Banking on unfairness: $203 million verdict against Wells Fargo

Gutierrez v. Wells Fargo Bank, N.A., --- F.Supp.2d ----, 2010 WL 3155934 (N.D. Cal.)

This decision finds that Wells Fargo’s unfair and fraudulent business practices generated hundreds of millions of dollars in overdraft fees. My extremely long recap leaves a lot out, though the facts are well worth reading if you want to see how a big institution squeezes profits out of its most vulnerable customers. (My first draft said "decides to squeeze," but I think that's wrong: with one exception, nobody at the bank seems to have decided to do this, only debated how it could best be done.) As the court said:

Overdraft fees are the second-largest source of revenue for Wells Fargo's consumer deposits group, the division of the bank dedicated to providing customers with checking accounts, savings accounts, and debit cards. The revenue generated from these fees has been massive. In California alone, Wells Fargo assessed over $1.4 billion in overdraft penalties between 2005 and 2007.

Wells Fargo currently charges $35 for a single overdraft, an amount not in dispute. The problem was that Wells Fargo devised a bookkeeping device to turn one overdraft into as many as ten. “The draconian impact of this bookkeeping device has then been exacerbated through closely allied practices specifically ‘engineered’--as the bank put it--to multiply the adverse impact of this bookkeeping device.” As predicted, these “neat tricks” generated “colossal sums.” “The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure.” The court enjoined these practices for the certified class of California depositors and ordered restitution.

In April 2001, Wells Fargo switched from low-to-high to high-to-low posting (reconciling deposits and withdrawals in the wee hours of the morning). The court found that Wells Fargo did so in order to maximize overdraft fees. Wells Fargo, unlike what most other institutions did and still do, started with the highest amount, deducted it from the depositor’s account, and proceeded down the list. So, a consumer who just barely overdrafted her $100 account with 10 $2 purchases and one $100 purchase would have paid one overdraft fee under the old system, and 10 under the new system; plus after a few overdrafts she would be kicked up into a higher penalty category, paying even more. (Ten was the bank’s voluntary limit.) The class representatives included plaintiffs whose experiences approached the theoretical limit and who had thus literally paid over $30 for a cup of coffee.

Compared to its previous practices, this produced—as the bank intended—substantially more overdrafts, especially because Wells Fargo combined this with two other changes. Initially, Wells Fargo had segregated debit card transactions from checks and automated recurring charges authorized by consumers—as to which consumers might have good reasons to want the transactions to have priority of payment. Missing a mortgage payment or having a check to the IRS declined could have much worse consequences than a couple of overdraft fees. By comminging debit card transactions with checks and automated charges and then going high-to-low, Wells Fargo amplified the overdraft-multiplying effect of high-to-low, with no corresponding consumer benefit.

Wells Fargo engaged in further “engineering”—its own term—by creating a secret “shadow line” in May 2002 to authorize debit card purchases into overdrafts. Previously, Wells Fargo declined debit card purchases at the point of purchase when the account balance was insufficient. The new shadow line was an undisclosed line of credit, meaning that customers’ debit cards would not be declined even if overdrawn, and they’d have no warning that an overdraft was in progress. The extent of the shadow line varied by customer according to Wells Fargo’s assessment of the likelihood that they’d pay the overdraft fees. Wells Fargo “correctly expected that it would make more money in overdraft fees than it would ever lose due to ‘uncollectibles’ (i.e., overdrafts that were never paid back).”

The representative plaintiffs were new to banking; they incurred massive overdraft charges that would have been hundreds of dollars lower under Wells Fargo’s prior practices. Wells Fargo took the position that customers should have been using check registers to protect themselves. The problem is that, even had customers been doing this (which Wells Fargo well knew they would not), a check register tracks transactions in the order in which the customer engages in them, not in high-to-low order. “In reality, the most exacting register would not have told Ms. Gutierrez that she would be hit with four rather than one overdraft fee.”

