Wells Fargo Seeks Reversal of $203 Million Overdraft Damages

Wells Fargo & Co. asked a federal appeals court to throw out a judge’s order to pay California customers $203 million for manipulating debit-card transactions to boost overdraft fees.

Wells Fargo said customers can’t sue under California law over how the bank deals with debit-card transactions because its practices are regulated by federal laws that allow Wells Fargo to determine its own methods for calculating fees.

The judgment should be reversed because the lawsuit claims are “preempted by federal banking law,” Robert Long, a lawyer for Wells Fargo, said at a hearing today before a three-judge panel of the U.S. Court of Appeals in San Francisco. The claims also “fail as a matter of state law,” Long said.

Customers alleged in a 2007 complaint that San Francisco-based Wells Fargo changed the way it treated daily debit transactions and cash withdrawals in 1999 so that transactions with the highest dollar amount posted first, rather than in the order they occurred.

The practice, which customers alleged was intended to boost revenue from overdraft fees, led to account holders overdrawing funds by small amounts multiple times a day, according to the complaint.

Overdraft Charges

Customers could be charged as much of $34 each time they overdrew, according to court filings. The bank violated California’s unfair business practices law, customers said.

Three Wells Fargo customers, suing on behalf of thousands of Californians, won their lawsuit in 2010 when U.S. District Judge William Alsup in San Francisco agreed that the policy was unfair, deceptive and fraudulent. Alsup ordered Wells Fargo to end the practice and pay $203 million to customers who were charged multiple overdraft fees.

Well’s Fargo’s practice of reordering transactions was “engineered” for the “sole purpose of generating overdraft fees,” Michael Sobol, a lawyer for the plaintiffs, told the court today.

The Office of the Comptroller of Currency, the federal agency that regulates national banks, has acknowledged that there are limits to its authority, Sobol said. In this case, those limits are subject to California law, which Alsup relied on in his opinion, Sobol said.

Bank of America

More than 30 banks have been sued over similar practices. Bank of America Corp. agreed to pay $410 million last year to settle customer claims and JPMorgan Chase & Co. reached a preliminary agreement in February to pay $110 million to resolve a lawsuit. A lawsuit against other banks is pending in federal court in Miami.

Long, the Covington & Burling attorney for the bank, said in court papers that customers were warned about the practice, which was stated in account agreements and allowed by the Federal Reserve and other national bank regulators.

The customer account agreement “expressly authorizes high-to-low posting and specifically discloses that high-to-low posting can result in high overdraft fees,” Long wrote.

Richard Heimann, another lawyer representing customers, said in court papers that Wells Fargo misled customers about the policy, burying it in fine print and advertising that debit transactions would “automatically” be deducted from accounts, which led customers to assume that withdrawals would be posted in chronological order.

He disputed the bank’s contention that customers can’t sue Wells Fargo under California’s unfair business practices law, saying that only claims which interfere with bank operations are preempted by federal regulation of banks.

Richele Messick, a spokeswoman for Wells Fargo, declined to comment on the case.|

The appeals court didn’t say when it will rule.

The case is Gutierrez v. Wells Fargo, 10-16959, U.S. Court of Appeals for the Ninth Circuit (San Francisco).

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