National Bank Act Preempts
State Regulation of Check Posting,
but Not a Ban on Misleading Statements
CALIFORNIA HAS AN Unfair Competition Law1 that was implicated in Gutierrez v. Wells Fargo Bank.
2 Customers of the
bank had brought a class action lawsuit against the bank,
claiming that its practices with respect to overdraft fees were
unfair under the California act.
The crux of the case was phrased by the court as follows:
“At issue is a bookkeeping device, known as ‘high-to-low’
posting, which has the potential to multiply overdraft fees,
turning a single overdraft into many such overdrafts.” The
plaintiffs sued under the act, claiming that the bank had
engaged in 1) unfair business practices by imposing overdraft fees based on the high-to-low posting order, and 2)
fraudulent business practices by misleading customers as
to the posting order it used.
The court observed that when a customer’s account is
overdrawn, the high-to-low posting sequence can have a
dramatic effect on the number of overdrafts incurred by
the customer, even though the amount overdrawn will be
the same as in a low-to-high posting system. The number
of overdrafts determines the total amount of overdraft fees.
Prior to April 2001, the bank used the low-to-high posting
system. But in April 2001, it changed direction in California
and went to a high-to-low system, meaning it posted items
in the order of the highest to the lowest dollar amount. The
change maximized the number of overdrafts in a customer’s
Gutierrez’s complaint invoked violations of sections of the
California act regarding unfair and fraudulent practices. The
trial court ruled in favor of Gutierrez and the class. Injunctive
relief was granted in addition to $203 million in damages.
The bank appealed, asserting federal preemption under
the National Banking Act3 (NBA) as its principal defense.
It was partially successful.
Prior decisions have crystallized the reach of the NBA.
State laws are allowed to apply to national banks so long
as “doing so does not prevent or significantly interfere with
the national bank’s exercise of its powers.” Therefore, the
question became whether any aspect of high-to-low posting
violated the California law.
Under the unfair business practices aspect of the act,
the question was whether the NBA and regulations of the
Comptroller of the Currency permitted national banks to
choose the method of posting transactions and the fees to
be charged for overdrafts. Citing 12 U.S.C. § 24 (Seventh),
which grants national banks the power to conduct the business of banking, the court said that necessarily includes the
power to post transactions. Citing federal banking regulation
12 C.F.R. § 7.4002(b), the court noted that the Comptroller
of the Currency had delegated the power to calculate fees to
the national banks. As a result, federal preemption barred
Gutierrez’s claim that the bank’s posting method was an
unfair business practice.
But Gutierrez and the class had better luck on their claim
that the bank had engaged in fraudulent business practices.
The Ninth Circuit observed that the trial court found the
bank “did not tell customers that frequent use of a debit
card for small-value purchases could result in an avalanche
of overdraft fees for each of those purchases due to the
high-to-low posting order.” It also said the bank “directed
are allowed to apply to
national banks so long as
“doing so does not prevent
or significantly interfere
with the national bank’s
exercise of its powers.”