Nor did Wells Fargo indicate in its statements, or with its online system, how the actual transactions had been processed. The court found as a fact that consumers could not have figured out what had happened to them: “The Court has studied [Gutierrez’s] account statements and finds that it was impossible for her or anyone else to reconstruct how the bank came up with its number of overdrafts.” Indeed, it seems that it took significant forensic accounting to figure out what had gone on in this case. Wells Fargo’s fine print disclosures (over 100 pages, 10-point font) said that it could post transactions in any order it wanted, not that it was going to do so in a way that would maximize overdraft fees.

The court found that Gutierrez was deceived by the bank’s “obfuscation” of its high-to-low posting practice, and that she relied upon the bank’s “misleading marketing materials that reinforced her natural assumption that debit-card transactions would post chronologically.”

The other named class member, also new to banking, had a depressingly similar story. Among other things, the bank used the shadow line to authorize an overdraft on a debit card purchase after it had already mailed out a deficiency notice and assessed $413 in overdraft fees (on an overdraft of a hair more than $100). She was ultimately assessed $506 in penalties for $120 in overdrafts; some of that wasn’t directly tied to high-to-low posting, but high-to-low posting increased the number of fees and kept her in overdraft longer, triggering additional fees.

The court found that Wells Fargo’s actual motive and purpose was “profiteering.” “Internal bank memos and emails leave no doubt that, overdraft revenue being a big profit center, the bank's dominant, indeed sole, motive was to maximize the number of overdrafts and squeeze as much as possible out of what it called its ‘ODRI customers’ (overdraft/returned item) and particularly out of the four percent of ODRI customers it recognized supplied a whopping 40 percent of its total overdraft and returned-item revenue.” The court found this internal history to be completely at odds with the bank’s public stance, which included the position that “overdrafts must be discouraged.” In fact, they were encouraged at every turn, despite the prescient warnings of an executive that (1) this was a bad thing to do to vulnerable consumers and (2) Wells Fargo was going to get sued over it.

Wells Fargo expected commingling to add $40 million to its bottom line annually in overdrafts, on top of what high-to-low already generated. This was the “only significant factor” behind the change. For California customers, the percentage of accounts incurring overdraft fees rose 7.8% after commingling was instituted, and the number of overdraft items per overdrafted account rose 10.1%.

Likewise, Wells Fargo expected the shadow line to generate an additional $40 million annually, over and above commingling and high-to-low, and that was the motivation for the change. This was because almost all debit card transactions are instantly approved or declined based on the money in the account, and settled (merchant gets payment from bank, bank takes money from account, all is right with the world) within a couple of days at most. Before the shadow line, any debit card purchase approved by the bank would therefore almost certainly avoid an overdraft fee. With the shadow line, “the bank had now found a way to rack up overdraft fees for point-of-sale purchases that previously were protected from overdrafts.” It’s theoretically possible that an intervening deposit might save the day in the interval between authorization and settlement, but that’s not the way to bet, and Wells Fargo didn’t. In fact, its expectations of $40 million in additional revenue were realized.

The bank was so concerned about maximizing overdraft revenue that when overdrafts dropped unexpectedly it commissioned an internal study, asking whether the manipulations in question were driving customers away. The study concluded that, fortunately for Wells Fargo, overdrafts had only dropped because of seasonal tax refunds that briefly swelled the accounts of frequent ODRI flyers, and that Wells Fargo could therefore expect the spigot to turn back on again. (The relevant emails were unredacted after a threatened Rule 37 motion.) Among other things, the emails showed that decisionmakers closely monitored overdraft fee revenue, and that they viewed any decline in overdrafts as “cause for concern” rather than for celebration (as was their public position). The return of the overdrafts would be “good news.” Moreover, Wells Fargo recognized that 4% of its customers generated 40% of its overdraft fee revenue, and that new accounts generated the bulk of overdraft revenue, and was afraid of driving them away.

A court order allowed plaintiff’s expert to access Wells Fargo’s data and crunch the numbers, revealing that the high-to-low switch increased overdraft fees by hundreds of millions of dollars for the California class during the class period. The court found that “gouging and profiteering were Wells Fargo's true motivations behind the high-to-low switch and the allied practices that soon followed.”

