National Bank Act Preempts State Regulation of Check Posting, but Not a Ban on Misleading Statements
Weissman, Michael L., The RMA Journal
CALIFORNIA HAS AN Unfair Competition Law (1) that was implicated in Gutierrez v. Wells Fargo Bank. (2) Customers of the bank had brought a class action lawsuit against the bank, claiming that its practices with respect to overdraft fees were unfair under the California act.
The crux of the case was phrased by the court as follows: "At issue is a bookkeeping device, known as 'high-to-low' posting, which has the potential to multiply overdraft fees, turning a single overdraft into many such overdrafts." The plaintiffs sued under the act, claiming that the bank had engaged in 1) unfair business practices by imposing overdraft fees based on the high-to-low posting order, and 2) fraudulent business practices by misleading customers as to the posting order it used.
The court observed that when a customer's account is overdrawn, the high-to-low posting sequence can have a dramatic effect on the number of overdrafts incurred by the customer, even though the amount overdrawn will be the same as in a low-to-high posting system. The number of overdrafts determines the total amount of overdraft fees.
Prior to April 2001, the bank used the low-to-high posting system. But in April 2001, it changed direction in California and went to a high-to-low system, meaning it posted items in the order of the highest to the lowest dollar amount. The change maximized the number of overdrafts in a customer's account.
Gutierrez's complaint invoked violations of sections of the California act regarding unfair and fraudulent practices. The trial court ruled in favor of Gutierrez and the class. Injunctive relief was granted in addition to $203 million in damages.
The bank appealed, asserting federal preemption under the National Banking Act (3) (NBA) as its principal defense. It was partially successful.
Prior decisions have crystallized the reach of the NBA. State laws are allowed to apply to national banks so long as "doing so does not prevent or significantly interfere with the national bank's exercise of its powers." Therefore, the question became whether any aspect of high-to-low posting violated the California law.
Under the unfair business practices aspect of the act, the question was whether the NBA and regulations of the Comptroller of the Currency permitted national banks to choose the method of posting transactions and the fees to be charged for overdrafts. Citing 12 U.S.C. [section] 24 (Seventh), which grants national banks the power to conduct the business of banking, the court said that necessarily includes the power to post transactions. …