Farrell v. Bank of America, N.A.
224 F. Supp. 3d 1016
S.D. Cal.2016Background
- Plaintiff Joanne Farrell brought a putative class action challenging Bank of America’s practice of charging a $35 "Initial Charge" for overdrafts and an additional $35 "Extended Charge" if the overdrawn balance was not cured within five days.
- The Deposit Agreement allows the Bank discretion to honor or return overdraft items; the Initial Charge is assessed whether or not the Bank advances funds.
- The Extended Charge is imposed only when the Bank advances funds to cover an overdraft and the customer fails to repay within five days.
- Farrell alleges the Extended Charges, when measured as a percentage of the negative balance, constitute usurious "interest" in violation of the National Banking Act, 12 U.S.C. § 85, and therefore exceed the lawful interest ceiling.
- Bank of America moved to dismiss, arguing the charges are deposit-account service fees (authorized by 12 C.F.R. § 7.4002) and not "interest" under § 85; the court decided the motion on the briefs and denied dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Extended Charges constitute "interest" under 12 U.S.C. § 85 | Extended Charges compensate the bank for advancing funds (an extension of credit) and thus are "interest" subject to § 85 | Extended Charges are deposit-account service fees or flat/contingent penalties (not interest) and fall under OCC-regulated deposit service charges | Court held Extended Charges may be "interest" because they can compensate for an extension of credit and plaintiff adequately pleaded this — denied motion to dismiss |
| Whether the OCC interpretation (and commentary) excludes overdraft/extended fees from § 85 | Plaintiff: OCC commentary distinguishes creditor-imposed NSF fees from deposit service fees but that does not foreclose finding Extended Charges are interest when tied to credit extension | Bank: OCC regulations and commentary classify overdraft/returned-check fees as deposit service charges, not "interest" | Court gave deference to OCC interpretation for Initial Charge but found commentary and regulations do not preclude Extended Charges from qualifying as "interest" when they compensate for credit extension |
| Whether an advance to cover an overdraft is an "extension of credit" | Farrell: advancing funds to cover overdraft is an extension of credit (plain meaning, Regulation O and Federal Reserve guidance support this) | Bank: an overdraft advance is a deposit-account service and not a classical credit transaction | Court found plain meaning and regulatory guidance support that paying overdrafts is an extension of credit, so Extended Charges can be interest |
| Whether the flat or contingent nature of the fee precludes it from being "interest" | Farrell: fee need not be percentage-based or non-contingent to be interest (Smiley controls) | Bank: flat fee, contingent nature, or arising from a deposit agreement means it is not interest | Court rejected petitioner's flat/contingent arguments as dispositive, citing Smiley and related authority; fee can be interest despite being flat or contingent |
Key Cases Cited
- Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (Sup. Ct.) (gives deference to OCC interpretation of "interest" under § 85)
- Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (Sup. Ct.) (framework for deference to agency interpretations)
- In re TD Bank, N.A., 150 F. Supp. 3d 593 (D.S.C.) (district court analyzing whether extended overdraft fees constitute interest)
- Video Trax, Inc. v. NationsBank, N.A., 205 F.3d 1358 (11th Cir.) (case addressing whether overdraft-related fees are interest)
- Kingdomware Technologies, Inc. v. United States, 136 S. Ct. 1969 (Sup. Ct.) (principle that plain meaning controls when law is unambiguous)