Lloyd et al v. Navy Federal Credit Union

Filing 33

ORDER granting in part and denying in part Defendant's 9 Motion to Dismiss. Court denies the motion to dismiss Plaintiffs' breach of contract claim and conversion claim. Court grants with prejudice the motion to dismiss Plaintiffs' ; unjust enrichment claim and California Consumer Legal Remedies Act (CLRA) Claim. Court grants without prejudice the motion to dismiss Plaintiffs' breach of implied covenant of good faith and fair dealing claim and Unfair Competition Law (UCL) claim. Plaintiffs are granted leave to amend the First Amended Complaint. Plaintiffs may file Second Amended Complaint by 5/4/2018. Failure to file a Second Amended Complaint by this date will result in the case proceeding only as to the claims not dismissed by this Order. Signed by Judge Cynthia Bashant on 4/12/2018. (jah)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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JENNA LLOYD, et al.,

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Case No. 17-cv-1280-BAS-RBB
Plaintiffs,

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v.

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NAVY FEDERAL CREDIT UNION,

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ORDER GRANTING IN PART
AND DENYING IN PART
DEFENDANT’S MOTION TO
DISMISS
[ECF No. 9]

Defendant.

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Presently before the Court is Navy Federal’s motion to dismiss the First

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Amended Complaint (“FAC”) in its entirety. (ECF No. 9.) Plaintiffs have opposed

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the motion (ECF No. 11) and Navy Federal has replied in support of dismissal (ECF

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No. 12). For the reasons herein, the Court grants in part and denies in part Navy

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Federal’s motion to dismiss.

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I.

BACKGROUND

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A.

Factual Background

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Navy Federal is a national bank with its headquarters and principal place of

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business located in Vienna, Virginia. (FAC ¶27.) Navy Federal’s banking services

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include the issuance of debit cards associated with its customers’ checking accounts.

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(Id.) The debit cards allow Navy Federal’s customers to have electronic access to

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their checking accounts for purchases, payments, withdrawals, and other electronic
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debit transactions. (Id. ¶29.) Plaintiffs Lloyd and Plemons are citizens of California

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who have accounts and debit cards with Navy Federal and patronized its banking

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centers located in southern California. (Id. ¶¶26, 28.) They seek to represent a

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national class of Navy Federal customers charged overdraft fees on transactions

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authorized into a positive account balance and a sub-class of Navy Federal customers

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in California. (Id. ¶84.)
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Navy Federal’s Debit Card Transaction Procedure

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Integral to Plaintiffs’ FAC is Navy Federal’s debit card transaction procedure.

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Plaintiffs allege Navy Federal maintains a running account balance in real time,

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which tracks funds consumers have for immediate use, which is adjusted in real time

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to account for debit card transactions when they are made. (Id. ¶5.) This procedure

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occurs in two steps. First, a merchant instantaneously obtains authorization for the

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purchase amount of a debit card transaction from Navy Federal, which verifies that

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a customer’s account is valid and has sufficient funds to cover a transaction amount.

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(Id. ¶31.)

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decrements the amount of the funds in a customer’s account and sequesters the funds,

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but does not yet transfer the funds to a merchant. (Id. ¶¶2, 5, 32, 50, 52.) At a later

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point, which can be several days after the transaction, the sequestered funds are

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transferred from the customer’s account to the merchant’s account, a process known

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as settling. (Id. ¶34.) Plaintiffs allege that the purpose of sequestering the funds is

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to ensure there are sufficient funds in the account to pay for the transaction when it

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settles. (Id. ¶33.) The sequestered funds are not available for any other use by the

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customer. (Id. ¶2.)

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Second, for an approved transaction, Navy Federal immediately

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Navy Federal’s Account Agreements and Alleged Unlawful
Imposition of Overdraft Fees

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Navy Federal allegedly charges and collects overdraft fees on debit card

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transactions for which there were sufficient available funds to cover the transactions

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in violation of the Account Agreements1, resulting in millions more dollars of profit

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to Navy Federal. (Id. ¶¶3, 10, 18, 20, 22, 48–49, 51.)

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The key agreement on which the FAC focuses is the Opt-In Form, titled “What

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You Need to Know About Overdrafts and Overdraft Fees.” (FAC ¶36; Ex. A (“Opt-

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in Form”).) This document is Navy Federal’s standardized contract dealing with

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overdraft fees and Navy Federal’s “Optional Overdraft Protection Service”

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(“OOPS”). (Id. ¶37.) An individual may opt into OOPS by completing the form.

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(See Opt-in Form.) The form identifies the terms and conditions of OOPS, including

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that Navy Federal charges a $20 fee each time Navy Federal pays an overdraft. (FAC

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¶¶3, 30; Opt-in Form at 1.)

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Plaintiffs identify certain provisions of the Opt-in Form at issue here. First,

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the Opt-in Form provides that: “[a]n overdraft occurs when you do not have enough

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money in your account to cover a transaction, but we pay it anyway.” (FAC ¶12;

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Opt-in Form at 1.) Plaintiffs allege that this provision means that Navy Federal

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promises it will only charge an overdraft fee on a given transaction for which there

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are insufficient funds to cover. (FAC ¶¶12, 38.) Plaintiffs allege that when a debit

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card transaction is approved on a positive account balance and funds are sequestered,

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there are always sufficient funds available to cover the transaction when it settles.

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(Id. ¶¶2, 8, 13, 20, 39–40.) Navy Federal allegedly violates this contractual promise

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Plaintiffs have attached to the FAC Navy Federal’s Opt-in Form for overdraft
protection and Navy Federal’s “Important Disclosures,” a document setting forth the
terms governing Plaintiffs’ accounts with Navy Federal. (FAC Ex. A (“Opt-In
Form”); Ex. B (“Important Disclosures”).) Because these documents are attached to
the FAC, the Court may properly consider these documents. See Davis v. HSBC
Bank Nev., N.A., 691 F.3d 1152, 1160 (9th Cir. 2012). Navy Federal also directs the
Court to its Debit Card Disclosure as an agreement which sets forth the terms
applicable to its customers’ debit card transactions. (ECF No. 9-2 Ex. B (“Debit Card
Disclosure”).) The Court finds that the Debit Card Disclosure is incorporated by
reference into the FAC. Davis, 691 F.3d at 1160. Plaintiffs have not objected to this
determination. The Court herein refers to the Opt-In Form, Important Disclosures,
and Debit Card Disclosure as the “Account Agreements”.
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by authorizing transactions on positive funds and setting the funds aside to pay those

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transactions when they settle, but then failing to use those funds when the transactions

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settle. (Id. ¶¶17, 18, 44.) Acknowledging that the term “to cover” is not defined,

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Plaintiffs further allege that Navy Federal abuses its contractual discretion to define

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the term so that a transaction is not covered when it settles even if sufficient funds

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existed for the transaction when it was authorized. (Id. ¶61.)

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Second, Plaintiffs allege that the Opt-in Form links authorization of a

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transaction with payment. The Form states that Navy Federal “may authorize and

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approve” certain transactions under OOPS. (Id. ¶41.) Plaintiffs allege that this

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statement reflects a contractual promise that transactions are only OOPS transactions

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when they are authorized and approved into a negative balance. (Id. ¶¶15, 42.) Navy

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Federal allegedly links authorization and payment of a transaction in the Opt-in

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Form’s statement that: “We pay overdrafts at our discretion, which means that we

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do not guarantee that we will always authorize and pay any type of transaction. If

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we do not authorize and pay an overdraft, your transaction will be declined and/or

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your check/ACH will be returned.” (Id. ¶¶16, 43; Opt-in Form.) Plaintiffs allege

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that despite sequestering funds for payments of debit card transactions authorized

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into positive balance, Navy Federal re-debits the amount to an account during a

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“secret batch posting process.” (FAC ¶¶19, 53, 56.) By doing so, Plaintiffs allege

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that Navy Federal assays the same debit card transaction twice to determine if the

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transaction overdraws an account—both at the time the transaction is authorized and

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at the time it settles. (Id. ¶54.) Plaintiffs allege that the available balance does not

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change for transactions previously authorized into positive funds.

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However, Navy Federal allegedly abuses its contractual discretion by knowingly

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authorizing transactions that consume funds previously sequestered for debit card

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transactions. (Id. ¶¶10, 62.) Consequently, Navy Federal assesses overdraft fees on

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the debit card transaction when it settles. (Id. ¶57.)

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(Id. ¶55.)

Plaintiffs further allege that Navy Federal’s representations and promises in
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the Account Agreements are untrue in light of Navy Federal’s alleged conduct. (Id.

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¶¶11, 18, 45.) They allege that reasonable consumers are likely to understand that

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funds for a debit card transaction are likely to be debited immediately such that they

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cannot be depleted by intervening transactions. (Id. ¶¶64–71.)

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3.

Allegations Concerning the Named Plaintiffs

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Neither Lloyd, nor Plemons disputes Navy Federal’s assessment of overdraft

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fees on their ATM withdrawals, but rather whether Navy Federal properly charged

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overdraft fees on debit card transactions that Navy Federal authorized into sufficient

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funds. (Id. ¶¶74, 77–78, 81–82.)

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Plaintiff Lloyd alleges that she was assessed improper overdraft fees on two

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occasions. First, on October 27, 2014, Plaintiff Lloyd was assessed three overdrafts

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for six transactions which settled that day, five of which were debit card transactions

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initiated on or prior to October 26, 2014. (Id. ¶72.) Positive funds allegedly were

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deducted immediately for at least three of the debit card transactions for which she

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was assessed overdraft fees. (Id.) Lloyd alleges that overdraft fees for these debit

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card transactions were assessed solely because of a $260 ATM withdrawal she made

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after her debit card transactions were initiated. (Id. ¶73.) Second, on January 31,

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2014, Lloyd was assessed three overdrafts for four transactions, three of which were

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debit card transactions. (Id. ¶75.) Positive funds were allegedly deducted for at least

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two of the debit card transactions on which she was assessed overdraft fees. (Id.)

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Lloyd alleges that overdraft fees for these debit card transactions were incurred solely

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because of a $400 ATM withdrawal she made after “some or all” of the debit card

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transactions were initiated. (Id. ¶76.)

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Plaintiff Plemons alleges that he was assessed improper overdraft fees on

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February 18, 2014. Navy Federal allegedly assessed three overdraft fees for three

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transactions, two of which were debit card transactions initiated on or prior to

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February 15, 2014. (Id. ¶79.) Positive funds were allegedly deducted immediately

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for at least two of the debit card transactions on which Plemons was assessed
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overdraft fees. (Id.) Plemons alleges that overdraft fees for these debit card

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transactions were assessed solely because of an $82.75 withdrawal that he made after

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the debit card transactions were initiated. (Id. ¶80.)

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B.

