Thanks for visiting! Welcome to a new way to research case law. You are viewing a free summary from Descrybe.ai. For citation and good law / bad law checking, legal issue analysis, and other advanced tools, explore our Legal Research Toolkit — not free, but close.
Hanjy v. Arvest Bank
Citations: 94 F. Supp. 3d 1012; 2015 U.S. Dist. LEXIS 44904; 2015 WL 1456186Docket: Case No. 4:14-cv-00006-KGB
Court: District Court, E.D. Arkansas; March 31, 2015; Federal District Court
Plaintiffs James Hanjy and J. J Virtual Communications, LLC, have filed a lawsuit against Arvest Bank, alleging breach of contract, breach of the covenant of good faith and fair dealing, unconscionable contract, and unjust enrichment due to the bank's overdraft fee practices on debit card transactions. They assert that Arvest improperly assessed overdraft fees when their account agreements did not permit such fees for debit card transactions, particularly when transactions should not have been authorized or when sufficient funds were available. Arvest’s motion to dismiss the plaintiffs’ first amended complaint has been addressed, with the Court denying the motion as well as the plaintiffs' motions to strike Arvest's supplemental brief and parts of its second reply. The plaintiffs aim to represent a class of all Arvest customers in the U.S. who incurred overdraft fees under similar conditions during the relevant statute of limitations. The core of the plaintiffs' argument rests on standardized deposit agreements and an "Electronic Funds Transfer Agreement and Disclosure," which they claim do not authorize the assessment of overdraft fees for debit card transactions. Attached to their complaint are examples of these agreements, which they allege imply that debit card transactions require adequate funds for authorization. Plaintiffs contend that Arvest Bank violated contractual terms by intentionally permitting debit card transactions without sufficient account balance, thereby incurring overdraft fees. They allege that Arvest employed manipulative practices, such as reordering transactions from highest to lowest amounts, which resulted in multiple overdraft fees that would not have occurred had transactions been processed in chronological order. This practice was purportedly aimed at maximizing overdraft fees. Additionally, plaintiffs claim that Arvest delayed transaction processing and inaccurately represented account balances through its electronic systems, leading customers to incur more overdraft charges due to confusion about their actual balances. Plaintiffs assert that Arvest failed to notify customers regarding changes to overdraft policies and did not disclose its practices related to transaction reordering or overdraft fees in the contract. They argue that Arvest breached the implied covenant of good faith and fair dealing by approving overdraft transactions without adequate disclosure. Furthermore, plaintiffs characterize the contracts as unconscionable, citing a lack of disclosure about the right to opt out of overdraft schemes, absence of affirmative consent for overdraft transactions, and failure to alert customers prior to incurring fees. They describe the contract as a contract of adhesion, highlighting Arvest's superior bargaining power and the lack of negotiation opportunities for customers. Plaintiffs claim the contract language is deceptive and misleading, resulting in unfair practices that were not adequately disclosed. Plaintiffs claim unjust enrichment against Arvest, alleging it is unfair for the bank to keep improperly assessed overdraft fees. In response, Arvest seeks to dismiss the entire first amended complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Arvest introduces a new argument in its amended brief, asserting that the National Banking Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations preempt the plaintiffs’ breach of contract claim. Plaintiffs respond by moving to strike this supplemental brief, citing its late filing almost a month past the deadline without seeking leave of the Court or showing excusable neglect as required by Rule 6(b)(1)(B). Arvest contends that it filed the supplemental brief after discovering a relevant federal case from October 2013 concerning NBA preemption applicable to state-chartered banks. They believed it would conserve judicial resources to raise the preemption issue in this manner rather than as an affirmative defense. The Court refers to the Eighth Circuit's definition of excusable neglect, which considers factors such as potential prejudice to the defendant, the length of the delay, reasons for the delay, and the party's good faith. Ultimately, the Court finds Arvest demonstrated excusable neglect for its late filing, noting that the plaintiffs had adequately responded to the supplemental motion, and that considering the preemption arguments serves judicial economy. Consequently, the Court denies the plaintiffs’ motion to strike while advising Arvest to follow the preferred procedure of seeking leave with the proposed filing attached in future instances. Plaintiffs seek to strike parts of Arvest's second reply that question the adequacy of their factual allegations, arguing these points were already addressed in previous briefs. They contend that Arvest's second reply should focus solely on the issue of preemption, as that was the only topic raised in their response to Arvest's supplemental brief. In response, Arvest asserts that the pleading arguments in its second reply were necessary to differentiate the cases referenced by the plaintiffs. The court notes