The court rejected Wells Fargo’s post-hoc rationalizations for the practices. First, Wells Fargo argued at trial that customers wanted and benefitted from high-to-low posting. The evidence for this was not credible. Because the vast majority of debit card purchases are “must pay” items—if authorized, the bank must pay them, even if the account balance is insufficient—posting them in high-to-low order confers no benefit on customers. Only two extremely rare exceptions allow the bank to reject debit card purchases: if the merchant didn’t obtain authorization before presenting the transaction for settlement, or if it didn’t present the transaction for settlement within 30 days. “Unlike checks or [automated] transactions, which the bank can return unpaid, there is no risk that Wells Fargo will reject a large debit-card purchase if it posts last rather than first.”

There was no evidence of any correlation between the dollar amount of an item and its priority of payment for the depositor, who might prefer to pay a small charge to the government than a larger private charge (as the court pointed out, a small check to pay a traffic ticket might go unpaid under the bank’s commingling scheme), and in any event the hypothetical “paying the mortgage” scenario was inapplicable to debit card purchases. But it was mathmatically certain that high-to-low increased overdrafts. The court “reject[ed] completely” the contention that consumers would prefer or benefit from “bone-crushing multiplication of additional overdraft penalties.” The numerous complaints filed by depositors, protesting how they’d been deceived by Wells Fargo, confirmed this.

Anyway, the bank produced no evidence that Wells Fargo management actually discussed or considered this supposed “benefit” for customers when it made its decisions. Nor did it produce even post-hoc studies or documentation that any Wells Fargo customers preferred high-to-low for any transactions, much less debit cards. Two Wells Fargo witnesses referred to a supposed 1998 consumer survey, which “proved to be an utter phantom.” The customer-focused rationale “was invented merely for public consumption and was not an actual motivating factor at the time any high-to-low decision was made, much less the high-to-low decision for must-pay items.” The only time it appeared was in “argument pieces distributed after the fact as scripts to bank employees to help justify the high-to-low posting order to customers who complained.”

The court further noted that only about a quarter of FDIC-supervised banks used high-to-low as of 2008, and that if it were true that consumers preferred this order one would expect that more banks would be doing it “and indeed promoting it as a plus.” Wells Fargo has never done so, and indeed “took pains to obfuscate this practice,” because it’s not a plus.

In deciding not to address high-to-low posting in 2009, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration stated in the Federal Register that it would be difficult to set forth a bright-line rule that would clearly result in the best outcome for all or most consumers, repeating the mortgage payment scenario. But that was not a decision, merely a choice not to decide at that time. “At most, it merely said that low-to-high posting--the proposal on the table--was not invariably the best sequence, a truism, and that the agencies were not yet ready to decide one way or the other whether to impose it on all banks in all circumstances.”

More saliently, that statement couldn’t outweigh the extensive trial record, when Wells Fargo was given a full and fair opportunity to prove a consumer preference for or benefit from high-to-low: “This is not an administrative proceeding where any blurb and argument piece can be tossed into the bin. We have had a trial with evidence and safeguards for getting at the truth. It is now evident that the bank's supposed studies and rationales have withered and vanished under effective cross-examination.” (I’m actually cutting out a lot of the court’s outrage. This is not to indicate that I think the bank’s conduct was anything other than outrageous.)

As for commingling, Wells Fargo witnesses testified that a key motivation was to “migrate” consumers and merchants from one transaction type (checks) to others (debit card and automated). Posting such transactions separately had supposedly become “increasingly confusing” to customers and service personnel. This also allegedly allowed the bank to honor more high-dollar items in the form of checks and automated transactions.

However, there was no documentary evidence that Wells Fargo considered “migration trends” when it made its decision. Nor was there any documentary evidence that any customers or service personnel were “confused” by separate posting. To the contrary, the evidence was that customers weren’t even aware of how posting worked. Nor did the bank notify customers about the old system, the new system, or the change. And the court already rejected the “paying more high-dollar items” rationale. The amplification of the harm to consumers was exactly why one Wells Fargo executive recommended against commingling, as he’d recommended against high-to-low; as before, he was overruled, despite his warning about litigation. The testimony about customer preference/benefit, and Wells Fargo’s consideration of same, was not believable.