Procedural Background

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On June 22, 2017, Plaintiffs filed a putative class action complaint against

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Navy Federal for breach of contract, breach of the implied covenant of good faith

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and fair dealing, conversion and unjust enrichment on behalf of a national class of

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Navy Federal customers. (ECF No. 1.) On behalf of a California sub-class, Plaintiffs

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alleged claims under California’s Unfair Competition Law (“UCL”), Cal. Bus. &

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Prof. Code §17200, et seq., and Consumer Legal Remedies Act (“CLRA”), Cal. Civ.

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Code §1750, et seq. (Id.) Plaintiffs filed the First Amended Complaint two months

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later, asserting the same causes of action against Navy Federal. (ECF No. 4.) Navy

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Federal filed its motion to dismiss the FAC under Rule 12(b)(6) on September 5,

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2017. (ECF No. 9.) After completion of the motion to dismiss briefing, Plaintiffs

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moved to file a notice of supplemental authority in support of their opposition to

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Navy Federal’s motion, which the Court granted. (ECF Nos. 16, 18.) Pursuant to a

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request from the Court (ECF No. 24), both parties submitted supplemental briefing

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on March 13, 2018, regarding a choice of law issue raised in the motion to dismiss

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briefing. (ECF Nos. 29, 30.) The Court now turns to the merits of Navy Federal’s

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motion to dismiss.

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II.

LEGAL STANDARD

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Federal Rule of Civil Procedure 8(a)(2) requires that a complaint set forth “a

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short and plain statement of the claim showing that the pleader is entitled to relief,”

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in order to “give the defendant fair notice of what the . . . claim is and the grounds

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upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting

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Conley v. Gibson, 355 U.S. 41, 47 (1957)). A Rule 12(b)(6) motion to dismiss tests

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the sufficiency of the complaint. N. Star Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578,

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581 (9th Cir. 1983). For the purposes of such a motion, the court accepts as true the
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allegations in the complaint and construes those allegations in the light most

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favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). To

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survive a Rule 12(b)(6) motion, a plaintiff is required to set forth “enough facts to

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state a claim for relief that is plausible on its face.” Twombly, 550 U.S. at 570. “A

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claim has facial plausibility when the plaintiff pleads factual content that allows the

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court to draw reasonable inferences that the defendant is liable for the misconduct

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alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Factual allegations must be

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enough to raise a right to relief above the speculative level. Twombly, 550 U.S. at

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556. The court need not accept as true legal conclusions pled in the guise of factual

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allegations. Clegg v. Cult Awareness Network, 18 F.3d 752, 754–55 (9th Cir. 1994).

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Relatedly, a pleading is insufficient if it offers only “labels and conclusion” or “a

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formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555;

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Iqbal, 556 U.S. at 676. In ruling on a 12(b)(6) motion to dismiss, a court may

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consider materials submitted as part of the complaint. Lee v. City of L.A., 250 F.3d

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668, 688–89 (9th Cir. 2001).

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III.

DISCUSSION

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A.

Choice of Law Issues

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The Court must first determine the appropriate law that applies to Navy

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Federal’s motion to dismiss. The Account Agreements state that Virginia law

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governs their interpretation and application. (Important Disclosures at 4; Debit Card

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Disclosure at 1.) Navy Federal argues that these provisions warrant application of

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Virginia law to Plaintiffs’ common law claims. (ECF No. 9-1 at 14 n.4; ECF No.

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29.) Plaintiffs contend that the provisions are unenforceable as to their CLRA and

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UCL claims.

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To resolve a choice of law dispute, a federal court sitting in diversity must

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apply the forum state’s choice-of-law rules to determine the controlling substantive

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law. Fields v. Legacy Health Sys., 413 F.3d 943, 950 (9th Cir. 2005). A federal court

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sitting in diversity in California follows California choice-of-law rules. Yeiser
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Research & Dev. LLC v. Teknor Apex Co., 281 F. Supp. 3d 1021, 1036 (S.D. Cal.

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2017). Like federal courts in the Ninth Circuit, California state courts look to the

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Restatement (Second) of Conflicts of Law (1971) for its choice-of-law rules. See In

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re Zukerkon, 484 B.R. 182, 188 (9th Cir. 2012); Nedlloyd Lines B.V. v. Superior

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Court, 834 P.2d 1148, 1151 (Cal. 1992). Section 187 of the Restatement applies

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where parties have entered into an agreement, negotiated at arm’s-length, which

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selects a particular state’s law to govern their contractual rights and duties. See

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Nedlloyd, 834 P.2d at 1151. To determine whether the choice-of-law provision is

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enforceable, a court must engage in a two-step analysis. First, the court must

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determine whether: (1) the chosen state has a substantial relationship to the parties or

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their transaction, or (2) there is any other reasonable basis for the parties’ choice of

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law. Id. at 1152. Second, if either is shown, the court must next determine whether

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the chosen state’s law is contrary to a fundamental policy of California. Id. “[A]

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separate choice of law inquiry must be made with respect to each issue in the case.”

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Wash. Mut. Bank v. Superior Court, 15 P.3d 1071, 1081 (Cal. 2001). The Court finds

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that Virginia law applies to Plaintiffs’ breach of contract and related common law

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claims under the choice of law provisions.

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unenforceable as to Plaintiffs’ California consumer protection statutory.

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However, the provisions are

Virginia Law Applies to the Contract Claim and Related
Common Law Claims

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As the party advocating application of the contractual choice of law provision,

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Navy Federal has met its burden to establish either a substantial relationship or

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reasonable basis for application of Virginia law. See Pulte Home Corp. v. Am. Safety

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Indem. Co., No. 16-cv-02567, 2017 WL 3007215, at *3 (S.D. Cal. July 14, 2017).

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Plaintiffs allege that Navy Federal is headquartered and has its principal place of

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business in Virginia. (FAC ¶27.) A substantial relationship exists if a party has its

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principal of place of business and corporate headquarters in the chosen state. In re

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Facebook Biometric Info. Privacy Litig., 185 F. Supp. 3d 1155, 1168–69 (N.D. Cal.
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2016) (substantial relationship shown for selection of California law because party

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had principal executive offices and corporate headquarters in California) (citing

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Peleg v. Neiman Marcus Grp., Inc., 140 Cal. Rptr. 3d 38 (Cal. Ct. App. 2012)); ABF

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Capital Corp. v. Grove Properties Co., 23 Cal. Rptr. 3d 803, 810 (Cal. Ct. App. 2005)

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(although party was incorporated in Delaware, its principal place of business in New

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York met substantial relationship test for applying New York choice of law

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provision). The burden now shifts to Plaintiffs to show that application Virginia law

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would violate a fundamental policy of California. Pulte Home Corp., 2017 WL

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3007215, at *3. Plaintiffs readily concede in their supplemental choice of law

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briefing that application of Virginia law to their breach of contract claim is not

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contrary to a fundamental policy of California. (ECF No. 30 at 2.) Accordingly, the

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Court will apply Virginia law to this claim.

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Virginia law also applies to Plaintiffs’ claims that arise from or relate to the

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contract, specifically Plaintiffs’ claims for breach of the implied covenant of good

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faith and fair dealing, conversion, and unjust enrichment. California courts will apply

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an enforceable contractual choice-of-law provision to claims “arising from or related

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to” the contract, Nedlloyd, 834 P.2d at 1153. This is especially true when “the legal

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relationship between the[] parties emanates from th[e] Agreement and the

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interpretation of the Agreement will be a central issue” in the case. Olinick v. BMG

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Entm’t, 42 Cal. Rptr. 3d 268, 278–79 (Cal. Ct. App. 2006) (concluding that New

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York law applied to FEHA and wrongful discharge claims pursuant to a choice-of-

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law clause in the agreement which established the parties’ legal relationship). Here,

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both parties agree that Virginia law applies to Plaintiffs’ common law claims. (ECF

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No. 29 at 3; ECF No. 30 at 2–3.) The Court agrees because it is evident that the legal

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relationship between the parties emanates from the Account Agreements, the

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interpretation of which is central to this case.

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The Choice of Law Provision is Unenforceable as to Plaintiffs’

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California Consumer Protection Statutory Claims

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Plaintiffs contend that the contractual choice of law provision is unenforceable

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as to their California statutory claims under the CLRA and UCL because Virginia

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law is contrary to a fundamental public policy of California. (ECF No. 30 at 3.)

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Navy Federal acknowledges that it generally does not assert Virginia law applies to

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these claims, but rather contends that the claims are “underdeveloped” and fail under

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Rule 12(b)(6). (ECF No. 29 at 1 n.1.)2

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Under California law, a court must apply the law chosen by the parties unless

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“application of the law would be contrary to a fundamental policy of a state which

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has a materially greater interest than the chosen state in the determination of the

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particular issue and which . . . would be the state of the applicable law in the absence

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of an effective choice of law . . .” Nedlloyd, 834 P.2d at 1151 (emphasis added).

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“The mere fact that the chosen law provides greater or lesser protection than

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California law, or that in a particular application the chosen law would not provide

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protection while California law would, are not reasons for applying California law.”

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Medimatch, Inc. v. Lucent Techs., Inc., 120 F. Supp. 2d 842, 861–62 (N.D. Cal.

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2000). However, where another state’s laws offer greater or lesser protection that

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runs contrary to a fundamental policy of California, then California law applies. See

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Walter v. Hughes Commc’ns, Inc., 682 F. Supp. 2d 1031, 1041 (N.D. Cal. 2010).

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Both the CLRA and UCL reflect multiple fundamental policies of the state of

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California aimed at protecting California consumers with which Virginia law

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Navy Federal alternatively argues that the claims “appear to be disguised
breach of contract claims” and thus, to the extent Plaintiffs must prove an underlying
breach of contract, Virginia law applies. (ECF No. 29 at 1 n.1.) The Court rejects
this argument. The CLRA and UCL are aimed at addressing particular types of harms
to consumers, which undoubtedly includes harms consumers may face through their
contractual relationship with a defendant. Plaintiffs may properly assert independent
CLRA and UCL claims concerning such harms, which warrant their own choice of
law analysis.
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conflicts. See Van Slyke v. Capital One Bank, 503 F. Supp. 2d 1353, 1361–62 (N.D.

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Cal. 2007) Aral v. Earthlink, Inc., 36 Cal. Rptr. 3d 229, 244 (Cal. Ct. App. 2005);

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Am. Online, Inc. v. Superior Court, 108 Cal. Rptr. 2d 699, 712–13 (Cal. Ct. App.

