Gardner v Flagstar

The 6th Circuit recently ruled against Flagstar Bank (FSB) concerning various overdraft fees. The 6th Circuit has jurisdiction over federal appeals from states including Kentucky, Ohio, Tennessee, and Michigan. Credit unions located in those states should pay close attention to this case because the ultimate legal implications may drastically affect their overdraft programs. However, credit unions from other states should also be aware of this legal trend, just in case. The opinion discussed the following issues:

Background Veronica Gardner (Gardner) had a joint checking account with her spouse at FSB for several years. In 2016, FSB charged Gardner two types of overdraft fees. "Flagstar billed Gardner during that period: (1) an overdraft fee for completed transactions that exceeded her available balance upon the transaction's settlement, but not authorization [Authorized Positive, Settled Negative]; and (2) a nonsufficient funds fee assessed each time a merchant unsuccessfully tried to reprocess a transaction that had already been denied." Gardner purported that these overdraft fees caught her off guard. Gardner admitted that she had not fully read the original contract when the account was opened, but she believed FSB was not authorized to charge overdraft fees that resulted in Authorize Positive Settle Negative (APSN) and nonsufficient funds (NSF) because the types of fees weren't disclosed before the transactions occurred.

APSNs occur when "a withdrawal of money from a bank is in excess of the balance on deposit." As in this case, NSF fees can be triggered when "when a bank denies an NSF transaction, the presenting merchant can "re-present" the returned transaction (i.e., try again to receive payment) in the hopes of receiving money."

When her complaints to the bank went unsettled, Gardner sued in federal court in a putative class action.

Legal Analysis The 6th Circuit delineated many reasons in its opinion why FSB's motion for summary judgement was defeated, but we will discuss a few of them below.

The 6th Circuit noted that Gardner's two disputed transactions of 2016 occurred before FSB modified or changed the original ambiguous contractual terms; FSB sent Gardner an updated "disclosure guide" in 2017. This updated 2017 "disclosure guide," or modification to the original Terms & Conditions (T&C), allegedly communicated to customers that the bank would begin charging fees to customers for any APSN-like transactions.

The parties' competing interpretations of the word "item" in the contract language were both considered reasonable interpretations by the district court.

"That means the T&C's "words may reasonably be understood in different ways," rendering the contract "ambiguous." Raska v. Farm Bureau Mut. Ins. Co., 314 N.W.2d 440, 441 No.24-1436, Gardner v. Flagstar Bank, FSB14(Mich. 1982). As before, the resolution of that ambiguity raises a factual question generally ill-fitting for summary judgment. See Klapp, 663 N.W.2d at 454."

In other words, the ambiguity of the word "item" raises a factual question that should be resolved by the fact finder, not summary judgment. Additionally, the 6th Circuit emphasized a few times that Gardner's failure to fully read an ambiguous contract was not a strong argument to grant Flagstar's summary judgment motion.

The 6th Circuit eventually concluded that due to Gardner not being made aware that an overdraft fee for APSNs could be charged at the time of her 2016 transactions, a rational factfinder could find FSB breached its contractual terms and conditions. In turn, the 6th Circuit reversed and remanded the case for further proceedings.

Takeaway Credit unions should monitor legal trends surrounding their overdraft protection programs in their states and across the country. Even though the CFPB has taken a step back from enforcing certain issues, like NSF fees or other types of overdraft fees etc., other government or private actors could increase lawsuits against financial institutions if disclosures are improperly disclosed. There are some states that have strict overdraft protection enforcement or laws/regulations (e.g., New York - see this and this - and California - see this and this). If states don't have laws on the books, litigation such as this case inevitably sets the tone for how those states approach overdraft issues. Credit unions should consult credit union counsel for any legal advice.

For any questions concerning this blog, please contact our Compliance Team using the email: compliance@americascreditunions.org.