The same sad story applied to the shadow line extension. Wells Fargo claimed that a key motivation was to increase the approval rate for debit card purchases. But why? Because it would “promote” (the bank's term) overdrafts. Again, no documentary evidence showed customer benefit from or preference for the change. Customers weren’t warned about overdrafts in progress, and the court didn’t believe they’d prefer this system, which explains why the Federal Reserve recently banned the practice absent affirmative opt-in.

The bank then asserted a preemption defense. The relevant regulation, 12 C.F.R. 7.4002, states:

A national bank establishes non-interest charges and fees in accordance with safe and sound banking principles if the bank employs a decision-making process through which it considers the following factors, among others:

(i) The cost incurred by the bank in providing the service;

(ii) The deterrence of misuse by customers of banking services;

(iii) The enhancement of the competitive position of the bank in accordance with the bank's business plan and marketing strategy; and

(iv) The maintenance of the safety and soundness of the institution.

Several problems: (1) Wells Fargo didn’t actually consider any of these factors when implementing the challenged practices; testimony that high-to-low posting was justified in part by cost considerations was not credible, and there was no documentary evidence supporting it. It’s true that switching to high-to-low in California brought California in line with the rest of the bank, but that doesn’t say anything about why the rest of the bank switched, which on the record was not motivated by cost considerations. Uniformity might have been good, but the bank chose high-to-low not because that minimized its costs but because that maximized its revenue. Likewise, there was no evidence that the bank instituted high-to-low to deter customers from misusing banking services. To the contrary, high-to-low with commingling and the shadow line was designed to, and did, significantly promote overdrafts. The court rejected testimony about Wells Fargo’s hopes for deterrence as untrue. There was also no consideration of the bank’s competitive position. Testimony to the contrary was “unanchored in a specific recollection” and simply recited what the bank “would have” considered, conveniently “regurgitating” the factors listed in the regulation. When asked directly, the bank’s witness couldn’t recall whether Wells Fargo considered competitors’ practices at all, and as was the pattern there was no supporting documentary evidence.

(2) Finally, no documentary evidence supported Wells Fargo’s argument that it made the change to maintain safety and soundness. Increasing profits could arguably contribute to safety and soundness, no matter how those profits were obtained from consumers. But the court found it implausible that promoting overdrafts served the goal of safety and soundness, and doubted that bank regulators would agree with Wells Fargo.

(3) If these policies had been “non-interest charges and fees” (which they weren’t, because they were policies for producing separately established non-interest charges and fees, a state law issue) covered by this regulation, Wells Fargo would have had to keep records to prove compliance for bank examiners to review, which it did not do.

Given the 9- to 12-month planning process required to deploy these practices, “there should have been some documents or emails showing that the bank considered these factors,” but there weren’t. “While Wells Fargo asserted that it did not have document retention policies at the time for these types of documents, its retention policies were never offered at trial despite an express invitation to present them at trial.”

In any event, the OCC (the relevant regulator) has specifically stated that a breach of good faith under California law could justify applying state law without triggering preemption if a bank misrepresents its policies to consumers. Wells Fargo also argued that a couple of other sections of the CFR applied; the court found that they were equally inapposite (protecting Wells Fargo’s “deposit-taking” powers against state regulation, for example, doesn’t require allowing Wells Fargo to reorder transactions solely for its own benefit).

The court then turned to a settlement release in a class action, Sean M. Smith v. Wells Fargo Bank, N.A. (Case No. GIC802664, San Diego Sup. Ct.), over an alleged failure by the bank to adequately disclose the extension of the shadow line to debit-card purchases in a 2002 "Policy Change Notice." A settlement was approved in November 2007. Class members were allowed to submit a claim form stating that they’d incurred an overdraft fee during the 12-month period following May 24, 2002, and Wells Fargo would then refund up to $20, subject to an aggregate cap of $3 million. “What Judge Prager did not know--since it only came to light in this proceeding--was that Wells Fargo paid merely $2080 to 166 claimants. This is not a typo.” Class counsel, however, received $2.2 million—a fact Wells Fargo only disclosed after repeated requests from the court here. The court concluded that the settlement was “almost certainly collusive,” though that was not determinative of any aspect of the present litigation.

