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Reyes v. Zions First National Bank

United States District Court, Third Circuit

September 23, 2013

REYNALDO REYES On Behalf of Himself and All Others Similarly Situated



Plaintiff Reynaldo Reyes brings this Racketeer Influenced and Corrupt Organizations Act (RICO) class action suit alleging fraud by several banking institutions. Reyes claims Defendant Zions First National Bank (Zions Bank) and two of its subsidiaries, NetDeposit LLC (ND) and MP Technologies d/b/a Modern Payments (MP), [1] collectively, the “Zions Defendants, ” knowingly provided banking services to fraudulent telemarketers in violation of 18 U.S.C. § 1962(c) and (d).[2] Reyes asks this Court to certify a class of individuals who, like him, were defrauded by telemarketers receiving banking services from the Zions Defendants. Upon review of the parties’ submissions and case law regarding class certification, the Court concludes the class cannot be certified and Reyes’s motion for class certification will be denied.


In November 2007, a telemarketer from National Healthcare Solutions (NHS) called Reyes and told him he was eligible for a government grant and, if he provided his bank account information, the government would deposit grant funds directly into Reyes’s account. The telemarketer did not tell Reyes he would incur any charges in connection with this grant or that any money would be withdrawn from his account. Reyes provided information for his account at Commerce Bank, and NHS then initiated a debit from this account in the amount of $29.95, which was processed by MP. MP provided information regarding the allegedly authorized deduction and Reyes’s account number to Defendant Zions Bank, which completed a wire transfer of the funds from Reyes’s Commerce Bank account into an account at Zions Bank. Almost two weeks later, NHS initiated a second deduction in the amount of $299.99 which was also processed by MP. Reyes did not authorize these deductions, and he did not receive a government grant. Because Reyes had insufficient funds in his Commerce Bank account to cover the withdrawals, he incurred overdraft fees and suffered a loss of nearly $400. After the two withdrawals from his account were completed, Reyes called NHS to complain, and an NHS representative played him an audio recording, which the representative claimed evinced Reyes’s oral consent for NHS to deduct funds from his bank account. Reyes asserts this recording was either fraudulently altered or taken out of context.

Reyes alleges the Zions Defendants participated in similar transactions with NHS and other fraudulent telemarketers to withdraw funds from the bank accounts of proposed class members. The scheme allegedly works as follows: representatives from several telemarketing firms, which have all been the subject of government consumer-fraud enforcement actions, call individuals and offer them valueless or significantly undervalued products, such as nonexistent government grants, worthless discount health programs, or a host of other services. In addition to contacting prospective victims by phone, the telemarketers also use solicitations over the Internet and “slamming, ” a process whereby a telemarketer acquires a list of consumers and their bank account information, typically from another telemarketer that engages in the business of buying and selling such lists. Using the customer account information from these lists, telemarketers misrepresent to consumers that they are trying to verify the account information, or, more often, initiate money transfer transactions without ever contacting the victims.

Because telemarketers cannot obtain funds from checking accounts of consumers unless there is a bank willing to process the transaction, the scheme requires participation of other parties. Most banks will not deal with telemarketers; thus, telemarketers will use third party payment processers like MP and Teledraft. The payment processor establishes an account at the bank in its own name or the name of the telemarketer and, using the victims’ account information, collects payments from the victims’ bank account into the payment processer’s bank account. After receiving funds from the victims, the payment processor deducts a fee for itself and transmits the balance to the telemarketer. A payment processor can use one of two methods to obtain payment based on a consumer’s bank information: 1) electronic transfer through an Automated Clearing House debit (ACH); or 2) a remotely created paper check/demand draft (RCC).

Under the ACH method, the telemarketer provides the payment processer with the consumer’s bank account information, which the payment processer uses to direct the bank to initiate a wire transfer through the ACH system from the consumer’s account into the payment processor’s account. Both the payment processer and the processor’s bank take a fee and the remaining funds are transferred into the telemarketer’s bank account. The RCC method involves a paper check created by the payment processor drawn on the consumer’s bank account, which includes the printed statement “authorized by drawer” or other similar language in lieu of a signature. The RCC is made out to the telemarketer and is either deposited directly into the telemarketer’s account, or deposited first into the processor’s account before being transferred to the telemarketer’s account. Each RCC generates a fee for the payment processor. In this case, MP used only the ACH method of processing payments, but Teledraft used the RCC method.

