Farrell v. Bank of America, N.A.

Citations: 224 F. Supp. 3d 1016; 2016 U.S. Dist. LEXIS 188415; 2016 WL 8223653Docket: Case No.: 3:16-cv-00492-L-WVG

Court: District Court, S.D. California; December 18, 2016; Federal District Court

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The Court, presided over by Hon. M. James Lorenz, denied Defendant Bank of America, N.A.’s Motion to Dismiss Plaintiff Joanne Farrell's Complaint regarding the Bank's practice of charging $35 fees for overdrafts. The case is a putative class action asserting that these Initial Charges and subsequent Extended Charges, which arise when an overdraft is not remedied within five days, violate 12 U.S.C. §§ 85 and 86 by exceeding permissible interest rates. The Bank has discretion to honor checks against insufficient funds but imposes the Initial Charge regardless of whether it advances funds. The Court evaluated the motion based solely on submitted documents, adhering to Federal Rule of Civil Procedure 12(b)(6), which requires accepting all material allegations as true and assessing them favorably towards the nonmoving party. The ruling indicates that the complaint sufficiently raises claims above the speculative level and does not lack a cognizable legal theory.

Plaintiff claims the defendant violated the National Banking Act (NBA), specifically 12 U.S.C. 85 and 86, by imposing usurious interest rates through Extended Overdraft (EOB) charges. The defendant contends that these charges are not interest but authorized service fees under 12 C.F.R. 7.4002. The crux of the dispute is whether EOB charges qualify as 'interest' under 12 U.S.C. 85. The Supreme Court has recognized the term 'interest' as ambiguous, allowing for deference to the Office of the Comptroller of the Currency (OCC) for interpretation. The OCC defines 'interest' broadly, encompassing payments for extensions of credit or defaults by borrowers.

The definition also includes a non-exhaustive list of fees, notably 'not sufficient funds' (NSF) fees, but commentary clarifies that these do not apply to general deposit account service fees like overdraft charges. The OCC explicitly distinguishes between fees related to loan obligations and those associated with deposit accounts, indicating that overdraft fees should not be categorized as interest. Consequently, the court applies Chevron deference and finds that the Initial Charge does not constitute interest since it does not involve an extension of credit; the bank assesses this fee regardless of whether it covers an overdraft. Thus, the Initial Charge is characterized as a service fee rather than a fee for the provision of credit.

The parties are at odds regarding the classification of the Extended Charge compared to the Initial Charge, with no binding authority on the matter. Three district court cases have addressed this issue, all concluding that Extended Charges do not qualify as interest under 12 U.S.C. § 85. The arguments presented by the defendants can be summarized as follows:

1. **Substantive Similarity**: The defendants argue there is no significant difference between the Initial and Extended Charges. They claim that since the Office of the Comptroller of the Currency (OCC) excludes Initial Charges from the definition of interest, Extended Charges should also be excluded. However, the court notes that the Bank can impose the Initial Fee without advancing funds, indicating that it does not compensate for an extension of credit. In contrast, the Extended Fee is charged only when funds are advanced, suggesting it is more aligned with the time value of money.

2. **Flat Fee Argument**: Defendants assert that the Extended Charges are not interest because they are flat fees, referencing previous cases that support this view. However, these cases do not provide authority indicating that flat fees cannot be classified as interest, and the Supreme Court has rejected this argument in Smiley v. Citibank.

3. **Contingent Nature**: The defendants argue that because the Extended Charge is contingent on the plaintiff's actions (i.e., failing to cover the overdraft), it should not be considered interest. They claim that allowing the plaintiff to trigger such fees could lead to unknowable usurious rates. The court finds this argument unconvincing, citing that the authority referenced is outdated and that the Supreme Court's ruling in Smiley supports the idea that similar fees can indeed be classified as interest.

Overall, the court does not see sufficient grounds to differentiate the Extended Charge from the precedents set in prior rulings.

Any fees arising from a deposit agreement, as opposed to a traditional credit arrangement, are argued to not constitute interest. This standpoint is backed by non-binding authority, specifically referencing the case Video Trax, Inc. v. NationsBank, N.A., which states that only fees from 'credit transactions' are defined as interest under 12 C.F.R. 7001(a), and that transactions under deposit agreements do not qualify as 'credit transactions.' However, this premise is challenged, as it inaccurately positions the depositor as the creditor and the bank as the debtor in all scenarios. In reality, when the depositor has a positive account balance, they effectively loan money to the bank, which compensates them with interest. Conversely, when the account is negative due to overdraft, the bank has advanced funds, reversing their roles. 

The argument further asserts that extended fees charged by the bank for deposit account services, including overdraft coverage, are not classified as interest. However, it is argued that for fees to qualify as interest, they need not be labeled as NSF fees; they simply must compensate a creditor for an extension of credit. The defendant contends that the bank's advancement of funds does not constitute an extension of credit, a position lacking support from binding authority or clear statutory language. According to the plain meaning of the law, providing money with the expectation of repayment qualifies as an extension of credit. In this case, the bank provided funds to cover an overdrawn check with the expectation of repayment, thereby constituting an 'extension of credit.' This interpretation is further supported by substantial authority cited by the plaintiff.

Regulation O, issued by the Federal Reserve, governs extensions of credit by banks to insiders, categorizing overdrafts as extensions of credit. While the defendant argues that Regulation O does not apply to the relationship between a bank and a deposit account holder, the Court disagrees, asserting that the interpretation of "extension of credit" should remain consistent in both contexts. The Court cites the Joint Guidance on Overdraft Protection Programs to support the view that paying overdrafts constitutes extending credit. The plaintiff claims that Extended Charges are intended to compensate the bank for this extension of credit. Accepting this allegation as true, the Court determines that these charges qualify as "interest" under 12 U.S.C. 85, thus denying the defendant’s Motion to Dismiss. Furthermore, the Court concludes that the Extended Charges are not classified as deposit account service charges under 12 C.F.R. 7.4002, nor are they Non-Sufficient Funds (NSF) Fees, which are incurred directly from writing a check without sufficient funds. Instead, Extended Charges arise from the failure to repay the obligation related to the original overdraft within a specified timeframe.