Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—E.D.N.Y.: State-law claims against overdraft fee charges not preempted by National Bank Act, (Mar 6, 2014)

By Richard A. Roth, J.D.

Claims that HSBC Bank violated laws of 13 different states by manipulating the posting of consumers’ debit card transactions were not preempted by federal law or regulations, according to a New York federal district court. However, the judge also decided that the named representatives of the proposed class of consumers had standing to sue only under New York and California and that many of the claims under those laws failed to describe violations (In Re: HSBC Bank, USA, N.A. Debit Card Overdraft Fee Litigation, March 5, 2014, Spatt, A.).

The consumers charged that HSBC Bank had manipulated the order in which it posted transactions to their accounts in order to maximize the amount of overdraft fees it could collect. According to the consumers, the bank’s standard account agreement gives it the discretion to decide whether to honor an overdraft that resulted from a debit card transaction and also allows the bank to charge $35 for each overdraft, regardless of the overdraft amount. Changing the order in which debits and credits are posted can change the number of overdrafts on an account, and thus can change the number of $35 fees that are imposed.

If the smallest debits are posted first, then the largest number of them will be paid before an account is overdrawn. On the other hand, if the largest debits are posted first, the account is emptied more quickly. The total overdraft amount remains the same, but the number of overdraft transactions grows, allowing the bank to charge a fee more often. The consumers claimed that the bank adopted this “high-to-low” posting order rather than using either the “low-to-high” order that would benefit the consumers or simply posting transactions in chronological order.

The consumers also claimed that HSBC did not post debit card transactions as they were received. Instead, the bank would accumulate several days of transactions and then post all of them in high-to-low order, again to increase its fee income. There was no notice at the time of a transaction that it would cause an overdraft, they added.

Preemption criteria. In asking the judge to dismiss the class action, HSBC asserted three distinct preemption arguments:

1. The state laws, as applied by the consumers, would interfere with the bank’s powers to accept deposits and engage in the business of banking as authorized by 12 U.S.C. §24 (Seventh).

2. The consumers were attempting to regulate the bank’s deposit-taking and operational powers granted by 12 CFR §7.4007.

3. The state laws would impose standards on the calculation and imposition of bank fees that would conflict with the bank’s authority under 12 CFR §7.4002.

The consumers replied that state contract, tort, and criminal laws are not preempted unless they significantly impair a bank’s exercise of powers granted by federal laws or regulations. HSBC’s banking activities would not be significantly impaired if it had to comply with these state laws, they said.

The judge began by noting that there are three types of preemption and the first two did not apply. The National Bank Act does not expressly preempt the state laws in question, and the federal government had not so pervasively occupied the field of national bank regulation as to leave no room for the states to act. The NBA and the Office of the Comptroller of the Currency’s implementing regulations did, however, preempt state laws if either a bank could not comply with both state and federal requirements or the state laws would conflict with or frustrate federal law.

Conflict preemption. OCC regulations permit HSBC to adopt a high-to-low posting order, the judge said. The regulations allow the bank to accept deposits without regard to any state laws or rules, to charge fees for its services, and to calculate those fees in any manner that is consistent with safe and sound banking practices. Interpretive guidance issued by the OCC makes clear that a national bank can decide whether to honor overdrafts and implies that the high-to-low posting order is permissible, he said.

However, when applied as requested by the consumers, the state laws would have no more than an incidental effect on HSBC’s exercise of these powers, the judge said. The consumers were not contesting the bank’s authority to use a high-to-low posting order; rather, they were contesting the bank’s practice of manipulating posting in order to charge overdraft fees when accounts were not actually overdrawn. State laws of general application that would affect such a manipulation were not preempted, the judge said.

The judge did agree with HSBC that the consumers’ claims were preempted to the extent they challenged the bank’s disclosure of its posting method. Disclosures are governed by OCC regulations (12 CFR §7.4007(b)(3)), and the state cannot impose conflicting or additional requirements.

Standing to assert state law violations. A plaintiff named to present class claims must have standing to assert those claims, the judge said. To challenge HSBC’s overdraft charges under state law, a named class representative had to live in, do business in, or have some other connection to the state.

The named class representatives could show a connection only to New York and California, according to the judge. They did not have standing to raise claims under the laws of the other 11 states.

State common law claims. The judge considered the claims under New York and California common law simultaneously. According to the judge:

• The consumers had not alleged a breach of any actual contract term, so their breach of contract claims failed.

• If HSBC had manipulated the posting order as described by the consumers it would have breached the covenant of good faith and fair dealing, even though the account agreements with the consumers allowed the bank to use a high-to-low posting order.

• The consumers’ claims did not describe conversion of their deposited funds by the bank. Funds on deposit were not property of the depositor, the judge said; they belonged to the bank. The consumers owned only the bank’s debt to them in the amount of the deposits.

• A claim for unjust enrichment could not be raised when a contract existed that governed the relationship between the parties.

As a result, the only common law claim that survived was the claim that HSBC breached the implied covenant of good faith and fair dealing.

State statutory claims. The consumer class raised three claims under California statutes. The first, citing the Consumer Legal Remedies Act, was dismissed because the law applies only to transactions involving goods or services. It did not apply to bank accounts or debit cards, the judge said.

However, the consumers did describe a violation of the state’s False Advertising Law, the judge said. The law bans the use of untrue or misleading statements in the sale of real estate, personal property, or personal services. The class charged that a reasonable consumer would expect to be able to keep track of his transactions and avoid overdraft charges, but HSBC’s overdraft and posting practices made this impossible, which the judge decided was enough to allow them to proceed with the suit.

The consumers’ Unfair Competition Law claims also survived the bank’s motion to dismiss. This law bans business acts or practices that are fraudulent, unfair, or unlawful. According to the judge, the consumers had laid out all three types of claims. The bank’s actions could have been fraudulent for the same reason they could have violated the False Advertising Law. The practices could have been unfair if the $35 fee was not insubstantial and violated public policy. Finally, a violation of the False Advertising Law would have made HSBC’s practices unlawful, the judge said.

The consumer class also raised a single claim under New York statutes, charging a violation of the state consumer protection law. That claim was dismissed as untimely.

The case is No. 13-md-2451 (ADS)(AKT).

Attorneys: Jonathan W. Cuneo (Cuneo, Gilbert & DeLuca LLP), Nancy L. Fineman (Cotchett Pitre & McCarthy, LLP), Seth Rigrodsky (Rigrodsky & Long, P.A.), and Brian S. Cohen (Cohen Law Group, P.C.), co-interim class counsel. Joseph E. Strauss (Stroock & Stroock & Lavan LLP) for HSBC Bank, USA, N.A.

Companies: HSBC Bank, USA, N.A.

Cases: StateUnfairTradePractices NewYorkNews