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2001) (declining to apply Virginia law given remedial limitations on injunctive and

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class action relief under its consumer protection statute). Both statutes permit

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consumers to obtain relief via class action, whereas Virginia’s consumer protection

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laws do not. See Aral, 36 Cal. Rptr. 3d at 244; Am. Online, Inc., 108 Cal. Rptr. 2d at

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710–11 (contrasting “the absence of any provision in the VCPA that allows suits

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under the act to proceed as class actions” with “the right to seek class action relief in

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consumer cases [that] has been extolled by California courts.”); see also Van Slyke,

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503 F. Supp. 2d at 1361 (noting that “Virginia consumer protection laws generally

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do not allow for class actions” and “[t]hus, there is a substantial risk that a California

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fundamental public policy in favor of class actions would be harmed by applying

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Virginia law.”) The CLRA also contains an express antiwaiver provision which

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states that “[a]ny waiver by a consumer of the provisions of this title is contrary to

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public policy and shall be unenforceable and void.” CAL. CIV. CODE §1751.3 When

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juxtaposed with the availability of punitive damages under the CLRA, this provision

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provides an additional basis for determining that the CLRA reflects a fundamental

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policy of California. See Walter, 682 F. Supp. 2d at 1041 (“Given the CLRA’s anti-

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waiver provision and role as a deterrent and check on public harm, this Court

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concludes that punitive damages are in fact a ‘fundamental’ part of the statutory

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The CLRA’s antiwaiver provision also shifts the burden to the party seeking
enforcement of a contractual choice of law provision “to prove that enforcement of
the forum selection clause would not result in a significant diminution of rights to
California consumers.” Am. Online, Inc., 108 Cal. Rptr. 2d at 706; see also Walter,
682 F. Supp. 2d at 1038 (reading Am. Online, Inc. to apply to “a contractual clause
[that] could have the effect of waiving legal protections that are afforded by
California law and protected by an antiwaiver provision”). Navy Federal has made
no attempt to meet this burden, which provides an additional basis not to apply the
choice of law provision to the CLRA claims in particular.
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scheme”), Am. Online, Inc., 108 Cal. Rptr. 2d at 712 (observing the absence of

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punitive damages under Virginia’s consumer protection law). Plaintiffs have thus

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shown a fundamental conflict between California law and Virginia law.

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Having determined that there is a fundamental conflict, the next consideration

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is whether California has a materially greater interest in adjudication of the particular

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issues. Kissel v. Code 42 Software, Inc., SACV 15-1936-JLS (KESx), 2016 WL

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7647691, at *5 (C.D. Cal. April 14, 2016); Walter, 682 F. Supp. 2d at 1042. Courts

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have determined that California has a “stronger interest” in protecting its consumers

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through its chosen statutory scheme for doing so, which “permits its injured

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consumers not only to bring class actions to recover their losses, but also to seek

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punitive damages and injunctive relief in order to deter and prevent future harm to

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other consumers located in the state.” See Walter, 682 F. Supp. 2d at 1042;

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Oestreicher v. Alienware Corp., 502 F. Supp. 2d 1061, 1068 (N.D. Cal. 2007); Van

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Slyke, 503 F. Supp. 2d at 1361 (“California’s own anti-deception statutes take priority

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. . . in a California forum” in the context of “a Virginia bank operating in California

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and nationwide” and “California consumers” allegedly scammed), Am. Online, Inc.,

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108 Cal. Rptr. 2d at 713. This Court similarly concludes that California has a stronger

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interest in the adjudication of Plaintiffs’ consumer protection claims under the CLRA

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and the UCL. Here, the fact that both Plaintiffs are California citizens who seek to

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represent a sub-class of California residents with respect to their CLRA and UCL

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claims “certainly increases California’s interest in the litigation.” Oestreicher, 502

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F. Supp. 2d at 1068 (“[t]he state where a party to the contract is domiciled has an

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obvious interest in the application of its law protecting its citizens against the unfair

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use of superior bargaining power.” (quoting Klussman v. Cross Country Bank, 36

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Cal. Rptr. 3d 728, 740 (Cal. Ct. App. 2005))). Moreover, Plaintiffs allege that at all

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relevant times, they patronized Navy Federal banking centers located in California.

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(FAC ¶26.) Accordingly, the Court concludes that Account Agreements’ choice of

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Virginia law is unenforceable as to Plaintiffs’ CLRA and UCL claims.
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B.

Breach of Contract

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In their breach of contract claim, Plaintiffs allege that they contracted with

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Navy Federal for bank account deposit, checking, ATM, and debit card services.

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(FAC ¶96.) Navy Federal allegedly breached the terms of their Account Agreements

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by charging overdraft fees on transactions that were authorized into sufficient funds,

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but whose available balances were allegedly insufficient at the time the transactions

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settled. (Id. ¶¶45, 100.) Plaintiffs allege that no contractual provision authorized

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Navy Federal to charge overdraft fees on such transactions and Navy Federal broke

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its contractual promises to Plaintiffs. (Id. ¶¶46, 99.) Navy Federal argues that the

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terms of Account Agreements expressly permit its conduct and, thus, Plaintiffs’

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breach of contract claims are implausible. (ECF No. 9-1 at 15.) The Court does not

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agree that the Account Agreements speak with the clarity Navy Federal ascribes to

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them.

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Plaintiffs offer a reasonable interpretation of the Account Agreements, which

15

supports their breach of contract claim.

Rather, they contain ambiguities which prevent dismissal at this stage.

16

Under Virginia law, the elements of a breach of contract claim are: (1) a

17

legally enforceable obligation of a defendant to a plaintiff; (2) the defendant’s

18

violation or breach of that obligation; and (3) injury or damage to the plaintiff caused

19

by the breach or obligation. Hanbrack v. DRHI, Inc., 94 F. Supp. 3d 753, 760–61

20

(E.D. Va. 2015) (citing Filak v. George, 594 S.E.2d 610, 614 (Va. 2004)). Here,

21

Navy Federal and Plaintiffs refer to provisions in the Account Agreements (i.e., Opt-

22

In Form, the Important Disclosures, and the Debit Card Disclosure), which are

23

multiple, related agreements as bearing upon the sufficiency of Plaintiffs’ breach of

24

contract claim. “[W]hen parties have entered into two documents relating to a

25

business transaction, the writings will be construed together to determine the parties’

26

intent.” First Am. Bank of Virginia v. J.S.C. Concrete Constr., Inc., 523 S.E.2d 496,

27

500 (Va. 2000). Accordingly, as the parties do, the Court construes these documents

28

together to resolve Navy Federal’s challenge.
– 13 –

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1

The rules regarding dismissal of a breach of contract claim when the relevant
Where a contract’s terms are

2

agreement has been provided are well-settled.

3

unambiguous, resolution on a motion to dismiss is proper. Stocco v. Gemological

4

Inst. of Am., Inc., 975 F. Supp. 2d 1170, 1179 (S.D. Cal. 2013) (citing Bedrosian v.

5

Tenet Healthcare Corp., 208 F.3d 220 (9th Cir. 2000)). However, a breach of

6

contract claim may not be dismissed for failure to state a claim if the contract’s terms

7

are ambiguous. See Consul Ltd. v. Solide Enters., Inc., 802 F.2d 1143, 1149 (9th Cir.

8

1986); Leghorn v. Wells Fargo Bank, N.A., 950 F. Supp. 2d 1093, 1117 (N.D. Cal.

9

2013); Monaco v. Bear Stearns Residential Mortg. Corp., 554 F. Supp. 2d 1034, 1040

10

(C.D. Cal. 2008) (“Where the language leaves doubt as to the parties’ intent, the

11

motion to dismiss must be denied.”). Virginia law treats the question of whether a

12

contract is ambiguous as a question of law for a court to decide. See Noell Crane

13

Sys. GmbH v. Noell Crane & Serv., 677 F. Supp. 2d 852, 869 (E.D. Va. 2009) (citing

14

Nextel WIP Lease Corp. v. Saunders, 666 S.E.2d 317, 321 (Va. 2008)). “Contractual

15

language is ambiguous when it may be understood in more than one way or when it

16

refers to two or more things at the same time. However, a contract is not ambiguous

17

merely because the parties disagree as to the meaning of the terms used.” Va. Fuel

18

Corp. v. Lambert Coal Co., 781 S.E.2d 162, 166 (Va. 2016). Even if a court

19

determines that a contract is ambiguous as a matter of law, the ultimate resolution of

20

contractual ambiguity is a question of fact that a court cannot decide on a motion to

21

dismiss. See W.C. English, Inc. v. Rummel, Klepper & Kahl, LLP, No. 6:17-cv-0018,

22

2017 WL 2123878, at *3, 5 (W.D. Va. May 16, 2017) (citing Martin Marietta Corp.

23

v. Int’l Telecommc’ns Satellite Org., 991 F.2d 94, 97 (4th Cir. 1992)).

24

The parties dispute whether the Account Agreements are ambiguous.

25

Plaintiffs point to the Opt-In Form’s provision that “[a]n overdraft occurs when you

26

do not have enough money in your account to cover a transaction, but we pay it

27

anyway.” (FAC ¶38 (quoting Opt-In Form); ECF No. 11 at 8.) This provision is

28

undoubtedly central to Plaintiffs’ breach of contract claim. (See, e.g., FAC ¶¶2, 12–
– 14 –

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1

13, 18, 20, 31, 38–40, 100.) Plaintiffs argue that this provision is ambiguous because

2

the term “to cover” is undefined. (ECF No. 11 at 12.) Although Navy Federal

3

disputes the existence of contractual ambiguity in the Account Agreements based on

4

other provisions, it never addresses whether the Opt-In Form’s key provision

5

defining when an overdraft occurs is ambiguous.

6

Based on a review of the Account Agreements, the Court finds that the term

7

“to cover” is ambiguous. The Account Agreements do not clearly identify how funds

8

sequestered for a transaction authorized with positive funds are to be used when the

9

transaction is paid. If the term “to cover” means that funds sequestered from a

10

positive account balance will be used to pay for the transaction when it settles, then

11

it cannot be said that Navy Federal actually pays for the transaction and, under the

12

Account Agreements, no overdraft fee could be charged. However, if the term “to

13

cover” does not mean that sequestered funds are to be used to pay for the transaction

14

when it settles, then Navy Federal presumably does pay for the transaction, which

15

triggers its contractual authority to assess an overdraft fee on the transaction. The

16

Court cannot say that the Account Agreements clearly foreclose either interpretation.

17

Moreover, the provision in which “to cover” appears contains another ambiguity.

18

The provision uses the term “transaction” with no qualification. The Opt-In Form

19

can thus be fairly read to include either a consumer’s transaction with a merchant

20

(i.e., authorization of the transaction) or Navy Federal’s transaction with a merchant

21

(i.e., settlement with the merchant). The former reading would lend support to

22

Plaintiffs’ breach of contract claim by tethering Navy Federal’s overdraft

23

determination to the point when Navy Federal authorizes the transaction.

