/>iCommunity banks are being sued more frequently in overdraft fee lawsuits. Many of these actions are putative class action lawsuits that can be costly for banks to defend and complicated to settle. At the center of these lawsuits are claims that banks’ account agreements are confusing, unfair, or deceptive. These claims often focus on banks’ “authorize positive, settle negative” (APSN) overdraft practices. Plaintiffs also commonly claim that banks charge nonsufficient funds fees and multiple re-presentment fees on a single item without customers’ agreement and charge multiple foreign ATM transaction fees.
Overdraft Fees and Opt-In Agreements
An APSN transaction happens when a debit card transaction is authorized while there are sufficient funds in the customer’s account, but then intervening transactions settle and decrease the amount of available funds, resulting in insufficient funds to cover the initial transaction. Because there are insufficient funds in the account when the initial transaction settles, the bank charges an overdraft fee.
Plaintiffs claim that charging an overdraft fee in this situation is either a breach of the account agreement or is unfair and deceptive because the agreement did not clearly explain the bank’s overdraft practices. Regulation E (12 CFR § 1005) requires financial institutions, including community banks, to provide notice to customers of the bank’s overdraft services and give the customer a reasonable time to “opt in” to those services. Banks are also required to provide written confirmation of the customer’s opt in and inform the customer of their right to “opt out” of the overdraft services at any time. The form, substance, and presentation of these disclosures are critical to defending an overdraft fee lawsuit and minimizing the risk of future litigation.
To aid in drafting these disclosures, the Federal Reserve created the Model A-9 Consent Form for Overdraft Services (Model Form). In the years since its creation, courts have considered whether the Model Form provides customers with sufficient notice of a bank’s overdraft services. Generally, courts have found that if the Model Form does not exactly and completely describe a bank’s overdraft practices, then it is an inadequate disclosure. Inadequate or confusing opt-in agreements can also give rise to breach of contract claims if customers incur overdraft fees that they believe are in violation of a bank’s stated overdraft practices.
Class Action Lawsuits in Mississippi
Mississippi banks are not immune from these lawsuits. Plaintiffs have recently filed class action lawsuits against community banks for breach of contract, claiming that the defendant bank charged overdraft fees in violation of the bank’s overdraft agreement. Bringing claims for breach of contract is usually preferable for plaintiffs because they have three years to bring state law breach of contract claims and only one year to bring federal claims under the Electronic Funds Transfer Act. The three-year limitation period on breach of contract claims also broadens the criteria for potential members of a plaintiff class. However, there are jurisdictional defenses that community banks in Mississippi should consider.
Class Action Fairness Act
Because Mississippi state courts do not have a procedural device for plaintiffs to bring class action lawsuits in state court, plaintiffs must file class action lawsuits in a federal court in Mississippi. In class action lawsuits where the plaintiff only asserts state law breach of contract claims, the plaintiff must establish federal class action jurisdiction under the Class Action Fairness Act (CAFA). CAFA expands federal jurisdiction to class action lawsuits where at least one plaintiff is a citizen of a different state than at least one defendant and the amount in controversy exceeds $5 million in the aggregate.
However, there are a few exceptions to CAFA jurisdiction. The “home state” exception is particularly relevant for community banks with large, local customer bases. This exception applies when two-thirds of the proposed plaintiff class are citizens of the state where the lawsuit is filed, and the defendant bank either (1) is incorporated in the state where the lawsuit is filed or (2) has its principal place of business in the state where the lawsuit is filed. If the defendant bank shows the requirements of the home state exception are met, a court cannot exercise jurisdiction over the lawsuit.
Banks should also be aware that exceptions to CAFA jurisdiction can be waived if not raised early in the proceedings. Evaluating the availability of the home state exception and other exceptions to CAFA jurisdiction is critical as similar class action lawsuits have survived the motion to dismiss stage, with courts finding that the defendant bank’s opt-in agreement is not so clear as to preclude the plaintiffs’ claims.