Judge Prager later ruled that, though the named plaintiff here was a member of the settlement class, the claims in this case were not released by the Smith settlement. Though its language appeared broad, the release was actually limited to the claims in the Smith complaint, specifically flawed disclosures in a 2002 policy change notice. Judge Prager made this ruling without knowledge that Wells Fargo had only paid out $2080 to claimants.

The court then turned to Wells Fargo’s misleading materials and inadequate disclosures. “Given the harsh impact of the bank's high-to-low practices, the bank was obligated to plainly warn depositors beforehand. Instead, the bank went to lengths to hide these practices while promulgating a facade of phony disclosure.” The court found that Wells Fargo’s marketing materials deceived reasonable consumers to expect that purchases would be debited in the order made, rather than resequenced high-to-low. The fine-print statements that Wells Fargo could pay items in whatever order it chose were insufficient, especially since Wells Fargo had emphatically decided to pay in high-to-low order, and never gave notice of the change. Later on, it added specific reference to high-to-low order as a possibility in the fine print. But the revised language kept using “may,” language, compounding the deception by reinforcing the impression that Wells Fargo had not yet chosen high-to-low. In any event, the disclosure “was buried within a sea of single-spaced text stretching over 60 pages in tiny ten-point font,” usually in the middle of the document. “[N]o reasonable depositor could be expected to read the entire document or locate the ‘disclosure’ …. Moreover, even if the customer read the [document], no reasonable depositor could be expected to understand the disclosure regarding posting order and overdraft fees, especially given the deceptive use of "may" throughout the disclosure.”

Wells Fargo’s own consumer expert, Itamar Simonson, to his credit, testified that it was “completely unrealistic to assume that ... many consumers would actually read those lengthy documents” and that the length and complexity of the agreement made it “so difficult for consumers to understand.” He further testified that “it would be impossible for [customers] to predict the exact balance [of their checking accounts] at any particular point in time” even if they read the agreements, which everyone agreed they probably didn’t. As Simonson noted, those Wells Fargo customers who do read the agreement “are probably not the same people who just have $20 in their bank account, and playing it close to the edge.” I would be shocked if anybody but the lawyers drafting the agreement actually read it. I’ve read that Elizabeth Warren assigns law students their own credit card agreements, and that most can’t make heads or tails of significant portions thereof; I believe it.

The court pointed out that Wells Fargo knew how to speak plainly after the fact, “when a customer complained about getting hammered with overdraft fees.” At that point, Wells Fargo provided a clear explanation of its posting process:

… The decision to pay or return items is based on the number of overdraft occurrences in the preceding 12 months.

We pay items from highest-to-lowest dollar amount. Transactions are processed in the following order:

• Credits

• Fees from overdraft/or returned items of the previous day

• Previous day's work--Items with an as of date

• Cash withdrawals

• Checks, check card and POS purchases from highest-to-lowest to [sic] dollar amounts

Wells Fargo had the same clarity in its phone scripts. “The very existence of these clear after-the-fact explanations further highlights the bank's before-the-fact obfuscation.”

No other documents alerted depositors to the multiplication effect of high-to-low; it wasn’t, for example, disclosed on the bank’s fee schedule (which, not for nothing, it would have to have been if it had been a pricing decision as claimed by Wells Fargo in its preemption argument). “Throughout the class period, Wells Fargo separated credit transactions, debit-card transactions, and checks on its printed account statements. The separation of these transactions made it nearly impossible for a customer to determine the actual posting order being employed by the bank.”

In fact, the “murky disclosures” were “exacerbated by misleading information widely disseminated by Wells Fargo reinforcing the perception that transactions would be deducted from their accounts in chronological order.” Wells Fargo persistently used the theme that debit card purchases were “immediately” or “automatically” deducted from an account, leading the class to believe “(1) that the funds would be deducted from their checking accounts in the order transacted, and (2) that the purchase would not be approved if they lacked sufficient available funds to cover the transaction.” Typical statements: “Don't spend money today counting on a deposit tomorrow. Check card and ATM transactions generally reduce the balance in your account immediately” and “Remember that whenever you use your debit card, the money is immediately withdrawn from your checking account. If you don't have enough money in your account to cover the withdrawal, your purchase won't be approved.”