24

In the face of contractual ambiguities, Plaintiffs offer a reasonable

25

interpretation of the term “to cover”, in the context of other provisions in the Account

26

Agreements, which would foreclose overdraft fees on the debit card transactions at

27

issue here. First, Plaintiffs point to the hold process described in the Debit Card

28

Disclosure, which expressly provides that a temporary hold is immediately placed on
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1

the account at the time of a transaction and is removed when the transaction posts to

2

the account or within three days. (ECF No. 11 at 4 (citing FAC ¶17).) According to

3

Plaintiffs, if funds are held for a transaction authorized by Navy Federal into positive

4

funds, then those funds cannot properly be consumed by an intervening ATM

5

withdrawal. This is because the hold is only removed when the transaction posts to

6

an account and, thus, a previously posted ATM withdrawal cannot affect them. (ECF

7

No. 11 at 8.) Second, Plaintiffs point to a provision in the Account Agreements which

8

shows that debit card transactions are instantaneously authorized and approved and,

9

further, that authorization and payment are linked. (ECF No. 11 at 5 (citing FAC

10

¶¶14–16).) Plaintiffs point to the provision appearing in both the Opt-In Form and

11

Important Disclosures which states that “[w]e pay overdrafts at our discretion, which

12

means we do not guarantee that we will always authorize and pay any type of

13

transaction. If we do not authorize and pay an overdraft, your transaction will be

14

declined and/or your check/ACH will be returned.” (ECF No. 11 at 11; see also FAC

15

¶16; Important Disclosures at 2; Debit Card Disclosure at 1.) A reasonable reading

16

of this provision is that it links authorization of a transaction with payment of the

17

transaction, and particularly with respect to Navy Federal’s authorization and

18

payment of a transaction that results in an overdraft. If this is the case, then whether

19

a transaction is an overdraft that Navy Federal pays is determined at authorization.

20

Consequently, a transaction that was not authorized as an overdraft, such as those the

21

Plaintiffs allege, would not incur an overdraft fee.

22

To refute Plaintiffs’ interpretation, Navy Federal points to other provisions of

23

the Account Agreements which it contends “make plain that an overdraft occurs ‘on

24

the date the transaction is paid.’” (ECF No. 9-1 at 15 (citing Debit Card Disclosure

25

at 1).) Navy Federal points to provisions in the Opt-In Form, including: the provision

26

on which Plaintiffs rely (i.e., “[a]n overdraft occurs when . . . we pay it anyway”),

27

“[w]e will charge a fee of $20 each time we pay an overdraft”, and “[w]e pay

28

overdrafts at our discretion, . . .” (ECF No. 9-1 at 15–16.) None of these provisions,
– 16 –

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1

however, facially identifies the precise moment when Navy Federal pays an

2

overdraft. The provisions do not identify if Navy Federal pays an overdraft on the

3

date Navy Federal authorizes a consumer transaction with a merchant, pays a

4

merchant for a debit card transaction, or that Navy Federal makes an overdraft

5

determination on the date. Implicitly recognizing this, Navy Federal seeks to link its

6

overdraft assessment to the date when a transaction posts to an account, presumably

7

when the transaction settles. Navy Federal relies on a provision in the Important

8

Disclosures which states that: “Optional Overdraft Protection Service is not a loan

9

and must be repaid promptly and cannot extend beyond 30 days of the initial

10

transaction posting.” (Id. at 16 (citing Important Disclosures at 3) (emphasis in

11

motion).) It is not clear that this provision supports Navy Federal. By qualifying the

12

term “transaction” with the word “initial,” the provision could be read to mean that

13

an overdraft occurs prior to some final posting, i.e. prior to when the transaction

14

settles, which would lend support to Plaintiffs’ position.

15

Navy Federal also construes Plaintiffs’ breach of contract claims as concerning

16

the “order in which transactions are actually initiated.” (ECF No. 9-1 at 16 (citing

17

FAC ¶71).) In particular, the Important Disclosures indicate that all credits post to

18

an account first, followed by ATM withdrawals, and debit card transactions

19

thereafter. (Important Disclosures at 3.) Navy Federal argues that because the parties

20

expressly agreed that Navy Federal would post transactions to customer accounts in

21

a specified order, a breach of contract claim based on this allegation is implausible.

22

Navy Federal’s selective reading omits that Plaintiffs’ relevant allegation concerns

23

“a consumer perception that debit card transactions reduce an available balance in a

24

specified order—namely the order the transactions are actually initiated . . .” (FAC

25

¶71.) This allegation and the surrounding allegations (id. ¶¶64–71)—all of which

26

concern the perceptions of “reasonable consumers”—appear to actually concern

27

whether Navy Federal’s conduct might violate the UCL. However, accepting that

28

Plaintiffs’ breach of contract claim implicates the posting order, the Court is not
– 17 –

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1

persuaded that the posting order forecloses Plaintiffs’ claim. The order in which

2

transactions post to an account does not resolve whether funds previously sequestered

3

for a transaction authorized and approved into positive funds are used “to cover” that

4

transaction when it settles. As Plaintiffs observe, if a temporary hold lasts until the

5

transaction posts, then their previously posted ATM withdrawals could not consume

6

funds sequestered from positive funds. (ECF No. 11 at 10.)

7

Lastly, Navy Federal argues that dismissal of Plaintiffs’ breach of contract

8

claim is warranted based on the decision in Roberts v. Capital One, N.A., 16 Civ.

9

4841 (LGS), 2017 WL 1750445 (S.D.N.Y. May 4, 2017). In Roberts, the plaintiffs

10

alleged that their account agreements with the defendant bank foreclosed the

11

defendant from charging overdraft fees if a customer’s balance was positive at the

12

time a merchant requested purchase authorization, but negative when the merchant

13

was paid. Id. at *3. This is the thrust of Plaintiffs’ breach of contract claim here.

14

The Roberts court found that the plaintiffs’ interpretation of their account agreements

15

was “unreasonable as a matter of law” because (1) no provision required the

16

defendant to make an overdraft determination at the time of purchase authorization

17

and (2) the agreements expressly provided that an overdraft occurred when the

18

defendant paid, rather than authorized a transaction. Id. Navy Federal’s reliance on

19

the district court decision in Roberts, however, is betrayed by the Second Circuit’s

20

reversal of dismissal of the contract claims. See Roberts v. Capital One, N.A., No.

21

17-1762, — Fed. App’x —, 2017 WL 5952720, at *2–3 (2d Cir. Dec. 1, 2017).4 The

22

Second Circuit determined that a “key provision” of the account agreements which

23

purported to define the term “overdraft” failed to provide “a definite and precise

24

meaning” of the term and it was reasonable to understand the term to mean the

25

defendant’s election to make a payment at the time of authorization or at the time of

26
27
28

Plaintiffs’ notice of supplemental authority concerned the Second Circuit’s
decision on appeal. (ECF No. 16.)
4

– 18 –

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1

settlement. Id. at *2.5 Of particular relevance, the Second Circuit rejected the

2

defendant bank’s reliance on a contractual provision identical to the one on which

3

Plaintiffs rely here: “[a]n Overdraft occurs when you do not have enough money in

4

your designated account to cover a transaction, but we pay it anyway.” Id. at *3. The

5

Second Circuit determined that the provision’s use of the term “transaction” could

6

plausibly refer to the consumer’s transaction with the merchant, rather than the

7

bank’s settlement of the transaction with a merchant. Id. Although the Second

8

Circuit’s decision is not binding, it lends persuasive force to Plaintiffs’ position that

9

the Account Agreements here are ambiguous as a matter of law given certain nearly

10

identical contractual provisions and the use of imprecise terms.

11

Moreover, as Plaintiffs observe in opposition (ECF No. 11 at 12–16), federal

12

courts have generally denied motions to dismiss breach of contract claims involving

13

imposition of overdraft fees due to contractual ambiguity. See, e.g., Ramirez v.

14

Baxter Credit Union, No. 16-cv-03765-SI, 2017 WL 1064991, at *5 (N.D. Cal. Mar.

15

21, 2017) (denying dismissal of breach of contract claim due to contractual

16

ambiguities regarding method defendant used to determine a customer’s balance for

17

assessing overdrafts); Pinkston-Poling v. Advia Credit Union, 227 F. Supp. 3d 848,

18

854–55 (W.D. Mich. 2016) (denying motion to dismiss where account agreement did

19

not define the term account or state how sufficient funds were determined for the

20

purposes of overdrafts); Gunter v. United Fed. Credit Union, No. 3:15-cv-00483-

21

MMD-WGC, 2016 WL 3457009, at *3 (D. Nev. June 22, 2016) (denying to motion

22

to dismiss where account agreements regarding overdrafts were ambiguous and

23
24

The specific “key provision” in Roberts was: “We may in our sole discretion,
and without obligation, elect to pay checks and other items drawn on your deposit
account or to permit automatic bill payments and withdrawals against your account
for an amount in excess of your available balance (an ‘Overdraft’).” Roberts, — Fed.
App’x —, 2017 WL 5952720, at *2. Like the key provision in Roberts, the key
provision in this case attempts to define when an overdraft occurs, and does so
imprecisely.
5

25
26
27
28

– 19 –

17cv1280

1

plaintiff offered a plausible interpretation); In re TD Bank, N.A., 150 F. Supp. 3d 593,

2

624 (D.S.C. 2015) (denying motion to dismiss breach of contract claim in part

3

because of “imprecise use of terms”); but see Chambers v. NASA Fed. Credit Union,

4

222 F. Supp. 3d 1, 9–13 (D.D.C. 2016) (dismissing breach of contract claim on the

5

ground that the relevant agreements unambiguously conveyed that the credit union

6

would impose overdraft fees on debit transactions that overdraft the available

7

balance).

8

Here, the Court is persuaded that the ambiguities in the Account Agreements

9

prevent dismissal of Plaintiffs’ breach of contract claims at this stage of the litigation.

10

At this juncture, Plaintiffs have alleged a reasonable interpretation of that Account

11

Agreements and conduct that would violate that interpretation. The meaning of the

12

Account Agreements is best ascertained through the discovery process. Accordingly,

13

the Court denies Navy Federal’s motion to dismiss the breach of contract claim.

14

C.

Breach of the Implied Covenant of Good Faith and Fair Dealing

15

Plaintiffs bring a claim against Navy Federal for breach of the implied

16

covenant of good faith and fair dealing based on Navy Federal’s alleged overdraft

17

policies and practices. (FAC ¶107.) They allege that Navy Federal assessed

18

overdraft fees by abusing contractual discretion in its interpretation of the undefined

19

term “to cover” and by authorizing later transactions that consume funds previously

20

set aside. (Id. ¶¶107–109.) Navy Federal asserts that this claim must be dismissed

21

because it is duplicative of Plaintiffs’ breach of contract claim and improperly seeks

22

to rewrite contractual provisions. (ECF No. 9-1 at 17.)

