Over the last decade, financial institutions have seen an avalanche of claims regarding overdraft fees, especially in connection with debit card transactions. These claims are almost always brought as class actions. The early cases concerned the practice of posting “high to low” during nightly processing, allegedly for the purposes of generating more overdraft fees. The lead case was Gutierrez v. Wells Fargo, 704 F.3d 712 (9th Cir. 2012). Eventually, an MDL was created in the Southern District of Florida against a large number of banks, leading to a number of settlements. At about the same time, the Federal Reserve altered Regulation E, requiring deposit institutions to obtain express consent to charge overdraft fees on “everyday” debit card transactions, and providing far greater understanding by consumers of overdraft fees on electronic transactions.
Today, plaintiff counsel have developed new, more sophisticated arguments for why overdraft fees are improper. One of the latest theories is “Authorize Positive, Settle Negative” (“APSN”). The argument concerns the situation when financial institution has authorized a consumer’s debit card transaction at a time that the consumer had a positive available balance. Before the debit card transaction settles through the VISA/Mastercard system, the financial institution receives some other transaction and it is processed during nightly posting. Therefore, when the debit card transaction clears on the next day, there are insufficient funds in the account and the financial institution charges an overdraft fee for the debit card transaction.
Typically, these claims are brought when the financial institution is using its “available balance” to determine overdraft fees rather than its “ledger balance” (the balance in the account without regard to pending debits). When this occurs, it is possible that the financial institution will generate two overdraft fees where only one would have occurred otherwise.
Plaintiffs claim that APSN is a breach of contract. They also claim that consumers are surprised by APSN because they assume that if the transaction is authorized that they cannot be charged an overdraft fee. These cases typically turn on extremely close reading of the contract language.
In Tims v. LGE Community Credit Union, 2019 WL4019847 (11th Cir. Aug. 27, 2019), the District Court dismissed the APSN claims. However, the Eleventh Circuit found the defendant credit union’s deposit agreement to be ambiguous and therefore reversed. Further, the Court found that under Regulation E, the Credit Union was required to describe “financial institution’s overdraft service” in a “clear and readily understandable” way. 12 C.F.R. §§ 1005.17(d)(1), 1005.4(a)(1).
Financial institutions should review their deposit agreements and marketing materials – as well as their posting practices — with the APSN claims in mind. There are a number of other ongoing actions asserting this “APSN” theory and the law is not yet settled. The results may vary among financial institutions depending upon the wording of their deposit agreements. Financial institutions should also be aware that various bank regulators have raised this issue for discussion.