that while Eighth Circuit precedent generally prohibits considering new arguments in reply briefs, the objections raised by plaintiffs were already part of Arvest's initial motion to dismiss. Consequently, the court denies the plaintiffs' motion to strike, affirming that they had ample opportunity to address these arguments. Regarding the Rule 12(b)(6) standard, a complaint must comply with Rule 8(a)(2) by providing a short and plain statement of the claim. While specific facts are not required, the complaint must inform the defendant of the claim and its basis. It must contain enough factual matter, accepted as true, to suggest a plausible claim for relief. A claim is plausible if the factual content allows for a reasonable inference of the defendant's liability. The complaint must avoid mere labels, conclusions, or bare assertions without further factual enhancement. On the issue of preemption, Arvest contends that the National Bank Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations preempt the plaintiffs’ breach of contract claims. The NBA governs national banks and provides them with certain powers, allowing them to operate free from excessive state regulation that may hinder their banking activities. Generally, NBA and OCC regulations preempt state laws that significantly interfere with a national bank's exercise of its powers. Plaintiffs allege that Arvest, a state-chartered bank in Arkansas, is not subject to the National Bank Act (NBA), which applies only to national banks. While Arvest acknowledges its status as a state-chartered bank, it claims that the preemptive effects of the NBA and Office of the Comptroller of the Currency (OCC) regulations also apply to it under 12 U.S.C. 1831a(j)(1) of the Federal Deposit Insurance Act (FDIA). This provision stipulates that state laws relevant to community reinvestment, consumer protection, and fair lending apply to branches of out-of-state state banks as they would to national banks, and if state law does not apply, home state law governs. Arvest references court decisions supporting its assertion that the FDIA preempts state laws for out-of-state banks similarly to the NBA's preemption for national banks. Specific cases cited include Pereira v. Regions Bank and Hawthorne v. Umpqua Bank, which held that certain state statutes were preempted under 12 U.S.C. 1831a(j)(1). Additionally, in Wells Fargo Bank of Texas v. James, it was stated that state-chartered banks have preemption rights akin to those of national banks under the FDIA. The plaintiffs contend that if Arvest were a national bank, the claims under California's Unfair Competition Law would be preempted by the NBA, and they dispute the premise that state-chartered banks enjoy similar preemption rights. However, they do not contest the judicial interpretations of 12 U.S.C. 1831a(j)(1). For the purpose of Arvest’s motion to dismiss, the Court will assume that Arvest possesses preemption rights comparable to national banks under the NBA. Courts evaluating preemption issues must determine if state regulations obstruct or significantly interfere with a national bank's operational powers. The Supreme Court in Barnett examined whether federal and state statutes were in irreconcilable conflict, specifically questioning if compliance with both was physically impossible or if state restrictions obstructed congressional objectives. In Watters, the Court clarified that national banks are subject to generally applicable state laws unless those laws conflict with the National Bank Act (NBA). States can regulate national banks as long as the regulations do not significantly interfere with the banks' powers. However, if state laws impair the exercise of enumerated or incidental powers under the NBA, they must yield. The Office of the Comptroller of the Currency (OCC) regulations affirm that national banks can impose non-interest fees, including overdraft fees, and that the establishment of such fees is a bank's discretion based on sound banking principles. The OCC has acknowledged that banks' decisions on check posting orders for fee assessments align with their authority under the NBA. Additionally, federal preemption applies to various deposit-taking activities, allowing national banks to operate without state law limitations on checking accounts, disclosure requirements, and other related matters, although certain state laws, such as those concerning contracts and torts, are not preempted if they only incidentally affect deposit-taking powers. Arvest argues that the plaintiffs' claims of breach of contract are preempted, asserting that they cannot challenge Arvest's imposition of overdraft fees or attempt to regulate fee assessment methods through state law. At this stage, the court cannot determine if the plaintiffs' claims are preempted, assuming that NBA preemption applies. Other courts have upheld state law claims related to overdraft fees, asserting that the National Bank Act (NBA) does not preempt state laws of general applicability. A Florida district court, in a multi-district litigation case concerning debit card overdraft fees, highlighted that Supreme Court rulings preempt only state laws specifically targeting national banks and that general state laws remain applicable. Federal courts have repeatedly ruled that claims based on contracts, consumer protection laws, and torts are not preempted by the NBA or Office of the Comptroller of the Currency (OCC) regulations. The Florida court noted that while banks have the right to charge overdraft fees as per 12 C.F.R. 7.4002, this does not exempt