OVERDRAFT FEES
Gardner v. Flagstar Bank
Date: April 16, 2024
Issue: Whether Flagstar Bank violated Regulation E and breached its contract with its customers by unlawfully charging overdraft fees.
Case Summary: A Michigan federal court granted Flagstar’s motion for summary judgment in a lawsuit alleging it unlawfully charged its customers overdraft fees.
Plaintiffs alleged Flagstar violated its Account Agreement Document by charging $36 overdraft fees while their accounts contained sufficient funds. The agreement contains various provisions on the assessment and payment of overdraft fees and nonsufficient funds as well as a disclosure guide to which Flagstar made continual updates.
Plaintiffs sued Flagstar alleging it engaged in “fee maximization practices” related to its assessment of overdraft fees and nonsufficient funds (NSF) fees. Plaintiffs claimed the agreement did not allow these fee maximization practices. According to plaintiffs, the agreement promised Flagstar would only charge overdraft fees for debits that are authorized with a nonsufficient fund balance. Plaintiffs alleged Flagstar breached its contract, breached the covenant of good faith and fair dealing, and unlawfully converted its funds under Section 600.2919a of Michigan’s Revised Judicature Act of 1961. In 2021, Judge Gershwin Drain of the eastern district of Michigan refused to dismiss the case, concluding plaintiffs could reasonably interpret the agreements’ terms as preventing Flagstar from charging overdraft fees when the initial transaction is conducted with a positive balance in the account.
Afterward, the court granted Flagstar’s motion for summary judgment, concluding the bank’s disclosure guide specified what would trigger overdraft fees before Plaintiffs made their transactions. Plaintiffs alleged Flagstar engaged in “fee maximization” by charging two types of fees: Authorize Positive, Purportedly Settle Negative (APPSN) fees and Item Presentment fees. APPSN fees occur when transactions are authorized on accounts with positive available balances. A temporary debit authorization hold is then placed on the account in an amount equal to the amount of the debit transaction. The transaction is later presented for payment (or settled) when the account’s available balance is negative due to intervening transactions that occur before the transaction is settled. Item Presentment Fees occur when items are declined for payment due to an account’s negative balance and later re-presented for payment.
First, the court determined Flagstar’s disclosure guide was enforceable and complied with Regulation E. On Feb. 5, 2018, Flagstar updated the agreement through its disclosure guide. Although plaintiffs consented to the updated overdraft policy in a Regulation E form, they argued Flagstar had to obtain their consent via a standalone opt-in contract under Regulation E. However, the court explained plaintiffs’ claim failed because they did not allege a Regulation E violation in their Second Amended Complaint (SAC). According to the court, permitting Plaintiffs to raise new claims and substantially different legal theories not discussed in the SAC would be considered an “unfair surprise.”
Next, the court determined the notice of the Feb. 5, 2018, disclosure guide update was effective and lawful. Plaintiffs argued Flagstar did not present any admissible evidence about whether it disseminated the disclosure guide to her. According to the court, Flagstar produced evidence to prove it mailed an account statement to Gardner with the updated language. Plaintiffs claimed they did not recall receiving any notices from Flagstar about the changes. Still, the court emphasized Flagstar undisputedly provided written notice to Plaintiffs and they pointed to no provision requiring more.
The court determined the assessment of APPSN fees and Item Presentment fees against the plaintiffs’ account did not constitute a breach of contract under the updated disclosure guide. The disclosure guide clarified even if a customer’s available balance is positive, a Temporary Debit Authorization Hold is created. The customer may still incur an overdraft fee when the Temporary Debit Authorization Hold is removed, and that same signature-based debit card transaction is posted if their available balance is negative at the time the transaction settles. The court noted plaintiffs’ understanding of the agreement “to promise that overdraft fees will not be assessed on APPSN transactions” was inconsistent with the explicit language of the agreement. The court also explained the updates provided a real-world example of how an account’s available balance is affected by a Temporary Debit Authorization Hold.
Finally, the court determined Flagstar did not breach the covenant of good faith and fair dealing. Michigan does not recognize a separate cause of action for breach of an implied covenant of good faith and fair dealing apart from a claim for breach of the contract itself. Plaintiffs alleged Flagstar abused its contractual discretion by maximizing fee revenue. But the court concluded the overdraft fees and NSF fees were detailed in the agreement, observing the updated disclosure guide explained those fees and defined terms that were pertinent to their application. As a result, there was no breach of contract, and Gardner’s claim for a breach of the covenant of good faith and fair dealing failed.
Bottom Line: Gardner has not specified whether she will appeal the district court’s decision.
Document: Opinion
