The U.S. Court of Appeals for the Sixth Circuit recently held that a consumer plaintiff’s breach of contract claim against a defendant bank failed where the bank processed the consumer’s transactions in accordance with the terms of the agreement with the consumer, even though the transactions were not processed in the order they were made by the consumer, which resulted in a greater number of non-sufficient funds (“NSF”) charges.
The Court further held that the bank did not violate the agreement’s limit of five NSF charges per day where it initially charged eight NSF fees to the account before manually removing three charges the next business day.
A copy of the opinion in Lossia v. Flagstar Bankcorp, Inc. is available at: Link to Opinion.
The consumer plaintiff opened a joint checking account with the defendant bank, which was subject to the bank’s “Terms and Conditions” disclosure guide (“agreement”). The agreement discussed the method by which the bank would process transactions, including Automated Clearing House (“ACH”) transactions.
Specifically, the agreement provided that “[o]ur policy is to process . . . ACH transactions . . . first – as they occur on their effective date for the business day on which they are processed.”
The agreement also stated that it was “subject to . . . payment processing system rules,” which included the National Automated Clearing House Association Operating Rules and Guidelines (“NACHA Guidelines”).
The NACHA Guidelines defined the effective date of an ACH transaction as “the date specified by the Originator on which it intends a batch of Entries to be settled.”
As you may recall, there are five parties to an ACH transaction: (1) the originator (the merchant with whom the plaintiff did business), (2) the originating depository financial institution (the merchant’s bank), (3) the ACH operator (the Federal Reserve), (4) the receiver (plaintiff), (5) the receiving depository financial institution (the bank).
Thus, in practice, the effective date under the agreement was the date the merchant or merchant’s bank chose to submit the transaction to the Federal Reserve. The Federal Reserve then includes that settlement date on the batch records it submits to the bank, and the bank processes the transactions in the order that they are presented by the Federal Reserve in batch files.
Between Wednesday, Feb. 25 and Saturday, Feb. 28, 2015, the plaintiff authorized merchants to initiate a series of 10 ACH transactions to be debited from the plaintiff’s checking account with the bank. The plaintiff did not have sufficient funds in his account to pay for the transactions. Each of the relevant transactions was processed by the bank on Monday, March 2, 2015.
The transactions were not processed in the order the plaintiff initiated them with the largest transaction last, which would have caused him to have only one overdraft fee, but instead the largest transaction was processed first, which caused the plaintiff to initially incur eight overdraft fees on March 2, although three were manually reversed.
The plaintiff thereafter filed a complaint asserting claims for breach of contract for (1) failing to process the transactions in the order he initiated them, and (2) initially posting eight overdraft charges on March 2 in violation of the agreement’s cap of five overdraft charges per day. The bank filed a motion for summary judgment, which was granted by the trial court. The plaintiff timely appealed.
On appeal, the plaintiff argued that because the bank’s policy was to process ACH transactions “as they occur on their effective date,” and because “occur” is defined in common parlance to mean “to come into existence,” that “[a]ny reasonable person” reading the agreement would conclude that “occur” means the order in which the plaintiff initiated the transaction.
The Sixth Circuit rejected the plaintiff’s argument for two reasons.
First, the agreement stated transactions would be processed as they occur “on their effective date,” not necessarily the actual date that each transaction was initiated. Under the guidelines, which were incorporated into the agreement, the term “effective date” means the “date specified by the Originator on which it intends a batch of Entries to be settled.”
Second, the unrebutted evidence demonstrated that the bank followed the terms of the agreement in how it processed the plaintiff’s ACH transactions. As evidence, the bank produced copies of the batch files it received from the Federal Reserve, which were confirmed by the plaintiff’s billing statement showing his transactions were processed in the order in which they occurred in the Federal Reserve’s batch files.
The Sixth Circuit therefore held that “[t]here is no genuine dispute as to any material fact on [plaintiff’s] ordering-of-transactions claim.”
With respect to his overdraft-fees claim, the plaintiff argued that the bank breached the agreement by initially imposing eight overdraft fees on March 2, even though the agreement stated that “[t]here is a combined limit of five Non-Sufficient Funds Charges per business day.”
The Sixth Circuit again rejected the plaintiff’s claim, determining that the bank “provided unrebutted evidence that [the bank’s] computer system is programmed to generate a list of customers who have had more than five overdraft fees assessed in a day,” and that the bank “manually reverses these additional fees for all affected customers the next business day,” which was what occurred with respect to the plaintiff’s account.
The Sixth Circuit determined that as a result, the plaintiff was not required to pay more than five overdraft charges, and there was no breach. Further, “even if we construe the initial posting of eight fees as a breach of the Agreement, the next-business-day reversal eliminated [plaintiff’s] damages, preventing [plaintiff] from establishing another element necessary for a breach-of-contract claim.”
Thus, the Sixth Circuit held “[t]here is no genuine dispute as to any material fact on [plaintiff’s] overdraft-fees claim.”