By John M. Bredehoft, Lisa Hudson Kim, Credit Union

Claims of unfair overdraft fees continue although it seems the media has taken a break from talking about them. A recent federal case in Virginia ruled in favor of all the Plaintiff’s counts and denied the Defendant’s Motion to Dismiss (“Motion”) the complaint. As a call to precaution, it is worthwhile to summarize the case and Motion in favor of the Plaintiff as a reminder that lawsuits involving overdraft fees have not disappeared.

In the matter of Ashley Garrett v. Call Federal Credit Union, the Plaintiff alleged the Defendant:

• Practiced charging overdraft fees on “Authorize Positive, Settle Negative Transactions” (“APSN Transactions”);
• Charged multiple fees for a single rejected item in violation of the Account Agreement (“Agreement”); and
• Misrepresented its overdraft practices in violation of Regulation E.

If these allegations sound familiar, they are. Many lawsuits seem to allege the same complaints about overdraft fees, but this case had a bit of a twist that is not often seen in other overdraft fee cases.

The Plaintiff relied on an earlier, outdated version of the Agreement that contained “ambiguous language” describing how the Defendant assessed fees; whereas the updated version more clearly described how overdraft fees are assessed. Although each party disagreed with which version of the Agreement controls in this case, the Court opined it had no evidence before it to consider whether the Plaintiff ever received the updated Agreement. The Motion further stated that under Virginia law, even when one party can unilaterally modify a contract, both parties must still mutually assent, citing a previous lawsuit requiring a credit union to show that plaintiff received notice of the modification and continued to use their services after receiving the notice to demonstrate assent to a new membership agreement. The Court ruled in favor of the Plaintiff and used the earlier, outdated version of the Agreement containing the “ambiguous language” describing how the Defendant assessed fees.

This decision is concerning for several reasons. Credit unions periodically need to revise account agreements for clarification and regulatory purposes. If a Court rules that a revised version of an agreement cannot be relied upon in a lawsuit, credit unions need to be strategic in the use of revised agreements and determine if language that asserts agreement by the member to the revisions of agreements is sufficient.

As to charging overdraft fees on APSN transactions, the Court concluded that the outdated version of the Agreement was not clear in describing the process for debit card transactions that are pre-authorized with sufficient funds at the time of the purchase but when the account had insufficient funds at the time the merchant posts payment for the transaction, resulting in an overdraft fee. Therefore, the Court ruled in favor of Plaintiff.

With regard to charging multiple fees for a single rejected transaction, the Plaintiff argued that the language in the outdated version of the Agreement asserts that the account may be subject to a charge (in the singular) for each item. The Defendant argued the language in the revised version of the Agreement clearly states the account can be charged multiple times for a single transaction that is re-submitted for payment if it is rejected due to an insufficient account balance. Since the Court ruled in favor of the Plaintiff and relied on the outdated version of the Agreement, the Court ruled in favor of the Plaintiff overall for this claim.

The Plaintiff alleged Defendant’s opt-in form, required by Regulation E, does not explain when the Defendant assesses overdraft fees, that the Defendant may charge multiple overdraft fees for the same transaction, and that the Plaintiff would pay overdraft fees for debit card transactions, conceivably in violation of Regulation E. Based on the lack of information and “ambiguous language” used in the opt-in form, the Court ruled in favor of the Plaintiff on this claim also.

Throughout the nation over the past year, courts have been scrutinizing the manner in which Account Agreements and important modifications – which may include class action waivers and arbitration requirements – are agreed-to by members or consumers. It remains the case, as this decision recites, that a member’s continued use of a credit union’s services constitutes consent to any new or modified terms. But the courts have become much more rigorous in requiring specific proof of the individual member’s knowledge of the new terms before enforcing them. (One federal appellate court, in a non-credit-union context, even ruled recently that while there is a duty to read before signing, there is no “duty to scroll down the web page”!) Other courts have looked to long-obsolete modification terms in Account Agreements (existing when a long-term member first joined) or have declined to enforce modifications entirely. It has become increasingly important over the last year for credit unions to ensure any new or modified terms are seen, understood, and agreed-to by members, through electronic or paper notification and on-line notices.

Credit unions should heed the warnings and lessons of this case, compare their own processes and Agreements, and take preventative measures to mitigate the risk of becoming a defendant in a similar case. The credit union team at Kaufman & Canoles has the expertise necessary to assist credit unions with these matters, as well as compliance, risk management, and all credit union matters.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.