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Soto v. Bank of Lancaster County

March 30, 2010


The opinion of the court was delivered by: Golden, J.


This is a purported class action brought on behalf of all customers of the Bank of Lancaster County (BLC) who allege that BLC's Overdraft Privilege Service ("OPS"), as it is applied to ATM and Debit Card transactions, results in violations of the National Bank Act, the Truth in Lending Act and the Pennsylvania Unfair Trade Practices and Consumer Protection Law. Presently before the Court is BLC's Motion to Dismiss for failure to state a claim.*fn1 The Court heard oral argument on this Motion. For the reasons that follow, the Motion is granted.

In construing a motion to dismiss for failure to state a claim, the Court must accept all allegations in the Complaint as true. The Complaint alleges that a BLC customer is automatically charged a fee of $35 every time BLC pays for an overdrawn check without first giving any notice to the customer that his account has insufficient funds. As a result of the application of the OPS to Plaintiff Soto's account, Soto was assessed $560 in "paid item fees" between September 11, 2007 and September 25, 2007.

Plaintiff's first cause of action alleges that BLC violated the National Bank Act ("NBA"), 12 U.S.C. § 85, by charging interest at a rate in excess of that permitted by Pennsylvania law. Complaint at ¶¶ 32-35.

Interest is defined by the Office of the Comptroller of the Currency ("OCC"), which is the exclusive supervisory agency of national banks, to include: any payment compensating a creditor or prospective creditor for an extension of credit, making available a line of credit, or any default or breach by a borrower of a condition upon which credit was extended. It includes, among other things, the following fees connected with credit extension or availability: numerical periodic rates, late fees, creditor-imposed not sufficient funds (NSF) charged when a borrower tenders payment on a debt with a check drawn on insufficient funds, overlimit fees, annual fees, cash advance fees, and membership fees.

12 C.F.R. § 7.4001(a).

Plaintiff alleges that BLC charged him NSF fees only in relation to his deposit account. Complaint at ¶ ¶18-22. The Supreme Court has held that the OCC's interpretation of its regulations is entitled to substantial deference. Smiley v. CitiBank, N.A., 517 U.S. 735, 739 (1996). According to the OCC, the overhead draft fee is not interest in connection with credit extension as long as the bank charges the fee without regard to whether it pays the item creating the overdraft. 66 Fed.Reg. 34784 et seq. at 34786-87 (July 2, 2001). ("Fees that a bank charges for its deposit account services-- including overdraft and returned check charges-- are not covered by the term 'NSF fees' as that term is used in § 7.4001(a)"). Rather, the fee is a deposit account service charge arising from the terms of the depository agreement.

Although the Third Circuit has not ruled on this issue, all courts which have addressed the issue have concluded that overdraft fees are not interest. See In re Washington Mutual Overdraft Protection Litig., 2004 WL 5046210 (C.D.Cal. April 26, 2004), aff'd in part, rev'd in part on other grounds, 201 Fed.Appx. 409 (9th Cir. 2006); Nicholas v. Deposit Guar.Nat. Bank, 182 F.R.D. 226, 231 (S.D. Miss. 1998); Video Trax, Inc. v. Nations Bank, N.A., 33 F.Supp.2d 1041, 1050 (S.D. Fla. 1998); Terrell v. Hancock Bank, 7 F.Supp. 2d 812, 816 (S.D. Miss. 1998).

Plaintiff attempts to distinguish these cases by noting that he alleges that BFC charged an overdraft fee only when an item was paid, and did not charge a fee when an item was not paid. Complaint at ¶¶ 11, 14. These allegations are contradicted by the plain terms of Plaintiff's Deposit Account Agreement, which provided that BLC had the right to charge an overdraft fee for each overdraft item presented regardless of whether BLC paid it or returned it. Exhibit B to Defendant's Motion to Dismiss at 1.*fn2 In addition, the Overdraft Privilege Service Policy that accompanied the September 5, 2007 notice letter regarding the application of BLC's overdraft privilege to Plaintiff's account states that "a fee will be charged for every non-sufficient fund item regardless of whether we pay it or return it." Exhibit A to Defendant's Reply Brief. (emphasis added).

In short, NSF fees arising from deposit accounts do not constitute interest. Since Plaintiff's account was not a loan account but a deposit account, the disputed NSF fees were not "interest" and Plaintiff fails to state a claim under the National Bank Act.

Plaintiff next contends that BLC violated the Truth in Lending Act ("TILA"), 15 U.S.C. § 1642, by: 1) failing to provide Plaintiff with disclosures regarding the true cost of using the OPS; 2) adding OPS to Plaintiff's ATM/credit card because, according to Plaintiff, the addition of OPS constitutes a credit feature which violates the TILA's prohibition against the use of unsolicited credit cards and 3) offsetting OPS fees assessed in connection with ATM and debit card transactions against the account of Plaintiff, thereby violating "TILA's prohibition of credit card issuers offsetting cardholders' indebtedness against funds held on deposit with card issuers in the absence of the cardholders' affirmative consent." Complaint at ¶¶ 39, 41-42.*fn3

In the first instance, nearly identical claims have already been rejected by the United States District Court for the Central District of California in In re Washington Mutual Overdraft Protection Litg., 539 F.Supp. 2d 1136, 1146 (C.D. Cal. 2008). The Official Staff Commentary of the Federal Reserve Board (the "Board") specifically states that credit is not extended by the addition of discretionary OPS features to debit cards. 12 C.F.R. Pt. 226 Supp. I at cmt. 226.2(a)(15)-2.ii.A. In an amicus brief filed in the Court of Appeals for the Ninth Circuit in the Washington Mutual litigation, the Board summarizes the applicable legal principles as follows:

The [Official Staff Commentary] provides explicitly that a credit card 'does not include...a check-guarantee or debit card with no credit feature or agreement, even if the creditor occasionally honors an inadvertent overdraft.' Comment 226.2(a)(15)-(2)(ii). Plaintiffs'-Appellants' arguments to the contrary notwithstanding, the Board does not consider automated overdraft programs such as the one at issue here to be distinct from programs in which a financial institution occasionally honors an inadvertent overdraft without an automated program. The Board was fully aware of this aspect of overdraft programs, see 70 Fed.Reg. 29,583 ('[s]ome institutions extend the overdraft service to non-check transactions, for example, withdrawal requests made at automated teller machines [or] purchases made using a debit card....'), and determined nonetheless that these programs are properly disclosed under Regulation DD rather than Regulation Z...Consistent with this interpretation, the Board has also not applied Regulation Z's rules regarding the issuance of credit cards to debit (e.g. ATM) cards unless the debit card has a 'credit feature' that goes beyond credit associated with overdraft protection. See 12 C.F.R. § 205.12(a)(2). For those debit cards for which the only credit involves overdraft protection, the Board has determined that Regulation E, its rule implementing EFTA [Electronic Funds Transfer Act], rather than Regulation Z, applies to card issuance even when there is a pre-existing agreement. See 12 C.F.R. § 205.12(a)(1)(ii).

Amicus Brief of Board at 9-10 attached to Defendant's Motion to Dismiss as Exhibit E (emphasis added). The Board's interpretation of TILA is entitled to a large degree of deference. Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980). Specifically, the Supreme Court stated, "[u]nless demonstrably irrational, Federal Reserve ...

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