23

Under Virginia Law, every contract carries with it an implied covenant of good

24

faith and fair dealing. Eplus Tech. Inc. v. AMTRAK, 407 F. Supp. 2d 758, 762 (E.D.

25

Va. 2005). To assert an implied covenant claim, a plaintiff must allege (1) a

26

contractual relationship between the parties and (2) a breach of the implied covenant.

27

SunTrust Mortg., Inc. v. Mortgages Unlimited, Inc., No. 3:11-cv-861-HEH, 2012 WL

28

1942056, at *3 (E.D. Va. May 29, 2012) (quoting Enomoto v. Space Adventures, Ltd.,
– 20 –

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1

624 F. Supp. 2d 443, 450 (E.D. Va. 2009)). Under Virginia law, the duty of good

2

faith under the covenant “defies a fast and true definition, but “at a minimum . . . it

3

includes ‘faithfulness to an agreed common purpose and consistency with the

4

justified expectations of the other party [to a contract].’” SunTrust Mortg., Inc., 2012

5

WL 1942056, at *3 (quoting SunTrust Morg., Inc. v. United Guar. Residential Ins.

6

Co. of N. Carolina, 806 F. Supp. 2d 872, 895 (E.D. Va. 2011); RESTATEMENT

7

(SECOND) OF CONTRACTS §205 cmt. a (1981)). As Navy Federal recognizes, a breach

8

of the implied covenant is not treated as an independent cause of action, but rather as

9

one for breach of contract. See Rogers v. Deane, 992 F. Supp. 2d 621, 633 (E.D. Va.

10

2014); Eplus Tech. Inc., 407 F. Supp. 2d at 762; Frank Brunckhorst Co., L.L.C. v.

11

Coastal Atl., Inc., 542 F. Supp. 2d 452, 465 (E.D. Va. 2008).

12

Several courts have dismissed implied covenant claims as “duplicative” when

13

a party has also asserted a breach of contract claim. See Rogers, 992 F. Supp. 2d at

14

633 (“Where there is a claim for breach of contract, the inclusion of a claim for breach

15

of the implied covenant . . . as a separate claim is duplicative. . .”) (emphasis added);

16

Want v. St. Martins Press LLC, No. 1:12-cv-908, 2012 WL 5398887, at *4 (E.D. Va.

17

Nov. 1, 2012) (dismissing implied covenant claim on the ground that the covenant

18

“does not provide an independent basis for recovery and only duplicates a breach of

19

contract claim.”). Despite dismissing the claims as “duplicative” of a breach of

20

contract claim, these cases recognize that Virginia law does not recognize an

21

independent claim for breach of the implied covenant. Other courts have dismissed

22

separately pleaded implied covenant claims as merely an improper “attempt to plead

23

a separate tort cause of action for breach of the implied covenant” which does not

24

exist under Virginia law. Jackson v. Ocwen Loan Servicing, LLC, No. 3:15-cv-238,

25

2016 WL 1337263, at *12 (E.D. Va. Mar. 31, 2016); Smith v. Flagstar Bank, F.S.B.,

26

No. 3:14-cv-741, 2015 WL 1221270, at *6 (E.D. Va. Mar. 17, 2015) (“Plaintiff has

27

attempted to assert a separate cause of action for breach of the implied duty of good

28

faith, and thus he has not stated a claim upon which relief may be granted under
– 21 –

17cv1280

1

Virginia law.”); Jones v. Fulton Bank, N.A., No. 3:13-cv-126, 2013 WL 3788428, at

2

*7 (E.D. Va. July 18, 2013), aff’d, 565 Fed. App’x 251, 253 (4th Cir. 2014)

3

(plaintiffs’ implied covenant “claim fails because it was pled as a separate tort

4

claim”).

5

Here, Plaintiffs have pleaded their implied covenant claims separately from

6

their breach of contract claim. (Compare FAC ¶¶95–102 (breach of contract as first

7

claim for relief) with id. ¶¶103–111 (breach of implied covenant as second claim for

8

relief).) Because Virginia law does not recognize such an independent cause of

9

action, the implied covenant claim is subject to dismissal on this basis. The Court

10

accordingly grants Navy Federal’s motion to dismiss the implied covenant claim on

11

this ground.

12

However, courts permit parties to plead breach of the implied covenant as part

13

of a breach of contract claim, or recognize that parties may do so. See, e.g., Goodrich

14

Corp. v. BaySys Techs., LLC, 873 F. Supp. 2d 736, 742 (E.D. Va. 2012) (permitting

15

breach of implied covenant to proceed where it was “incorporated under the umbrella

16

of a breach of contract claim” and not pleaded as “an independent tort”); cf. Jackson,

17

2016 WL 1337263, at *12 n.14 (“The [plaintiffs] do not couch their claim as a breach

18

of contract”) (dismissing independently pleaded implied covenant claim). Because

19

a breach of the implied covenant may be pleaded as breach of contract under Virginia

20

law, there may be a basis to permit Plaintiffs to amend the FAC.

21

Navy Federal argues that Plaintiffs’ claim for breach of the implied covenant

22

otherwise fails because of the express terms of the Account Agreements. Whereas

23

Plaintiffs allege that Navy Federal abused its contractual discretion in its

24

interpretation of the term “to cover” (ECF No. 11 at 17), Navy Federal asserts that

25

“[i]t applied the contract according to its terms” (ECF No. 12 at 8.) Whereas

26

Plaintiffs allege that Navy Federal also abused its contractual discretion to authorize

27

later-in-time transactions that would consume previously held funds (ECF No. 11 at

28

17), Navy Federal asserts it authorized transactions in a manner consistent with the
– 22 –

17cv1280

1

Account Agreements (ECF No. 12 at 8). Navy Federal contends that Plaintiffs seek

2

to rewrite the Account Agreements because the agreements “do not foreclose Navy

3

Federal from charging overdraft fees.” (ECF No. 9-1 at 17.) The Court is persuaded

4

that Plaintiffs may press a breach of contract claim based on Navy Federal’s alleged

5

abuse of contractual discretion in contravention of the implied covenant.

6

Under Virginia law, “when parties to a contract create valid and binding rights,

7

an implied covenant of good faith and fair dealing is inapplicable to those rights.”

8

Ward’s Equip. v. New Holland N. Am., Inc., 493 S.E.2d 516, 520 (Va. 1997). The

9

implied covenant “cannot be invoked to undercut a party’s express contractual

10

rights”, nor does it “compel a party to take affirmation action not otherwise required

11

under the contract” or “establish independent duties not otherwise agreed upon by

12

the parties.”

13

3596519, at *7 (E.D. Va. Aug. 20, 2012) (citing De Vera v. Bank of Am., N.A., No.

14

2:12-cv-17, 2012 WL 2400627, at *3 (E.D. Va. June 25, 2012)); McInnis v. BAC

15

Home Loan Servicing, LP, 2:11CV468, 2012 WL 383590, at *8 (E.D. Va. Jan. 13,

16

2012) (“The implied covenant cannot “rewrit[e] an unambiguous contract in order to

17

create terms that do not otherwise exist.”) (quoting Ward’s Equip., 493 S.E.2d at

18

520), report and recommendation adopted by, 2012 WL 368282 (E.D. Va. Feb. 3,

19

2012). However, Virginia law recognizes that “a party may not exercise contractual

20

discretion in bad faith, even when such discretion is vested solely in that party.” Va.

21

Vermiculite, Ltd. v. W.R. Grace & Co., 156 F.3d 535, 542 (4th Cir. 1998) (reversing

22

dismissal of implied covenant claim under Virginia law) (emphasis added).

Monton v. America’s Servicing Co., No. 2:11-cv-678, 2012 WL

23

Here, Plaintiffs do not challenge Navy Federal’s contractual rights. Rather,

24

they identify contractual provisions that imbue Navy Federal with discretion. They

25

allege that Navy Federal exploited an undefined contractual term and a provision that

26

on its face grants “discretion” to knowingly authorize transactions to consume funds

27

previously set aside and extract additional overdraft fees. (FAC ¶¶60–63, 107–108;

28

see also Opt-In Form.) The Court can reasonably infer that Navy Federal exercised
– 23 –

17cv1280

1

its contractual discretion in bad faith, such that it breached the Account Agreements.

2

See Goodrich Corp., 873 F. Supp. 2d at 742 (sustaining breach of contract claim

3

premised on breach of the implied covenant because the allegations “all evidence

4

[defendant’s] bad faith”); cf. Bennett v. Bank of Am., N.A., No. 3:12CV34-HEH, 2012

5

WL 1354546, at *11 (E.D. Va. April 18, 2012) (dismissing implied covenant claim

6

because “[p]laintiff does not allege that [defendant] took any actions from which the

7

Court might reasonably infer that [defendant] exercised its contractual discretion in

8

bad faith.”). Multiple federal courts have recognized that contractual provisions

9

providing a financial institution with discretion over overdraft fees provides a basis

10

for a breach of the implied covenant. See, e.g., In re HSBC Bank, 1 F. Supp. 3d 34,

11

54 (E.D.N.Y. 2014) (permitting claim to proceed despite HSBC’s argument that it

12

had contractual authority to post debit transactions from high to low), Gutierrez v.

13

Wells Fargo, 622 F. Supp. 2d 946, 954 (N.D. Cal. 2009) (permitting claim to proceed

14

despite Wells Fargo’s argument that it had contractual authority to post items to

15

checking account in any order the bank chose). In line with the persuasive approach

16

of these courts and in view of Virginia law, the Court grants Plaintiffs leave to amend

17

their breach of contract claim to add therein the allegations regarding a breach of the

18

implied covenant of good faith and fair dealing.

19

D.

20

Plaintiffs press a conversion claim in which they allege that Navy Federal

21

“wrongfully collected” amounts for overdraft fees from them without proper

22

authorization. (FAC ¶114; see also ECF No. 11 at 24.) Plaintiffs allege that Navy

23

Federal continues to retain these funds, which Plaintiffs properly own and to which

24

they have right to immediate possession. (FAC ¶¶116–119.) As a threshold matter,

25

Navy Federal argues that this claim must be dismissed on the ground that Plaintiffs

26

may not pursue a claim based on conversion of money under Virginia law. The Court

27

does not agree.