them from adhering to general contract or tort law. It clarified that the OCC’s Interpretive Letter 997 does not permit banks to structure debit postings to increase fees, stating that it merely confirms such practices do not violate sound banking judgment principles. The court emphasized that the plaintiffs were not contesting the banks' right to charge fees but rather the allegedly unlawful methods used to maximize those fees. In rejecting a motion for reconsideration, the court distinguished its findings from an Eleventh Circuit decision that preempted a Florida statute limiting check cashing fees. It concluded that seeking to regulate fee charges differs from holding banks accountable for bad-faith practices in managing overdraft programs. Other courts have similarly ruled against preemption of state law claims regarding bank debit posting practices at the motion to dismiss stage. Arvest argues for preemption based on the Ninth Circuit's ruling in Gutierrez v. Wells Fargo Bank, which determined that the National Bank Act (NBA) preempts certain state consumer protection claims related to a national bank's transaction posting practices. The court held that the Office of the Comptroller of the Currency (OCC) views posting order as a federal pricing decision, thus prohibiting state regulation of the order in which banks post transactions. Arvest references a California district court ruling, Hawthorne v. Umpqua Bank, which extended this reasoning to preempt breach of contract claims, marking it as the sole case cited by Arvest that addresses preemption of contractual claims. In contrast, a Florida MDL court rejected preemption by stating that the plaintiffs merely sought enforcement of the contract's good faith provisions rather than dictating transaction order. Other district courts, including In re HSBC and King, also reviewed Gutierrez but declined to preempt claims related to debit posting practices. The current court finds these latter decisions persuasive, asserting that the plaintiffs’ breach of contract and implied covenant claims only incidentally affect the banks' operations and do not challenge Arvest's authority to impose overdraft fees. The plaintiffs assert that their contracts do not permit overdrafts for debit transactions, and while the regulations allow overdraft fees, they do not exempt banks from adhering to contract or tort law. Furthermore, the plaintiffs’ claim regarding the covenant of good faith and fair dealing focuses on how transactions are organized to maximize fees, rather than disputing the legality of overdraft charges, which aligns with the Ninth Circuit’s interpretation in Gutierrez regarding disclosure obligations under the NBA. In Gutierrez, the court determined that the 'fraudulent' aspect of California’s consumer protection law was not preempted in cases alleging affirmative misrepresentations. Conversely, the district court in In re HSBC rejected Gutierrez's reasoning regarding posting practices but applied its analysis to find preempted claims related to the bank's failure to disclose its posting methods. Consequently, the current court holds that HSBC cannot be held liable for inadequate disclosure of its posting methods due to preemption. The court referenced a prior case, White v. Wachovia Bank, which indicated that claims about inadequate disclosure might be preempted, but also noted that those claims could be linked to improper overdraft fees, suggesting the need for further examination through discovery. In other cases, like In re Checking Account Overdraft Litigation and King, courts did not find preemption for similar disclosure-related allegations, indicating that such claims may only incidentally affect a national bank’s deposit-taking powers and could be permissible under relevant federal regulations. Regarding Arvest, the plaintiffs’ disclosure claims are tied to express contractual terms and contribute to their breach of the covenant of good faith and fair dealing claims; thus, the court does not preempt them at this stage. Furthermore, Arvest contends that its contracts authorize the fees and overdrafts, that both federal and state law support the high-to-low posting method, and that the plaintiffs’ assertions regarding unconscionability and the sufficiency of their allegations are inadequate. The court will apply Arkansas’s choice-of-law principles, which allow enforcement of a contractual choice-of-law clause if it is reasonably related to the contract and does not contravene public policy. In the absence of an effective choice-of-law provision, Arkansas courts typically utilize the 'most significant relationship' test for breach of contract claims. Conflicting choice-of-law provisions have been addressed by applying this test, as indicated in relevant case law. The parties acknowledge that the attached documents to the plaintiffs’ pleadings contain differing choice-of-law provisions, with one deposit agreement specifying Arkansas law and others indicating Missouri law. However, both parties agree that Arkansas and Missouri laws are substantially similar concerning the plaintiffs’ common-law claims and have cited both in their arguments. The court will analyze the claims under both Arkansas and Missouri law at this stage, but recognizes that specific state laws may need to be applied to certain plaintiffs later, particularly in relation to class certification or summary judgment motions. Regarding the breach of contract claim, Arvest seeks dismissal, arguing that its contracts allow it to charge fees for debit card overdrafts. Plaintiffs contest