By Ray Birch
KALAMAZOO, Mich.—Credit unions should take several key steps to protect themselves against a growing wave of lawsuits related to NSF fees, according to one attorney whose firm has just successfully defended a credit union in an overdraft case.
Brandon Wilson, a partner at Honigman, LLP, recently represented Y-12 Credit Union in Oak Ridge, Tenn. in litigation that was dismissed before the case went to trial.
According to court documents, Daphne Saunders, a member of Y-12 CU, filed a complaint in Anderson County Circuit Court against the credit union alleging breach of the parties’ banking contract. Saunders asserted Y-12 had improperly charged NSF fees for ACH items presented for payment from her account that were returned due to insufficient funds. Saunders also alleged breach of the covenant of good faith and fair dealing and asserted Y-12 had been unjustly enriched by charging excessive fees.
The circuit court dismissed Saunders’ claims, finding she had failed to state a claim upon which relief could be granted. Saunders appealed that decision, but the Tennessee Court of Appeals upheld the dismissal.
“I think, finally, the credit union industry has figured out that these suits are serious, and I think the industry is making better efforts to make sure that their account documents and disclosures are up to snuff,” said Wilson. “I would say, by and large, credit unions have not had great success in getting overdraft fee complaints dismissed.”
Wilson believes there are several reasons why credit unions have been failing to get many of the overdraft cases dismissed before they go to trial.
Brandon Wilson
“The plaintiff’s lawyers like to parse words to make it seem like the account agreement is ambiguous. In the Y-12 case, it was the clear language in the credit union’s account agreement that led to the dismissal,” said Wilson. “The court’s takeaway was that the credit union’s language was very clear about what happens to the member’s account in the circumstance alleged in the complaint, and that the document couldn’t be read any other way.”
One Judge’s Insight
Wilson said he gained some critical insights two years ago from a federal judge related to what courts are looking for in financial institution account agreements.
“I was arguing a motion to dismiss in an overdraft case,” said Wilson, who has defended several credit unions in OD lawsuits. “I was explaining to the judge what method the credit union used for calculating account balances and the judge essentially said, ‘Mr. Wilson, that sounds great, so why doesn't your client just say that in their documents?’”
Wilson said that exchange made it apparent the courts want clear language in account agreements—simple, straightforward plain language.
“I think a lot of credit unions for many years have been using forms from vendors that have canned language,” said Wilson. “That is what I believe has gotten some credit unions in trouble during overdraft lawsuits. And they might even be making changes to the documents over the years, so what you end up with is a document that isn’t as clear as it could be in the eyes of the court.”
Reconsider Vendor Agreements
Wilson said he has recommended for years that credit unions not rely on agreements written by vendors and instead use a compliance professional to regularly review and update their agreements and disclosures.
Michael Bell
“What we like to see, in addition to the plain language, are examples in the agreement,” said Wilson. “For example, ‘This is the way your debit card works. If you go and buy $50 worth of groceries there's going to be a temporary hold, and that transaction might not post for a couple days.’ I think it's that kind of language that makes a great deal of difference in the outcome in court. And I feel that is keeping with the culture of credit unions—their focus on financial education, being upfront and transparent with their members.”
Wilson added he does believe more credit unions today understand how account agreements should be worded to avoid fee lawsuits and are improving their contracts. Moreover, he noted an increasing number of CUs are including class action waivers in their agreements.
“Class action waivers in their account documents are going to prove to be very beneficial in dissuading plaintiffs’ lawyers from filing these cases in the first place,” said Wilson, who believes in the years ahead plaintiffs’ attorneys may begin to challenge the enforceability of those waivers.
Not Going Away
Michael Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, said those kinds of moves by credit unions could lead to a slowdown next year in overdraft lawsuit filings.
“It’s possible overdraft lawsuits against financial institutions could begin to subside in 2021,” he said. “I think over the next 12 months you're going to see a reduction in these filings. I think the industry is waking up and realizes that the plaintiff’s lawyers are not going away.”