28

Conversion

Under Virginia law, “[c]onversion is the wrongful assumption or exercise of
– 24 –

17cv1280

1

the right of ownership over goods or chattels belonging to another in denial of or

2

inconsistent with the owner's rights.” Economopoulos v. Kolaitis, 528 S.E.2d 714,

3

719 (Va. 2000). Virginia law generally provides that “money cannot be the subject

4

of conversion, only tangible personal property may be converted.” (ECF No. 9-1 at

5

18 (quoting Jones v. Bank of Am. Corp., 2010 WL 6605789, at *5 (E.D. Va. Aug. 24,

6

2010).). As both parties recognize, however, there is an exception. (ECF No. 9-1 at

7

19, ECF No. 11 at 23–24.) “[M]oney can be the basis of a conversion claim” if it is

8

“in the form of an identifiable fund . . .” Jones, 2010 WL 6605789, at *5 (emphasis

9

added). For example, the Virginia Supreme Court has permitted a conversion claim

10

based on settlement proceeds. PGI, Inc v. Rathe Productions, Inc., 576 S.E.2d 438,

11

443 (Va. 2003). Courts have also permitted conversion claims under Virginia law

12

for funds deposited into a bank account and amounts placed into an escrow account.

13

See Jones, 2010 WL 6605789, at *5; Raleigh Radiology, Inc. v. Eggleston &

14

Eggleston, P.C., 2009 WL 3764092, at *4 (W.D. Va. Nov. 10, 2009) (funds deposited

15

into bank account). Here, Plaintiffs plead specific and identifiable sums of money

16

that were allegedly converted—namely each $20 overdraft fee they allege Navy

17

Federal improperly assessed and the funds to satisfy the charges. (FAC ¶¶72, 75, 79,

18

114–15, 120.) Thus, their conversion claim is not subject to dismissal on this basis.

19

Plaintiffs must nevertheless satisfy the requirements to plead conversion under

20

Virginia law: (1) their ownership or right to possession of property at the time of the

21

conversion, and (2) the defendant’s wrongful exercise of dominion or control over

22

the plaintiff’s property, depriving the plaintiff of possession. Pro-Concepts, LLC v.

23

Resh, No. 2:12-cv-573, 2014 WL 549294, at *16 (E.D. Va. Feb. 11, 2014) (citing

24

Enomoto v. Space Adventures, Ltd., 624 F. Supp. 2d 443, 457 (E.D. Va. 2009));

25

Jones, 2010 WL 6605789, at *5. Navy Federal disputes that Plaintiffs have plausibly

26

pleaded either element.

27

Navy Federal argues that Plaintiffs’ conversion claim fails to plead the first

28

element of a conversion claim because once Plaintiffs deposited funds with Navy
– 25 –

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1

Federal, title to those funds immediately passed to Navy Federal. (ECF No. 9-1 at

2

18.) Plaintiffs argue that their conversion claims may proceed based on the right to

3

immediate possession of the allegedly converted property, not solely on ownership.

4

(ECF No. 11 at 22–23.) Under Virginia law, the “general rule is that once funds are

5

deposited in a bank account, the funds become the property of the bank.” Terry v.

6

Bank of Am., N.A., 350 F. Supp. 2d 727, 730 (W.D. Va. 2004) (citing Bernardini v.

7

Central Nat’l Bank, 290 S.E.2d 863, 864 (Va. 1982).6 Federal courts have dismissed

8

conversion claims under Virginia law on the basis of this general rule when

9

allegations of possessory interest were conclusory or foreclosed. See Hughes v. Bank

10

of Am., No. 5:07CV00109, 2008 WL 857059, at *2 (W.D. Va. Mar. 31, 2008) (citing

11

Bernardini, 290 S.E.2d at 864) (dismissal where plaintiff conclusory alleged

12

ownership of deposited funds and a “superior possessory right to” them); Terry, 350

13

F. Supp. 2d at 730 (dismissal where there was no indication that an SEC freeze order

14

concerning deposited funds entitled plaintiffs to immediate possession of the funds);

15

Jones, 2010 WL 6605789, at *5–6 (finding that plaintiff failed to plausibly plead

16

right to immediate possession of funds placed in escrow because she had contractual

17

obligation to make payments).

18

conversion claim may proceed when there are plausible allegations of a right to

19

immediate possession of converted funds, notwithstanding the general rule.

These decisions implicitly recognize that a

20

The Court is persuaded that Plaintiffs have plausibly alleged the first element

21

of a conversion claim under Virginia law. Plaintiffs allege that they have the right to

22

immediate possession of the funds Navy Federal allegedly converted “without

23

authorization” and that Navy Federal has interfered with this right. (FAC ¶¶115–

24
25
26
27
28

6

This general rule is not unique to Virginia law, but rather exists across
multiple jurisdictions. See, e.g., Crocker-Citizens Nat’ Bank v. Control Metals Corp.,
566 F.2d 631, 637–38 (9th Cir. 1978) (under California law); In re HSBC Bank, USA,
N.A., Debit Card Overdraft Litig., 1 F. Supp. 3d 34, 53 (S.D.N.Y. 2014) (under New
York law); Maurello v. Broadway Bank & Trust Co., 176 A. 391, 394 (N.J. 1935)
(under New Jersey law).
– 26 –

17cv1280

1

119.) “Plaintiffs unquestionably had the right to possess the funds in their bank

2

accounts upon demand to the bank, and they have alleged that Defendants wrongfully

3

took funds from their accounts so that Plaintiffs were unable to possess and use those

4

funds.” In re Checking Account Overdraft Litig., 694 F. Supp. 2d 1302, 1323 (S.D.

5

Fla. 2010) (collecting case law from various states permitting conversion claims

6

based on right to possess funds in bank account notwithstanding general rule

7

regarding bank-depositor relationship); see also In re TD Bank, N.A., 150 F. Supp.

8

3d 593, 630 (D.S.C. 2015) (denying motion to dismiss conversion claim under

9

general rule because “plaintiffs retain a right to immediate possession of the property

10

at any time”); Metro. Life Ins. Co. v. Hunter, No. 1:12-cv-01009 (GBL/IDD), 2013

11

U.S. Dist. LEXIS 187375, at *12 (E.D. Va. Mar. 5, 2013) (finding that plaintiff, as

12

administrator of insurance proceeds erroneously paid to defendant, had pleaded right

13

to possession of those proceeds). Navy Federal identifies no basis under the Account

14

Agreements which would foreclose this allegation, nor can the Court identify one at

15

the motion to dismiss stage based on the contractual ambiguities previously

16

discussed. The Court thus follows the position of “[t]he majority of federal courts

17

that have addressed this question in the context of overdraft fees [to find] that

18

plaintiffs may bring a conversion claim for fees that are alleged to have been

19

wrongfully assessed . . .” In re TD Bank, N.A., 150 F. Supp. 3d at 630.

20

Navy Federal further argues that Plaintiffs cannot plausibly allege a wrongful

21

act necessary for a conversion claim “if Navy Federal complied with the parties’

22

agreements concerning overdrafts.” (ECF No. 9-1 at 19.) Resolution of this issue is

23

not appropriate as the Court has denied Navy Federal’s motion to dismiss Plaintiffs’

24

breach of contract claim based on contractual ambiguities and Plaintiffs’ factual

25

allegations regarding breach of contract. See, e.g., In re TD Bank, N.A., 150 F. Supp.

26

3d at 630 (denying dismissal of conversion claim in light of court’s denial of breach

27

of contract claim dismissal); White v. Wachovia Bank, N.A., 563 F. Supp. 2d 1358,

28

1371 (N.D. Ga. 2008) (same). Moreover, Plaintiffs have pleaded that Navy Federal
– 27 –

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1

exercised its contractual discretion in bad faith to define the phrase “to cover” in a

2

manner that caused them to incur additional overdraft fees, which would support a

3

determination that Navy Federal wrongfully charged the challenged overdraft fees.

4

See In re Checking Account Overdraft Litig., 694 F. Supp. 2d at 1323 (denying

5

motion to dismiss conversion claims where plaintiffs alleged sufficient facts

6

regarding defendant bank’s abuse of contractual discretion to impose overdraft fees).

7

Accordingly, the Court denies Navy Federal’s motion to dismiss Plaintiffs’

8

conversion claim.

9

E.

Unjust Enrichment

10

In their unjust enrichment claim, Plaintiffs allege that they conferred a benefit

11

on Navy Federal “from the imposition of [overdraft fees]” which Navy Federal

12

knowingly received and continues to retain. (FAC ¶¶127–130.) Navy Federal argues

13

that this claim must be dismissed because it concerns an issue governed by the

14

Account Agreements. (ECF No. 9-1 at 19.) The Court agrees.

15

To state an unjust enrichment claim under Virginia law, a plaintiff must plead

16

that: “(1) he conferred a benefit on [the defendant]; (2) [the defendant] knew of the

17

benefit and should reasonably have expected to repay [the plaintiff]; and (3) [the

18

defendant] accepted or retained the benefit without paying for its value.” Rosetta

19

Stone Ltd. v. Google, Inc., 676 F.3d 144, 165–66 (4th Cir. 2012) (quoting Schmidt v.

20

Household Finance Corp., II, 661 S.E.2d 834, 838 (Va. 2008)). However, there is

21

an important limitation: unjust enrichment is “based on a quasi-contractual theory

22

that is premised on the lack of a contract between the parties.” Run Them Sweet,

23

LLC v. CPA Global Ltd., 224 F. Supp. 3d 462, 469 (E.D. Va. 2016) (citing Dr.

24

William E.S. Flory Small Bus. Dev. Ctr., Inc. v. Commonwealth, 541 S.E.2d 915, 918

25

(Va. 2001)) (emphasis added). It is only when there is no contract or the contract

26

does not cover the particular issue that “equity will effect a ‘contract implied in law’.

27

. .” to permit an unjust enrichment claim. Guardian Pharm. of E. NC, LLC v. Webster

28

City Healthcare, No. 2:12-cv-00037, 2013 WL 277771, at *8 (W.D. Va. Jan. 24,
– 28 –

17cv1280

1

2013) (quoting Po River Sewer Co. v. Indian Acres Club of Thornburg, Inc., 495

2

S.E.2d 478, 482 (Va. 1998)); see also Maggard v. Essar Global Ltd., 16 F. Supp. 3d

3

676, 688 (W.D. Va. 2014) ( “[i]f an express contract exists but does not cover the

4

services rendered, a cause of action for unjust enrichment remains available.”). On

5

the other hand, the existence of an express contract governing the particular issue

6

precludes an unjust enrichment claim. Acorn Structures, Inc. v. Swantz, 846 F.2d

7

923, 926 (4th Cir. 1988) (affirming dismissal of unjust enrichment claim asserted

8

under Virginia law “[b]ecause there is an express contract in this case”); Run Them

9

Sweet, LLC, 224 F. Supp. 3d at 469 (“Virginia law holds that where, as here, a

10

contract exists, there can be no recovery . . . . [a]s a result, plaintiffs’ unjust

11

enrichment claim must be dismissed because the parties unquestionably have an

12

express contract[].”); S. Biscuit Co., Inc. v. Lloyd, 6 S.E.2d 601, 606 (Va. 1940)

13

(“[A]n express contract defining the rights of the parties necessarily precludes the

14

existence of an implied contract of a different nature containing the same subject

15

matter.”).