this interpretation, asserting that the contracts only authorize overdraft charges on checks and not debit transactions. They reference specific contract provisions that imply overdrafts on checks are permitted but do not authorize overdraft fees for debit transactions. The plaintiffs also highlight that the Electronic Funds Transfer (EFT) agreement suggests that transactions will not be processed if there are insufficient funds in the account. Arvest, while acknowledging the deposit agreement’s focus on checks, points to language in the EFT agreement that emphasizes the customer's responsibility for all authorized transactions, implying that all transactions, including debit card uses, are governed by the applicable agreements and regulations. You authorize the Financial Institution to charge your checking and savings accounts for all transactions made using the Access Device, as well as for any preauthorized transfers. You bear full responsibility for these transactions. Arvest contends that the EFT agreement, combined with the deposit agreement’s provision on overdraft charges for checks, permits overdraft fees for debit transactions, asserting that using a debit card is akin to writing a check. However, the plaintiffs argue that debit transactions differ significantly from checks. Neither party references state law regarding contract interpretation. The Court determines that, based on the plaintiffs' allegations and attached contract documents, Arvest's agreements do not explicitly authorize overdraft fees for debit transactions, leading to the denial of Arvest's motion to dismiss on this point, with potential for future review of contract interpretation. Additionally, the plaintiffs allege Arvest breached the implied covenant of good faith and fair dealing, a principle recognized in both Arkansas and Missouri law. This covenant is part of every contract, creating actionable obligations that emphasize adherence to common purposes and the justified expectations of the parties involved. Arvest's attempt to dismiss this claim was based on the argument that the contracts allowed for overdraft fees; however, the Court finds that since the plaintiffs are asserting this breach as part of a general breach of contract claim, and not as an independent cause of action, the dismissal is not warranted. Furthermore, a breach of the implied covenant cannot occur if the contract expressly allows the challenged actions, emphasizing the principle that the covenant should not limit agreed-upon terms. The Court is currently unable to determine if the contract explicitly permits debit card overdraft fees. Plaintiffs' claim regarding the breach of the covenant of good faith and fair dealing extends beyond the mere charging of such fees, also addressing Arvest's alleged bad faith in processing debit card transactions and calculating overdraft fees. Prior case law indicates that factual questions about bank operations should be explored during discovery. Arvest argues that its practices, including high-to-low posting of transactions, are supported by state and federal regulations, specifically citing the Uniform Commercial Code (UCC) provisions that allow banks discretion in item posting order. While Arvest acknowledges that UCC Article 4-303(b) pertains to checks and not debit transactions, it contends that similar principles should apply to debit cards. The Court, however, is not persuaded to extend UCC 4-303(b) to debit card transactions, noting significant differences compared to checks, as highlighted by the Florida MDL court. Arvest further argues that high-to-low posting is sanctioned under UCC Article 4A concerning fund transfers, but this article explicitly excludes transactions governed by the Electronic Fund Transfer Act (EFTA), which includes debit card transactions. Arvest also claims that federal law authorizes its practices, referencing a 2009 comment from federal regulatory agencies related to their authority under the Federal Trade Commission Act. The legal document indicates that regulatory agencies have chosen not to establish a specific rule governing transaction posting orders for debit card transactions, citing the difficulty in creating a universally beneficial guideline. This decision does not imply that Arvest's practices are federally sanctioned, contrary to Arvest's claims. The court finds plaintiffs' allegations about Arvest's high-to-low posting practices sufficient to meet the notice requirements, rejecting Arvest's argument that they lack specificity under Twombly and Iqbal standards. Furthermore, the court clarifies that the allegations do not constitute fraud, and therefore, the heightened pleading requirements of Rule 9(b) do not apply. Plaintiffs’ claims about misleading balance information and transaction batching are adequately detailed to withstand Arvest’s dismissal motion. The court also denies Arvest’s motion to dismiss the breach of the implied covenant of good faith and fair dealing. Regarding unconscionability, Arvest contends it is not a standalone cause of action but is instead a doctrine used to limit contract enforcement, as outlined in the Restatement (Second) of Contracts. A court may refuse to enforce a contract or its unconscionable terms at the time it is made, choosing instead to enforce the remainder of the contract or limit the application of the unconscionable term to avoid unjust outcomes. Unconscionability is typically a defense in contract disputes, as illustrated by cases such as Hughes v. Wet Seal Retail, Inc., where it was recognized as a state-law contract