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Client Alert: New York Plaintiffs’ Firm Sues Illinois Banks For Overdraft Fees & Transaction Reordering

Consumer Account Agreements, Rules and Regulations Covering ATM and Debit Cards Require Attention as a Result of New Class Action Filings Against Banks in Illinois

Banks should review all consumer account agreements and applicable rules and regulations pertaining to ATM and debit cards to ensure that disclosures permit the posting of transactions in any order.  Banks should further review their practices with respect to the posting of transactions to determine whether they are in fact posting to maximize overdraft fees.

Illinois Banks Have Been Targeted

Illinois banks have become the focus of at least one New York law firm that is suing banks across the country as a result of the order in which they allegedly post their customers’ electronic transactions (see website here).  Although Illinois courts have held that utilizing a posting method for overdrawn checks that results in more overdraft fees does not violate Illinois law (because such postings are authorized by Illinois law), no Illinois court has addressed whether a bank may lawfully reorder electronic transactions for such purpose.  Section 4-303(b) of the Uniform Commercial Code permits banks to pay checks “in any order.”  Section 4-303(b), however, has not been interpreted to apply to electronic transactions, and some authority exists that suggests Section 4-303(b) is inapplicable to electronic transactions.  

Recent Class Actions Alleging These Claims Have Provided A Windfall For Plaintiffs’ Counsel

These types of lawsuits are very lucrative for Plaintiffs’ counsel — and costly to banks.  For example, a class action lawsuit brought against Fifth Third Bank regarding its posting practices resulted in Fifth Third Bank paying $9.5 million into a settlement fund and paying an additional $1.08 million in settlement administration expenses.  Schulte v. Fifth Third Bank, 805 F.Supp.2d 560, 569 (N.D. Ill. 2011).  In connection with the settlement, Plaintiffs’ counsel sought — and obtained — a fee award of $3,166,666, or one-third of the settlement fund.  Id. at 597.  Finally, as part of the settlement, Fifth Third Bank agreed to stop high-to-low processing of electronic transactions in the future, at an estimated cost to Fifth Third Bank of $58.8 million over the next five years.  Id. at 583.

Watch Out For Copycat Lawsuits

In a class action lawsuit, one or more named plaintiffs bring suit on behalf of a class of similarly-situated consumers seeking damages for a defendant’s alleged violation of the law.  It is common for Plaintiffs’ counsel to troll court dockets looking for lawsuits, the substance of which they copy verbatim into a new complaint.  The internet makes it considerably easier for Plaintiffs’ counsel to find individuals willing to serve as named plaintiffs in their lawsuits and, indeed, the New York lawyers fomenting this litigation invite aggrieved consumers to contact them.

What Next?

Regardless of your actual practices vis-à-vis electronic transactions, you may find yourself named as a defendant in a class action lawsuit containing these types of allegations.  Moreover, if your account agreements and/or rules and regulations do not expressly authorize you to reorder the posting of electronic transactions to consumer accounts, but you do reorder transactions in order to maximize overdraft fees, you may find yourself facing liability as a defendant in a class action lawsuit.

While banks may have robust defenses to class certification (and also to the merits), better to reduce or eliminate liability on the front end to avoid protracted litigation or a costly settlement.  Banks should review all consumer account agreements and applicable rules and regulations pertaining to ATM and debit cards to ensure that disclosures permit the posting of transactions in any order.


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