16

Here, the Account Agreements undoubtedly govern the subject matter of

17

overdraft fees, including the assessment of the fees, the amount of the fees and the

18

consequences of failure to pay an overdraft fee.

19

Agreements.) Plaintiffs’ unjust enrichment claims are therefore subject to dismissal.

20

See Lion Assocs., LLC v. Swiftships Shipbuilders, LLC, 475 Fed. App’x 496, 503 (4th

21

Cir. 2012) (affirming dismissal of unjust enrichment claim under Virginia law

22

“because an express contract exists that covers the services it rendered”); Dickman v.

23

Banner Life Ins. Co., No. WMN-16-192, 2016 WL 7383869, at *7 (D. Md. Dec. 21,

24

2016) (dismissing unjust enrichment claim under Virginia law based on plaintiffs’

25

payments of premiums to defendant because “[p]laintiffs’ payments . . . clearly fall

26

within the scope of the insurance contracts. . .”).

(See generally Account

27

Plaintiffs nevertheless assert that they may plead their unjust enrichment

28

claims in the alternative to their breach of contract claims. (ECF No. 11 at 24.) There
– 29 –

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1

is disagreement about whether a plaintiff, at the pleading stage, may assert alternative

2

claims for unjust enrichment and breach of contract. McPike v. Zero Gravity

3

Holdings, Inc., 280 F. Supp. 3d 800, 809 (E.D. Va. 2017). Some courts permit

4

alternative unjust enrichment and breach of contract claims under one of two

5

approaches. This Court, however, is not persuaded that either approach provides a

6

basis for Plaintiffs to plead an alternative unjust enrichment claim here.

7

First, courts generally permit alternative pleading when a defendant does not

8

concede the existence of a valid contract. See In re Bay Vista of Va., No. 2:09cv46,

9

2009 WL 2900040, at *6 (E.D. Va. June 2, 2009) (permitting unjust enrichment claim

10

because “[d]efendants have not conceded the existence of an enforceable contract.”);

11

Atl. Credit & Fin. Special Fin. Unit, LLC v. MBNA Am. Bank, N.A., No. Civ. A.

12

700CV00846, 2001 WL 856704, at *5 n.6 (W.D. VA. June 4, 2001) (“It is proper to

13

allege an alternative ground for recovery, which might provide a basis for relief

14

should [the defendant] successfully attack the validity of the agreement.”); see also

15

McPike, 280 F. Supp. 3d at 810 (stating more broadly that “the rationale for

16

alternative pleading disappears when neither party contests the applicability or

17

validity of the contract” (emphasis added)). Alternative pleading is appropriate in

18

such a circumstance because equity could still permissibly effect a quasi-contract

19

between the parties. McPike, 280 F. Supp. 3d at 810. However, Navy Federal does

20

not challenge that a valid express agreement covers the conduct Plaintiffs allege and

21

indeed points to the Account Agreements. (ECF No. 9-1 at 19.)

22

Second, courts have permitted alternative pleading on the basis of Federal Rule

23

of Civil Procedure 8(d). See Harrell v. Colonial Holdings, Inc., 923 F. Supp. 2d 813,

24

826–27 (E.D. Va. Feb. 12, 2013) (“[Rule] 8(d)(2) specifically permits alternative

25

theories of recovery, regardless of whether ‘in a single count . . . or in separate

26

ones.’”) (permitting unjust enrichment claim in the alternative based on different

27

factual allegations). Although Rule 8 permits notice pleading of alternative theories

28

of recovery, a Rule 12(b)(6) challenge nevertheless requires the Court to assess the
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1

sufficiency of all claims challenged, including the plausibility of the factual

2

allegations underlying them. FED. R. CIV. P. 12(b)(6). In conducting its assessment,

3

the Court is “not bound to accept as true a legal conclusion couched as a factual

4

allegation,” Iqbal, 556 U.S. at 678.

5

enrichment claims “exclud[e] statements which allege that valid contractual terms

6

govern the challenged conduct.” (FAC ¶124.) This conclusory allegation, however,

7

is belied by the express terms of the Account Agreement and the Court need not

8

accept it. See Addison v. CNX Gas Co., LLC, No. 1:10cv00065, 2011 WL 4553090,

9

at *18 (W.D. Va. May 13, 2011) (“The Complaint in this case specifically alleges

10

that the parties’ relationship, rights and obligations are set out in a valid express

11

contract, the Lease. That being the case, I find that [plaintiff] cannot recover for

12

unjust enrichment. . .”).7 Accordingly, the Court grants Navy Federal’s motion to

13

dismiss Plaintiffs’ unjust enrichment claims with prejudice.

Here, Plaintiffs allege that their unjust

California UCL “Fraudulent” Claim

14

F.

15

The FAC alleges a claim under the UCL on behalf of a California sub-class on

16

the ground that Navy Federal “falsely indicat[ed] in account documents that

17

[overdraft fees] will not be charged when sufficient funds exist to ‘cover’

18

transactions.” (FAC ¶135.) The UCL prohibits “any unlawful, unfair or fraudulent

19

business act or practice.” CAL. BUS. & PROF. CODE §17200. Any of these prongs

20

may support a UCL cause of action. Cel-Tech Commc’ns, Inc. v. Los Angeles

21
22
23
24
25
26
27
28

7

Federal courts have similarly dismissed unjust enrichment claims when a
valid, express contract governs the relationship between the parties despite an attempt
to plead the claim in the alternative. See, e.g., Steinberg v. Provident Funding
Assocs., L.P., No. 15-cv-03743-JST, 2016 WL 3361815, at *4 (N.D. Cal. June 17,
2016) (concluding that plaintiffs could not plead a claim for unjust enrichment under
Florida law where it was uncontested that an express contract existed); Corchado v.
BAC Home Loans Servicing, LP, No. 2:10-CV-01860-KJD-RJJ, 2011 WL 4573905,
at *4 (D. Nev. Sept. 29, 2011) (dismissing unjust enrichment claim under Nevada
law because there was “an express contract that governs the relationship between the
parties” despite plaintiff’s “attempt at alternative pleading”).
– 31 –

17cv1280

1

Cellular Tel. Co., 973 P.2d 527, 539 (Cal. 1999). Plaintiffs’ claim is asserted under

2

the UCL’s fraudulent prong. Navy Federal argues that, as pleaded, the claim lacks

3

particularity, does not identify an actionable representation, and inadequately pleads

4

reliance on any alleged misrepresentation. (ECF No. 9-1 at 20–21.)

5

A UCL claim under the fraudulent prong is distinct from common law fraud.

6

It does not require actual falsity, knowledge of falsity, or reasonable reliance by the

7

alleged victim. See Stearns v. Ticketmaster Corp., 655 F.3d 1013, 1020 (9th Cir.

8

2011) (citing In re Tobacco II Cases, 207 P.3d 20 (Cal. 2009)). “A UCL plaintiff

9

need not show that he or others were actually deceived or confused by the conduct

10

or business practice in question.” Flores v. EMC Mortg. Co., 997 F. Supp. 2d 1088,

11

1119 (E.D. Cal. 2014) (citations and internal quotations omitted). Rather, “[t]he

12

determination as to whether a business practice is deceptive is based on the likely

13

effect such [a] practice would have on a reasonable consumer.” Morgan v. AT&T

14

Wireless Services, Inc., 99 Cal. Rptr. 3d 768, 786 (Cal. Ct. App. 2009). Thus, to state

15

a claim under the UCL’s “fraud” prong, a plaintiff must allege facts showing that

16

members of the public are likely to be deceived by the alleged fraudulent business

17

practice. In re Sony Grand WEGA KDF-E A10/A20 Series Rear Projection HDTV

18

TV Litig., 758 F. Supp. 2d 1077, 1092 (S.D. Cal. 2010) [hereinafter “In re Sony”]

19

(citing Puentes v. Wells Fargo Home Mortg., Inc., 72 Cal. Rptr. 3d 903, 909 (Cal. Ct.

20

App. 2008)).

21

UCL claims grounded in fraud must also satisfy the heightened pleading

22

strictures of Rule 9(b) for fraud claims. FED. R. CIV. P. 9(b) (“In alleging fraud . . .,

23

a party must state with particularity the circumstances constituting fraud or mistake.

24

. .”); Kearns v. Ford Moto Co., 567 F.3d 1120, 1125 (9th Cir. 2009) (citing Vess v.

25

Ciba-Geigy Corp. USA, 317 F.3d 1097, 1102–05 (9th Cir. 2003)). The purpose of

26

Rule 9(b)’s pleading requirements is “to give defendants notice of the particular

27

misconduct which is alleged to constitute the fraud charged so that they can defend

28

against the charge and not just deny that they have done anything wrong.” Swartz v.
– 32 –

17cv1280

1

KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007). A plaintiff generally “must include

2

a description of the ‘time, place, and specific content of the false representations as

3

well as the parties to the misrepresentations.’” In re Sony, 758 F. Supp. 2d at 1092

4

(citation omitted). However, when allegations concern a defendant’s omissions, a

5

plaintiff need not plead all of Rule 9(b)’s requirements because he “cannot plead

6

either the specific time of [an] omission or the place, as he is not alleging an act, but

7

a failure to act.” Stickrath v. Globalstar, Inc., 527 F. Supp. 2d 992, 998 (N.D. Cal.

8

2007) (quoting Washington v. Baenziger, 673 F. Supp. 1478, 1482 (N.D. Cal. 1987)).

9
10

1.

The Plaintiffs Have Plausibly Alleged Misrepresentations by
Navy Federal

11

Navy Federal seeks dismissal of the UCL claim on the ground that Plaintiffs

12

fail to identify a single alleged misrepresentation in any Account Agreements. (ECF

13

No. 9-1 at 20.) The Court disagrees with Navy Federal’s characterization of the FAC.

14

The core misrepresentation the FAC alleges is that Navy Federal represented that it

15

“will only charge [overdraft fees] on transactions with insufficient funds to ‘cover’ a

16

given transaction.” (FAC ¶¶38, 46, 135.) Plaintiffs allege that this representation

17

was false because Navy Federal charged overdraft fees on transactions that were

18

authorized into positive funds. (Id.) These allegations sufficiently identify an

19

allegedly false or misleading misrepresentation. See Hawthorne v. Umpqua Bank,

20

No. C-11-6700 YGR, 2012 WL 1458194, at *2 (N.D. Cal. April 26, 2012) (denying

21

dismissal of UCL claims based on similar allegations that bank used misleading

22

Account Agreements regarding overdraft fees); see also Sutcliffe v. Wells Fargo

23

Bank, N.A., 283 .F.R.D. 533, 548–49 (N.D. Cal. 2012) (finding UCL claim sufficient

24

where plaintiffs identified the specific statements alleged to be fraudulent).

