Wednesday, November 2, 2022

FYI: 7th Cir Affirms Dismissal of Putative Class Action Alleging Excessive NSF Fees

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's ruling that a credit union's fee practices did not breach its contract with a customer.


In so ruling, the Seventh Circuit held that the credit union did not make any promises not to use the "available balance" method to assess nonsufficient fund (NSF) fees or not to charge multiple fees when a transaction is presented to it multiple times. 


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


The customer sued the credit union under the federal Electronic Fund Transfers Act, 15 U.S.C. § 1693–1693r, and state law on behalf of herself and other similarly situated customers, essentially alleging that the credit union charged fees in violation of its contract.


The credit union charged an NSF fee when it rejected an attempted debit because an account lacked sufficient funds to cover the transaction. The customer argued that the contract required the credit union to assess NSF fees using the "ledger-balance method" and only allowed one NSF fee per transaction, while the credit union claimed that the contract permitted it to use the "available-balance method" and charge multiple NSF fees if presented with the same insufficient funds transaction more than once.


The trial court agreed with the credit union and granted the credit union's motion to dismiss with prejudice. The customer timely appealed.


On appeal, the customer argued that the plain language of the contract promised that the credit union would not charge NSF fees unless a customer's account had an insufficient ledger balance at the time of the transaction.


Section 8(a) of the contract provided that when the credit union determined a customer had an "insufficient account balance" to cover a transaction, "[her] account may be subject to a charge." The customer argued that an ordinary English speaker would understand "account balance" to mean what the banking industry calls the ledger balance.


However, the Seventh Circuit determined that it must look beyond Section 8(a) and construe the contract as a whole. Sanders v. Ill. Union Ins. Co., 157 N.E.3d 463, 467–68 (Ill. 2019).  Section 7(a) advised that the credit union "permit[s] withdrawals only if [an] account has sufficient available funds to cover the full amount of the withdrawal" and that "[c]hecks or other transfer or payment orders which are drawn against insufficient funds may be subject to a service charge as set forth in the Fee Schedule."


The Seventh Circuit concluded that a reasonable person would read Section 7(a) before Section 8(a) and understand that Section 8(a)'s reference to an "insufficient account balance" referred back to Section 7(a)'s "insufficient available funds." Therefore, the Court held that the contract unambiguously allowed the credit union to use the "available-balance method" to charge NSF fees.


The customer next argued on appeal that the contract promised to assess an NSF fee only one time per transaction by the customer. The Fee Schedule in the contract provided for a $25 "Nonsufficient Fund Item (each)," and therefore the customer's theory turned on the definition of "item."  The customer read Section 7(a) and the Fee Schedule to mean that the credit union could only charge a $25 NSF charge for each payment order that a member draws against insufficient funds, even if the same payment order were submitted multiple times with insufficient funds to cover it.


However, the Seventh Circuit agreed with the trial court that the contract did not forbid the credit union from charging multiple fees when it was presented with the same transaction more than once.


Section 8(a) stated: "We do not have to notify you if your account does not have funds to cover checks, ACH debits, debit card transactions, fees or other posted items. Whether the item is paid or returned, your account may be subject to a charge as set forth in the Fee Schedule." The Seventh Circuit interpreted the list ending with "other posted items" to mean that the previous terms were also "items," including ACH debits. See Corbett v. County of Lake, 104 N.E.3d 389, 397 (Ill. 2017). The Court reasoned that defining "item" by reference to the debit rather than the transaction or purchase rendered the customer's reading untenable.


Thus, the Seventh Circuit held that, taken together, Section 8(a) and the Fee Schedule permitted the credit union to charge an NSF fee each time a payee attempted to make an ACH debit from an account with insufficient funds.


Accordingly, the Seventh Circuit affirmed the trial court's dismissal with prejudice of the customer's breach of contract claim.




Ralph T. Wutscher
Maurice Wutscher LLP
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