigation Background

The class action against NBT was one of more than a hundred similar actions brought by account holders against banks throughout the country.  Plaintiffs in these cases typically allege that the banks improperly charge their customers multiple overdraft fees for debit card and Automated Clearing House ("ACH") transactions by posting transactions in "high-to-low" order rather than processing debit and ACH transactions in chronological order. This practice, plaintiffs allege, enables banks to deplete customer account balances more quickly by processing large transactions first so that the bank can collect overdraft fees on a greater number of transactions.

Banks have argued in reply that plaintiffs' claims are, among other things, preempted by federal law.  Federal regulations expressly permit banks to reorder paper check transactions, in part based on the arguments that: (i) customers prefer that larger checks for expenses such as mortgage and car payments be paid first; and (ii) account holders benefit from the certainty of a predictable payment order because they cannot control the order in which checks they write ultimately will be presented to the bank for payment.  Most banks, however, apply the same high-to-low reordering practice in the context of debit and ACH charges, even though both are nearly instantaneous electronic transactions.  Plaintiffs have argued that paper-check regulations should not apply to electronic transactions because account holders now control the order in which they incur charges and because, now that overdraft protection is broader and more ubiquitous, reordering of electronic transactions is likely only to affect fees and not which items the bank will pay.  Plaintiffs illustrate these allegations with examples of "high-to-low" reordering resulting in account holders incurring many more overdraft fees in a single day than chronological processing would have produced.  Plaintiffs also allege that customers who frequently overdraw their accounts are a large source of revenue for many banks and that banks should instead process transactions in chronological order or in order from smallest to largest. 

Many banks have already settled these class actions for large sums.  At the high end, these range from TD Bank's $62 million settlement to Bank of America's $410 million settlement, according to published reports, and many smaller banks have also settled for millions of dollars.  Some banks have opted to proceed to trial rather than settle.  Sovereign Bank won a motion to dismiss affirmed by the Third Circuit Court of Appeals, based in large part on the explicit disclosure of its "high-to-low" ordering practice contained in the bank's terms and conditions.  In contrast, Wells Fargo lost a $202 million verdict at trial.

Overdraft actions brought in the federal courts have generally been transferred to the Southern District of Florida pursuant to an order of the Judicial Panel on Multi-district Litigation. Federal District Judge Lawrence King has largely been unsympathetic to the bank defendants, rejecting an omnibus motion to dismiss in 2010 and denying several banks' motions to compel arbitration, a decision that recently was reversed by the Eleventh Circuit Court of Appeals.

Suit against NBT

NBT is a regional bank primarily serving customers in New York and Pennsylvania.  NBT's account agreement terms and conditions stated that the bank "generally pay[s] items in dollar amount order, high to low."  That language provided a strong contractual basis for attacking the sufficiency of the complaint, but was not nearly as strong as the language in Sovereign Bank's account agreement, which included a detailed explanation of how payment reordering could result in additional fees. 

Plaintiff Hope Costello sued on behalf of herself and a putative class of bank customers seeking damages, restitution and injunctive relief.  Her complaint alleged five causes of action: breach of contract, unconscionability, conversion, unjust enrichment, and violation of N.Y. Gen. Bus. Law § 349, New York's consumer protection statute.

NBT filed a motion to dismiss Costello's claim on November 9, 2011, arguing that: (i) the practice about which Costello complained was expressly permitted under her agreement with the bank; (ii) New York law does not recognize an affirmative claim for unconscionability; (iii) Costello's conversion and unjust enrichment claims could not stand since the parties had a binding agreement; (iv) conduct disclosed in a contract cannot, as a matter of law, violate New York's consumer protection law; and (v) plaintiff's claims were preempted by federal law.

The Decision

The Court dismissed all of Costello's claims, with leave to amend the complaint.

Breach of Contract

The Court observed that the general practice of paying items in high-to-low order was specifically permitted by NBT's account agreement.  Although Costello also alleged a breach of the implied covenant of good faith and fair dealing, the Court held that, under New York law, conduct consistent with the stated terms of the contract did not violate the implied covenant.

Unconscionability, Conversion and Unjust Enrichment

The Court swiftly dismissed Costello's unconscionability claim, agreeing with NBT that, under New York law, unconscionability is merely a defense to non-performance, not an independent cause of action. 

The Court also dismissed Costello's conversion claim as duplicative of her breach of contract claim.  The Court dismissed Costello's unjust enrichment claim based on similar reasoning, agreeing with NBT that a quasi-contractual remedy was inapposite for a case governed by a binding contract that expressly allowed the conduct in question.

N.Y. Gen. Bus. Law § 349

Finally, the Court dismissed Costello's claim under New York's consumer protection statute, concluding it was preempted by federal law.  The Court concluded that NBT was acting in accordance with federal regulations that govern it as a national bank and that allow the bank to assess the fees in question. 


Plaintiff Costello may get another opportunity to pursue her claims; on June 20, 2012, her attorneys filed a Notice of Appeal.