The essence of Reyes’s claims is that MP and Zions (and later Teledraft) knew the ACH debits and RCC transactions they executed for the relevant telemarketing clients were fraudulent. Reyes’s central burden, therefore, is to show the Defendants knew they were facilitating a scheme to defraud by processing the transactions. In support of his class certification motion, Reyes presents the Court with evidence he contends demonstrates the fraudulent nature of the transactions. The most significant evidence is the “return rates” for each of the alleged fraudulent telemarketers. When an ACH debit cannot be completed due to insufficient funds of the consumer, or when the consumer complains an ACH debit was not authorized, the transaction is “returned” and the funds are placed back in the consumer’s account by the bank which conducted the transaction. The National Automated Clearing House Association (NACHA) publishes industry return rates and has stated high return rates are a strong indication of fraud. In this case, all of the allegedly fraudulent telemarketers had return rates significantly higher than the national average. Further, internal communications demonstrate the high return rates were issues of concern for both MP and Zions Bank. NACHA itself had expressed concern over the rates to the Defendants.

Reyes also offers evidence of several other indicators that the Defendants were aware of the fraud. For example, Reyes asserts MP knowingly and improperly “coded” cold-call telemarketing transactions, for which ACH transactions are not permitted, as recurring transactions, which are permitted through ACH. Reyes also argues MP and Zions violated their obligations under federal banking regulations to do reasonable due diligence in monitoring their customers; had they followed the proper administrative procedures, they would have learned the telemarketers for which they did processing had long histories of regulatory sanctions for fraud.

Reyes asks this court to certify a class consisting of “[a]ll individuals in the United States as to whom ACH debit entries or remotely created check drafts on their accounts were prepared by defendants Netdeposit, Modern Payments, or Teledraft during the four-year period immediately preceding the filing of this action and finally charged to the class members’ bank accounts by a Telemarketer, or pursuant to information provided to defendants Netdeposit, Modern Payments, or Teledraft by the Telemarketers, or who otherwise incurred any bank charges as a consequence of such ACH debit entries or remotely-created checks.” Pl.’s Mot. for Class Certification 1-2, ECF No. 140. The class includes at least tens of thousands of persons. Id. at 2. In his Second Amended Complaint, Reyes specifically names at least six different telemarketers as part of the “Telemarketing Enterprises”[3] who did business with MP. See Second Am. Class Action Compl. at 5-13, ECF No. 188. Reyes asks this Court to certify the class and hold Zions Defendants liable under the RICO statutes.


To obtain class certification, a plaintiff must demonstrate the proposed class satisfies all four elements of Federal Rule of Civil Procedure 23(a), along with one of the three requirements Rule 23(b). Comcast Corp. v. Behrend, 133 S.Ct. 1426, 1432 (2013); Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2548 (2011); Georgine v. Amchem Prods., Inc., 83 F.3d 610, 624 (3d Cir. 1996). Rule 23(a) requires a showing of: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. See Fed. R. Civ. P. 23(a). Rule 23(b) can be satisfied three different ways. In this case, Reyes advances his certification under Rule 23(b)(3), which requires the plaintiff to show “the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed.R.Civ.P. 23(b)(3).

When deciding whether to certify a class under Rule 23, the district court must make whatever factual and legal inquiries are necessary to determine that each requirement of Rule 23 is met. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 307 (3d Cir. 2008). Furthermore, the court’s findings as to the Rule 23 requirements must be supported by factual determinations made by a preponderance of the evidence; a threshold showing by a party is not sufficient. Id. A court must “resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits—including disputes touching on elements of the cause of action.” Id.

In this case, the Court need not decide whether the proposed class action meets the requirements of numerosity, typicality, or adequacy of representation because the class fails to meet the commonality requirement of ...

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