defense, and Cowbell, LLC v. BORC Bldg. Leasing Corp., which considered it as an affirmative defense. Plaintiffs argue for the application of a precedent from In re Checking Account Overdraft Litigation, where the court utilized its equitable powers to declare contractual terms unconscionable and award damages for past enforcement. The court emphasized that a declaration of unconscionability could impact the legal status of contractual terms and affect other related claims. Although unconscionability is usually viewed as a defense rather than an affirmative cause of action, the unique circumstances of the case—where the bank collects fees directly from the customer's account—suggest that plaintiffs should be allowed to pursue an unconscionability claim. The Florida MDL court upheld this reasoning in subsequent rulings and recognized that both Arkansas and Missouri's declaratory judgment acts permit challenges to the enforceability of contracts. Consequently, plaintiffs are entitled to seek declaratory relief regarding the unconscionability of the contracts in question, with provisions for supplemental relief available under state law. The Florida MDL court has found that Arkansas law permits monetary damages as supplemental relief in the context of declaratory judgment actions, referencing the case In re Checking Account Overdraft Litigation. Missouri courts similarly allow petitions for declaratory judgment to seek monetary damages. The court has rejected Arvest's motion to dismiss concerning unconscionability, affirming that such a claim can be an affirmative cause of action. Under Arkansas law, the determination of unconscionability requires a review of the totality of circumstances, focusing on factors such as the bargaining power between parties and the aggrieved party's understanding of the contract terms. Both procedural and substantive unconscionability must be proven for a contract to be unenforceable. Procedural unconscionability examines how the contract was entered into, while substantive unconscionability assesses whether the contract terms are excessively harsh or one-sided. Arvest contends that the mere use of a form contract does not imply unconscionability and that non-negotiable contracts are not automatically considered procedurally unconscionable. However, the plaintiffs have claimed that Arvest failed to adequately disclose its practices, and factual disputes regarding the circumstances of contract signing remain unresolved at this stage. The court concludes that the plaintiffs have sufficiently alleged procedural unconscionability based on their claims and the overall circumstances surrounding the contracts. Plaintiffs successfully pleaded procedural unconscionability due to a significant imbalance in sophistication and bargaining power, a lack of negotiation opportunities, and failure to inform them about the option to decline overdraft services. The court found that whether the alleged high-to-low posting practices are substantively unconscionable remains unproven at this stage and that routine practices do not automatically negate unconscionability claims. The court rejected Arvest's argument that regulatory approval under the UCC supports dismissal of the plaintiffs' claims, emphasizing a lack of evidence to substantiate Arvest's position. Arvest contended that the contracts cannot be substantively unconscionable since plaintiffs had control over their accounts and could avoid overdraft fees by managing their spending. However, the court noted that plaintiffs specifically alleged that Arvest's posting practices led to excessive overdraft fees and inaccurate balance information. It dismissed Arvest's reliance on precedents regarding dishonored checks, asserting that plaintiffs’ claims involve debit card transactions, which differ fundamentally. The court concluded that plaintiffs adequately alleged a claim of unconscionability, highlighting concerns over Arvest's practices that disproportionately affected customers with lower account balances. The court found that plaintiffs adequately pleaded substantive unconscionability regarding defendants’ deposit agreements, which allegedly allowed for the manipulation of debit transaction postings to maximize overdraft fees. The court determined that the fees imposed lacked a reasonable relationship to the actual costs or risks of providing overdraft services. Both procedural and substantive unconscionability components were sufficiently alleged, leading to the denial of Arvest's motion to dismiss this claim. Additionally, the plaintiffs presented a claim of unjust enrichment as an alternative if their breach of contract claim failed. Arvest sought to dismiss this claim, arguing that it lacked validity because of its assertions against the contract and unconscionability claims. The court noted that unjust enrichment, as an equitable doctrine, applies when one party unjustly benefits at another's expense, provided there is no existing express contract covering the matter. The court also clarified that exercising a legal or contractual right does not constitute unjust enrichment. Despite Arvest's arguments, the court found that the plaintiffs had sufficiently alleged unjust enrichment, particularly regarding claims of bad faith in assessing overdraft fees and manipulating debit transactions. Consequently, the court denied Arvest's motion to dismiss both the unconscionability and unjust enrichment claims. The plaintiffs also previously claimed a violation of the Electronic Funds Transfer Act, which they later abandoned in their amended complaint.