If customers went online, Wells Fargo displayed “pending” debit card purchases in chronological order, leading them to believe that processing would take place in that order, even though they were never posted in that order during the class period, as the bank well knew. The website didn’t warn them that pending transactions would be resequenced behind the scenes. Instead, Wells Fargo encouraged customers to keep track of their balances using a register, which fostered the false view that items were deducted in chronological order.

A customer faithfully using a register would know the exact transaction at which her account went into overdraft. “That faithful customer could not reasonably be expected to know that the bank would manipulate the order of her transactions so as to deplete her account balance faster than shown in her register, triggering not one but as many as ten overdraft penalties, all due to the bank's high-to-low bookkeeping scheme. A precise register could never alert a customer who makes a mistake that her one overdraft will be converted into as many as ten overdrafts.”

Similar inadequate disclosures attended the shadow line, whose specific workings “remain shrouded in secrecy.” It’s some sort of “computerized credit-risk assessment on an account-by-account basis” designed to promote overdrafts at the point of sale (the shadow line was also known as “overdraft via POS,” in the bank’s internal memos, indicating its true and sole purpose). “The available-balance information communicated online to customers was supposed to represent the amount of funds the bank would make available for their next transaction. Wells Fargo defined it as such. This, however, was not true. Wells Fargo allowed customers to spend more than their available balance using their debit cards via undisclosed shadow-line overdrafts.”

Before adopting the shadow line for debit card purchases, Wells Fargo added a notice to account statements and new account agreements indicating that, if an account had insufficient funds, it could choose to decline the transaction, or could choose to pay the item and charge an overdraft fee for a debit card purchase. (This notice was the subject of Smith, which involved whether the notice adequately disclosed the shadow line itself; the present case involves the high-to-low practice, and the disclosure is only relevant here because it didn’t adequately disclose the impact that high-to-low would have on overdraft fees.) The court found this notice inadequate to constitute fair warning. First, at all times, all banks have the option under commercial law to pay an item into overdraft or to decline to do so. The real change was a switch from routine denial to routine approval without point-of-sale notice. Second, the notice warned that the customer “may” be charged a fee, but the conditional language was misleading, as was the implication that there’d be “a fee” instead of possibly ten fees, at $35 each. In short, the insert vastly understated the risks that the shadow line would amplify the impact of high-to-low, which was likely to deceive class members.

The record also included hundreds of customer complaints expressing indignation that transactions were "re-dated," "re-arranged," and "manipulated" from the order in which they had occurred. (These were admissible to show that “depositors were assessed large overdrafts and that customers--once informed of the bank's rationale--disagreed that high-to-low resequencing was for the depositor's benefit.”) The court agreed that “Wells Fargo constructed a trap--a trap that would escalate a single overdraft into as many as ten through the gimmick of processing in descending order. It then exploited that trap with a vengeance, racking up hundreds of millions off the backs of the working poor, students, and others without the luxury of ample account balances.”

The court then turned to Wells Fargo’s ability to engage in the business of banking. Federal law doesn’t preempt general laws banning deception by all businesses. The court found that enforcing plaintiffs’ claims would only have an incidental effect, and would not “obstruct, impair, or condition” the bank’s ability to exercise its deposit-taking powers. For years, Wells Fargo used low-to-high and other posting methods. And it’s complied with far more restrictive laws in Nevada barring high-to-low simply by posting transactions differently in Nevada; it also posts them differently in New Mexico and Washington. Thus, there was no conflict or other preemption.

