FYI: 5th Cir Rejects Putative Class Action Under National Bank Act on Overdraft Fees

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the dismissal of a putative class action challenging a bank's overdraft fees as usurious under the National Bank Act, 12 U.S.C. § 1 et seq. (NBA).

 

In so ruling, the Fifth Circuit held after extensive analysis that the Office of the Comptroller of the Currency's (OCC) official Interpretive Letter on the subject was entitled to deference.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff checking account holder filed a putative class action under the NBA, challenging the "Extended Overdraft Charges" assessed by the bank when she overdrew on her checking account and failed to timely cover the overdraft.

 

The plaintiff alleged that the bank extended credit to her when it covered her overdraft, and that the overdraft charges constituted usurious interest in violation of the limits set for the bank under the NBA.

 

As you may recall, the NBA authorizes national banks to charge "interest at the rate allowed by the laws of the State . . . where the bank is located." 12 U.S.C. § 85.  The statute allows a bank customer who is charged interest exceeding the usury limit to "recover 'twice the amount of the interest paid.'" 12 U.S.C. § 86.  Non-interest charges are not subject to these limits.

 

The Fifth Circuit noted that, although the NBA does not define the term "interest," the Supreme Court of the United States has held that this statutory term is ambiguous and that courts should therefore defer to OCC interpretations of the word.  Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 739 (1996).

 

Under the OCC's regulations, "non-interest charges include fees for what are broadly referred to as 'deposit account services.'"  See 12 C.F.R. § 7.4002(a). The Court noted that "[b]anks have discretion to impose deposit account services fees and other non-interest charges on their account holders, such as the bank's checking account customers, so long as the bank acts within the bounds of 'sound banking judgment and safe and sound banking principles.'" Id. § 7.4002(b)(2).

 

The Fifth Circuit also recited that, "[i]n 2007, OCC issued Interpretive Letter 1082, squarely addressing for the first time whether fees charged by a Bank in connection with paying an overdraft may qualify as 'interest' under the NBA."  See OCC, Interpretive Letter No. 1082, 2007 WL 5393636, at *1 (May 17, 2007). 

 

"Interpretive Letter 1082 was a response by OCC to an unnamed bank that described its overdraft fee structure to OCC and asked the agency whether, under the NBA and OCC's regulations, it could '(1) in its discretion, honor items for which there are insufficient funds in depositors' accounts and recover the resulting overdraft amounts as part of the Bank's routine maintenance of these accounts; and (2) establish, charge and recover overdraft fees from depositors' accounts for doing so.'" Id. at *1.

 

OCC concluded that the bank's practices complied with the NBA and the OCC's regulations interpreting the NBA," that "[c]reating and recovering overdrafts have long been recognized as elements of the discretionary deposit account services that banks provide," and "that the bank's authority to charge a fee when it pays an overdraft is expressly provided for in 12 C.F.R. § 7.4002(a), which concerns non-interest charges and fees like deposit account service charges."

 

Here, Fifth Circuit noted that the defendant bank's deposit account agreement expressly authorized the overdraft charges at issue.  The Court then examined whether it should defer to the OCC's Interpretive Letter 1082.

 

The Fifth Circuit noted that the Supreme Court of the United States "recently reaffirmed that courts should defer to an agency's reasonable interpretation of its own regulations when the regulation's text is 'genuinely ambiguous,' and the 'character and context of the agency's interpretation entitles it to controlling weight.'  Kisor v. Wilkie, 139 S. Ct. 2400, 2414, 2416 (2019)." 

 

However, "courts must 'exhaust all the traditional tools of construction' before determining that a regulation is genuinely ambiguous", and must "carefully consider the text, structure, history, and purpose of a regulation," before deferring to the regulatory agency.  Kisor, 139 S. Ct. at 2415 (quoting Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843 n. 9 (1984)).

 

In addition, "deference is only merited when an agency's interpretation of its regulation is 'reasonable'", and "whether the character and context of the agency interpretation entitles it to controlling weight."  The Court noted that "'especially important markers' for determining if an agency's regulatory interpretation" requires deference include: "(1) whether the agency's interpretation reflects the agency's 'authoritative' or 'official position'; (2) whether 'the agency's interpretation implicates its substantive expertise'; and (3) whether the agency's construction is rooted in its 'fair and considered judgment.'" 

 

The Fifth Circuit also noted that the Supreme Court of the United States "has deferred to 'official staff memoranda . . . even though never approved by the agency head' (quoting Ford Motor Credit v. Milhollin, 444 U.S. 555, 566 n.9 & 567 n.10 (1980)".

 

After extensive examination recounted in its opinion, the Court concluded that "deference to OCC's interpretation of these regulations is appropriate, and the agency's determination in Interpretive Letter 1082 that the type of bank fees at issue here ... are noninterest charges is a sufficient basis to resolve this case."

 

Therefore, the Fifth Circuit affirmed that trial court's judgment.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Ill Sup Ct Holds Homeowner's Insurer Could Not Reduce Loss Reimbursements by Depreciating Cost of Labor

The Supreme Court of Illinois recently held that a homeowner's insurance company could not deduct depreciation from reimbursements for labor costs from the actual cash value (ACV) of a covered loss, because the policy at issue did not specifically and unambiguously allow the practice.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff was the insured under a homeowner's policy that provided replacement cost coverage for structural damage.  Under the policy, covered losses were paid in two parts -- the insured would initially receive an actual cash value (ACV) payment, and later could then receive a replacement cost value (RCV) payment if the repairs or replacement were completed within two years. The policy did not define "actual cash value."