Conclusions of law: these practices were both unfair and fraudulent under Section 17200. Unfairness requires plaintiffs to (1) identify an unfair policy or practice tethered to a legislatively declared policy or (2) show an actual or threatened impact on competition. Here, the unfairness claim was properly tethered to the legislative comment to California Commercial Code Section 4303(b), which addresses the relationship between the bank and presenters of items for payment. The code generally gives banks discretion to pay items in any order, subject to a legislative comment that “[t]he only restraint on the discretion given to the payor bank … is that the bank act in good faith. For example, the bank could not properly follow an established practice of maximizing the number of returned checks for the sole purpose of increasing the amount of returned check fees charged to the customer.” The comment also made clear that the bank’s discretion was item-by-item, allowing the bank to prioritize a check to the IRS, or another check, if it "appears to be particularly important."

The court ruled that computer-driven resequencing isn’t the exercise of item-by-item discretion, which fed into the court’s conclusion that the posting discretion afforded by California law “must be exercised in good faith towards the customer and may not be exercised solely to drive up overdraft fees.” “Wells Fargo itself argued that Section 4303(b) applied to both checks and debit cards when it raised this section as a shield to liability--albeit without expecting anyone to read the legislative comment.” The court also pointed out that relying on California law was in tension with the preemption argument.

Even without the California version of the UCC, there is an implied covenant of good faith and fair dealing in the exercise of its contractual discretion that the bank breached. Express grants of discretion are subject to the reasonable expectations of the parties, which were violated here. The public interest is also important in determining the parties’ reasonable expectations in the context of adhesion contracts. The legislative comment to §4303(b) evidences California policy to ensure that banks act in good faith when reordering transactions and not attempt to ramp up overdraft fees. Given the ambiguous at best language in the contract on posting order, even a sophisticated customer could reasonably have believed that Wells Fargo hadn’t yet chosen high-to-low or would implement it on an item-by-item basis. Ambiguities are resolved against the drafter. Moreover, the contract stated that posting order would be subject to laws requiring or prohibiting a particular order, meaning that Wells Fargo subjected itself to the good faith limitations of California law.

Consumers reasonably expect overdraft fees, but not what happened here: consequences so severe and pernicious that they should be allowed, if at all, only by showing that they were reasonably expected by the parties. “Here, the proof is the opposite. The bank went to great lengths to bury the words deep in a lengthy fine-print document and the words selected were too vague to warn depositors, as even the bank's own expert conceded.”

Wells Fargo acted in bad faith, motivated solely by avarice, in posting debit card transactions high-to-low, commingling debit card transactions with others, and using the shadow line to increase overdrafts, thus making its conduct unfair. Wells Fargo argued that it wasn’t seeking to maximize overdraft fees, because it posted credits to accounts before debits, offered overdraft protection services, limited overdrafts to ten a day, and eventually put a one-dollar “courtesy threshold” in place before assessing overdraft fees. “That Wells Fargo could have gouged even worse than it has hardly alters the fact that it has gouged badly. Plaintiffs do not need to prove that the bank mistreated depositors in every way possible in order to show that they were mistreated.” The challenged practices were implemented for the sole purpose of multiplying overdrafts. Overdraft protection, which is another profit center for the bank, didn’t change the intent of high-to-low to squeeze more overdrafts out of consumers.

Wells Fargo also blamed consumers: if they’d simply avoided overdrafting their accounts, they’d have avoided the fees, and thus Wells Fargo’s conduct couldn’t be unfair. The court disagreed. Of course “we should all live within our means,” and of course “when we overdraft, whether by accident or not, we must expect to pay a fee.…This, however, cannot justify turning what would ordinarily be one overdraft into as many as ten.”

Likewise, Wells Fargo’s conduct was fraudulent in that reasonable consumers were likely to be deceived by poor disclosure and misleading promotions focusing on chronological accounting. (The court noted that it’s fine to promote the use of check registers—but wrong to lead customers to expect that items will be deducted in chronological order if they won’t be.) If Wells Fargo was going to gouge consumers like this, it should have prominently disclosed its high-to-low scheme and its effects. It didn’t.

The court declined to order relief on the negligent misrepresentation and fraud claims, since the Section 17200 claims were established; false advertising under Section 17500 also followed from the finding of fraudulent conduct.

Under Prop. 64, plaintiffs must prove actual reliance to have standing to bring fraud-based Section 17200 claims on behalf of absent class members. Under the Tobacco II cases, the class plaintiffs here did so by proving that deceptions were “an immediate cause” of their injury; they didn’t need to show that deception was the sole or even the predominant or decisive factor, as long as the representation at issue played a substantial part in influencing their decisions. Additionally, where a plaintiff has been exposed to "an extensive and long-term advertising campaign," proof of individualized reliance on specific misrepresentations or false statements is not required. Gutierrez and Walker clearly met these standards.

The court further rejected Wells Fargo’s argument that the classwide misrepresentation claims had to be “surgically and precisely limited” to those identical to the class plaintiff’s, including the exact documents at issue. Tobacco II: “Representative parties who have a direct and substantial interest have standing; the question whether they may be allowed to present claims on behalf of others who have similar, but not identical, interests depends not on standing, but on an assessment of typicality and adequacy of representation.”

The relief granted was limited to high-to-low resequencing. The Federal Reserve dealt with the shadow line by requiring opt-in and mandating disclosure of the downsides of opt-in (though banks are already trying to figure out how to convince consumers to do so anyway). This regulation was instructive to the court’s order of injunctive relief. As of November 30, Wells Fargo was ordered to cease high-to-low posting for debit card transactions for class members, either using low-to-high or chronological posting, or some combination.

In addition, the court ordered restititution for wrongful extraction of overdraft fees. In order to prevent wrongdoers from benefiting from their misconduct, relief under the UCL is available without individualized proof of deception, reliance, or injury if necessary to prevent the use of an unfair practice. Thus, absent class members need not show on an individualized basis that they’ve lost money or property as a result of the unfair practice. That said, restitution must be restitution: the return of money obtained through an unfair business practice to those persons from whom the money was taken.

The court concluded that chronological posting was the best way to measure the appropriate restitution, rather than low-to-high. Low-to-high is more favorable to depositors, and was the prior system, but the plaintiffs’ case had as a theme that the bank promoted an expectation of chronological posting. Plaintiffs’ expert showed that it was entirely practical to re-run the stored data for each class member’s account to determine how many overdrafts were added by high-to-low. In fact, he did so (after receiving the data pursuant to court order).

The court set forth the proper sequence for calculating restitution, posting credits and priority debit transactions (cash withdrawals and equivalents), then debit card transactions in chronological order (and after that low-to-high where there was no date/time information), and finally checks and automated transactions high-to-low. This preserved the usual and customary order of everything else while fixing the debit card transactions, as opposed to commingling or putting checks and automatic transactions first. The court described Wells Fargo’s proposal as “radical rearrangements and manipulations of credits, checks, and [automatic] transactions … to artificially minimize the restitution awarded to the class.”

The court also specifically noted that a small percentage of debit card transactions (16%) lacked date/time information, but “it makes very little difference in the aggregate whether these transactions without date/time information are posted before or after the chronologically sequenced debit-card transactions that did have date/time information,” a conclusion with which the bank’s own expert agreed. Moreover, data deficiencies in the computer systems used to power the bank’s unlawful practices shouldn’t be used to avoid restitution. “It would not be equitable to allow the bank to extract hundreds of millions of dollars through unfair and fraudulent business practices and then use the supposed inadequacies of its own record-keeping system to shield itself from restitution.”

This calculation excluded overdraft fees that would have been assessed regardless of sequencing, such as overdraft fees solely attributable to the shadow line, as well as overdraft fees the bank never managed to collect, class opt-outs, and overdraft fee reversals. The result was close to $203 million.

Wells Fargo argued that plaintiffs’ studies failed to take the shadow line into account. The court found this a red herring. First, plaintiffs were never provided with the proper tools to investigate the shadow line. “Instead, they were provided with a bare algorithm--without any accompanying instructions--that would take years to decipher and many guesses along the way.” The bank’s own restitution expert couldn’t program the shadow line from scratch, instead using Wells Fargo’s preprogrammed system for his forensic calculations, “a luxury denied to plaintiffs' expert.” Second, all of the bank's analyses were based on 10 days’ worth of customer data (as compared to the 43 months of data analyzed by plaintiffs). “This strips the bank's arguments of all weight and credibility.”

Wells Fargo is, of course, appealing. And the peasants are revolting.