 

The plaintiff suffered wind damage to his residence.  The insurance company approved his claim and determined a RCV of $1,711.54.  In determining the ACV, the insurance company began with the RCV, then subtracted the $1000 deductible and an additional $394.36 for depreciation.  Plaintiff received an ACV payment of $317.18.  Plaintiff claimed he was underpaid because the insurance company depreciated the cost of labor.

 

The plaintiff filed a putative class action against the insurance company, alleging that labor is an intangible, and may not be depreciated because it is not susceptible to aging or wear and tear. He also argued that the insurance company concealed its practice of depreciating labor in three ways: (1) by not stating in its written estimates that the software used to calculate the ACV was set to depreciate intangibles such as labor; (2) by not separating labor and materials in its estimates; and (3) by not depreciating labor in obvious labor-only charges.

 

The plaintiff alleged that the insurance company uses a software program to calculate replacement and repair costs, that the program's default setting is to apply depreciation only to materials, but that the insurance company adjusted the program to also depreciate labor.

 

The insurance company argued that its method fully complied with the policy and Illinois insurance regulations. It quoted Illinois Department of Insurance (IDOI) regulations which mandated a "replacement cost less depreciation" method of determining ACV.

 

The trial court denied the insurance company's motion to dismiss, and held that the policy was ambiguous. The trial court held that, due to the ambiguity, it was required to construe the ambiguity in favor of the insured.  The insurance company appealed.

 

The appellate court affirmed the trial court's ruling, determining that the plain and ordinary meaning of depreciation in an insurance context is "a reduction in the value of property because of aging and wear and tear to the physical structure of that property." Id. at 6 35.  The appellate court held that the policy language was not ambiguous, and clearly prohibited depreciation of labor.

 

The insurance company appealed to the Illinois Supreme Court, which granted the insurance company's petition for leave to appeal before it.

 

The Illinois Supreme Court examined similar cases in other jurisdictions. The Oklahoma Supreme Court examined the issue in Redcorn v. State Farm Fire & Casualty Co., 2002 OK 15, 55 P.3d 1017 (2002), holding that an insurer should be allowed to depreciate labor, because "depreciation" is the actual deterioration of a structure by reason of age, computed at the time of loss, and that the plaintiff purchased one roof; he did not separately purchase parts and labor. Id. at 6 14.

 

Other state and federal jurisdictions have split on the question. The North Carolina Supreme Court agreed with Oklahoma and allowed labor depreciation in Accardi v. Hartford Underwriters Insurance Co., 838 S.E.2d 454 (N.C. 2020), as have the Supreme Courts of South Carolina and Nebraska in Butler v. Travelers Home & Marine Insurance Co., 858 S.E.2d 407, 408 (S.C. 2021), and Henn v. American Family Insurance Co., 894 N.W. 2d 179, 182 (Neb. 2017). Federal courts generally agree with this reasoning. See Graves v. American Family Mutual Insurance Co., 686 Fed. App x 536, 537 (10th Cir. 2017), and In re State Farm Fire & Casualty Co., 872 F.3d 567 (8th Cir. 2017).

 

However, other state courts have held labor is not depreciable. These courts generally held that the term "actual cash value" is ambiguous and should be construed in favor of the insured. In Lammert v. Auto-Owners (Mutual) Insurance Co., 572 S.W.3d 170 (Tenn. 2019) the Tennessee Supreme Court held that the term "depreciation" was ambiguous, and should be construed in favor of the insured. The Arkansas Supreme Court reached the same conclusion in Adams v. Cameron Mutual Insurance Co., 2013 Ark. 475, 430 S.W.3d 675.

 

The plaintiff here argued that the policy was not ambiguous, and that it plainly stated that labor is an intangible, and therefore not depreciable.  The insurance company argued that the policy was unambiguous, but supporting the opposite interpretation. The Illinois Supreme Court disagreed with both positions, holding that the language was ambiguous. It also disagreed with the insurance company's argument that the matter was a simple question of regulatory interpretation, finding that the regulation did not address the question.

 

The Illinois Supreme Court held that the policy was ambiguous, as there were several reasonable arguments why labor would not be depreciable.

 

First, the Court noted, labor is not logically depreciable, since it does not lose value over time due to wear and tear. It is a fixed cost not subject to deterioration or obsolescence.

 

Second, depreciating labor can result in the insured being placed in a worse position that he was before the loss. The labor cost of installing old materials would be the same as that of installing new materials. Therefore, indemnity is frustrated when labor is depreciated. Not allowing the depreciation of labor is proper indemnity, not a windfall to the insured.

 

Third, the Court held that the plaintiff's position is more in keeping with actual insurance practice. The insurance company's estimate software allows for depreciation of materials only, and the insurer must opt-in to depreciating labor. Therefore, it is not unreasonable to not depreciate labor. In this case, the insurance company depreciated labor for only 7 of the 26 line-item repairs, and did not depreciate labor for the labor-only items.

 

For these reasons, the Illinois Supreme Court held that it was required to construe the ambiguity against the insurer, and upheld the appellate court's ruling.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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