25

Navy Federal, however, argues that Plaintiffs cannot show that any

26

representations in the Account Agreements were misleading because it properly

27

disclosed whether and to what extent a member would have sufficient funds to cover

28

transactions. (ECF No. 9-1 at 20.) Navy Federal contends that it disclosed that: “if
– 33 –

17cv1280

1

the amount of a [debit card] purchase transaction exceeds the available balance in

2

your checking account or Checking Protection option on the date the transaction is

3

paid, your account may be overdrawn.” (Id. (citing Debit Card Disclosure at 1).)

4

The Court construes Navy Federal’s argument to be that members of the public were

5

not likely to be deceived or misled and, therefore, Plaintiffs’ UCL fraudulent claim

6

fails as a matter of law.

7

Whether a business practice is deceptive is usually a question of fact not

8

appropriate for decision on a motion to dismiss. Williams v. Gerber Prods. Co., 552

9

F.3d 934, 938–39 (9th Cir. 2008). In certain instances, a court may dismiss a UCL

10

claim if no reasonable consumer would be likely to be deceived or misled by the

11

alleged misrepresentations. See Freeman v. Time, Inc., 68 F.3d 285, 290 (9th Cir.

12

1995) (finding that when a flyer was read as a whole, including the qualifying

13

language, the plaintiff’s allegation that a particular statement was deceptive was

14

dispelled); In re Sony Gaming Networks & Customer Data Sec. Breach Litig., 996 F.

15

Supp. 2d 942, 990 (S.D. Cal. 2014) (dismissing UCL claims because no reasonable

16

consumer would be misled by certain representations challenged by plaintiffs). But

17

“[u]nless we can say as a matter of law that contrary to the complaint’s allegations,

18

members of the public were not likely to be deceived or misled by [the defendant’s

19

alleged conduct], we must hold that [plaintiffs] state[] a cause of action.” Day v.

20

AT&T Corp., 74 Cal. Rptr. 2d 55, 60 (Cal. Ct. App. 1998) (declining to conclude on

21

the facts alleged that no reasonable consumer would be likely to be misled or

22

deceived by defendants’ practices); see also Morgan, 99 Cal. Rptr. 3d at 786

23

(reversing dismissal of UCL claim in light of the conduct alleged). Dismissal on the

24

reasonable consumer standard will generally be “the rare situation.” Williams, 552

25

F.3d at 939.

26

Here, the Court cannot conclude as a matter of law, that no reasonable

27

consumer would be likely to be misled or deceived by the defendants’ representations

28

in the Account Agreements.

The FAC specifically alleges that a reasonable
– 34 –

17cv1280

1

consumer would believe that funds immediately debited for a transaction would be

2

applied to the transaction for which they are debited, that overdraft fees would not be

3

assessed a transaction authorized into sufficient funds, and that debit transactions

4

reduce an available balance based on the order transactions are initiated. (FAC ¶¶64–

5

71.) Considering the Account Agreements and the facts alleged, the Court is

6

persuaded that a reasonable consumer could have interpreted Navy Federal’s

7

Account Agreements to mean that a debit card transaction that was authorized and

8

approved by Navy Federal into positive funds, with corresponding funds held until

9

the transaction posted, would not incur an overdraft fee when the transaction settled.

10

Accordingly, the Court denies Navy Federal’s motion to dismiss the UCL fraudulent

11

claim on the ground that Plaintiffs have failed to allege any misrepresentations.

12

2.

The Plaintiffs Have Failed to Adequately Plead Reliance

13

Navy Federal also challenges Plaintiffs’ UCL claim on the ground that

14

Plaintiffs fail to specifically allege that they actually read and relied on the alleged

15

misrepresentations in Account Agreements.

16

Plaintiffs acknowledge they must plead reliance, they contend there is a liberal

17

reliance requirement under the UCL by which reliance may be presumed if a

18

misrepresentation is material. (ECF No. 11 at 18.) Plaintiffs contend that the

19

misrepresentations here were material and, therefore, the Court can infer reliance

20

such that they have sufficiently pleaded their UCL fraudulent claim. (Id. at 19 (citing

21

FAC ¶¶9, 12–21, 36–59, 64–71).)

22

Plaintiffs’ UCL fraudulent claim is subject to dismissal for failure to sufficiently

23

plead reliance.

(ECF No. 9-1 at 21.)

Although

The Court agrees with Navy Federal that

24

The issue regarding what a plaintiff must plead to show reliance sufficient to

25

state a UCL claim arises from the California Supreme Court’s decision in In re

26

Tobacco II Cases, 207 P.3d 20, 28 (Cal. 2009), a case on which Plaintiffs heavily

27

rely to oppose dismissal. In that case, a group of plaintiffs sought to represent a class

28

of all people in California who smoked one or more cigarettes during the class period
– 35 –

17cv1280

1

and were exposed to the defendants’ long-term marketing and advertising activities

2

in California. The California Supreme Court held that the UCL “imposes an actual

3

reliance requirement on plaintiffs prosecuting a private enforcement action under the

4

UCL’s fraud prong.” Id. at 39. But it appeared to relax that requirement. The court

5

stated that “a presumption, or at least an inference, of reliance arises wherever there

6

is a showing that a misrepresentation was material.” Id. at 39. The court further

7

stated a plaintiff does not “need to demonstrate individualized reliance on specific

8

misrepresentations to satisfy the reliance requirement,” and “is not required to allege

9

that that those misrepresentations were the sole or even the decisive cause of the

10

injury-producing conduct.” Id. at 40. Plaintiffs’ position regarding these latter

11

statements by the California Supreme Court is not without some support. Relying on

12

In re Tobacco II Cases, one federal district court in the Ninth Circuit determined that

13

similar allegations regarding overdraft misrepresentations “give rise to at least an

14

inference that Plaintiffs relied on the representations. . .” See Hawthorne, 2012 WL

15

1458194, at *2. This Court, however, is not persuaded that Plaintiffs are relieved

16

from expressly pleading actual reliance.

17

In re Tobacco II Cases establishes that there is “an actual reliance requirement

18

[for] plaintiffs prosecuting a private enforcement action under the UCL’s fraud

19

prong” even if the nature of that requirement is relaxed under certain circumstances.

20

In re Tobacco II Cases, 207 P.3d at 39. Distinguishing the facts of that case, multiple

21

courts in the Ninth Circuit have required a plaintiff to plead actual reliance on a

22

misrepresentation. See, e.g., In re Yahoo! Inc. Customer Data Sec. Breach Litig.,

23

No. 16-MD-02752-LHK, 2017 WL 3727318, at *16 (N.D. Cal. Aug. 30, 2017)

24

(“California courts have held that when the ‘unfair competition’ underlying a

25

plaintiff's UCL claim consists of a defendant’s misrepresentation or omission,’ a

26

plaintiff must plead that he or she ‘actually relied on the misrepresentation or

27

omission’ to bring a UCL claim.”); Letizia v. Facebook, Inc., 267 F. Supp. 3d 1235,

28

1243 (N.D. Cal. 2017) (“[I]n order for a UCL claim to survive a motion to dismiss,
– 36 –

17cv1280

1

a plaintiff must sufficiently satisfy the actual-reliance requirement, which means the

2

plaintiff must allege that he or she saw the specific misrepresentation at issue and

3

actually relied on it.”); McVicar v. Goodman Glob., Inc., 1 F. Supp. 3d 1044, 1052

4

(C.D. Cal. 2014) (dismissing UCL claim because the plaintiffs “make absolutely no

5

allegation that either they or their contractor checked defendant’s website or saw any

6

advertisement by defendant); Backhaut v. Apple, Inc., 74 F. Supp. 3d 1033, 1047

7

(N.D. Cal. 2014) (“[T]he Court has consistently required allegations of actual

8

reliance and injury at the pleading stage for claims under all three prongs of the UCL

9

where such claims are premised on misrepresentations”). Thus, even if a plaintiff

10

need not plead reliance extensively to have UCL standing in light of In re Tobacco

11

II Cases, there must still be actual allegations of reliance. This “specific pleading is

12

necessary to establish a causal relationship between alleged misrepresentations and

13

the harm claimed to have resulted therefrom.” Monaco v. Bear Stearns Companies,

14

Inc., No. CV 09–05438 SJO (JCx), 2011 WL 11027559, at *8 (C.D. Cal. Jan. 13,

15

2011) (quoting Mirkin v. Wasserman, 858 P.2d 568, 573 (Cal. 1993)).

16

Here, the FAC contains no allegations that Plaintiffs actually relied on Navy

17

Federal’s misrepresentations, such as allegations that Plaintiffs read the alleged

18

misrepresentations or that they would not have opted into Navy Federal’s OOPS but

19

for Navy Federal’s misrepresentations. Plaintiffs’ UCL claim is therefore subject to

20

dismissal. See, e.g., Letizia, 267 F. Supp. 3d at 1243–44 (dismissing UCL claim

21

where “Plaintiffs never state in their complaint that they ever saw” the alleged

22

misrepresentations); Murray v. Elations Co., No. 13-cv-2357-BAS(WVG), 2014 WL

23

3849911, at *10 (S.D. Cal. Aug. 4, 2014) (dismissing UCL claims in part because

24

plaintiff did not allege that he was exposed to and relied on defendants’ alleged

25

misrepresentations).

26

Second, and independent of whether Plaintiffs have adequately pleaded

27

reliance under the UCL, are Rule 9(b)’s pleading requirements for fraud claims in

28

federal court. Although Navy Federal does not flesh out its Rule 9(b) challenge to
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1

the UCL claim in the context of Plaintiffs’ failure to plead that they actually read and

2

relied on the alleged misrepresentations, Rule 9(b) independently warrants dismissal

3

on this issue. Several courts have determined that In re Tobacco II Cases cannot

4

relax Rule 9(b)’s requirement that a plaintiff plead with particularity the

5

circumstances pertaining to alleged fraud. See, e.g., Garcia v. Sony Computer Entm’t

6

Am., LLC, 859 F. Supp. 2d 1056, 1063 (N.D. Cal. 2012); Herrington v. Johnson &

7

Johnson Consumer Cos., No. C 09-1597 CW, 2010 WL 3448531, at *8 (N.D. Cal.

8

Sept. 1, 2010); In re Actimmune Mktg. Litig., No. C 08-02376 MHP, 2009 WL

9

3740648, at *8 (N.D. Cal. Nov. 6, 2009). Although Rule 9(b)’s requirements are less

10

stringent with claims of omissions by a defendant, claims pertaining to affirmative

11

misrepresentations are not. Despite Plaintiffs’ suggestion in opposition that their

12

UCL claims also concern omissions by Navy Federal (ECF No. 11 at 18, 20), their

13

claims are premised on affirmative misrepresentations. (FAC ¶135.) Thus, Plaintiffs

14

must provide particularized allegations regarding the circumstances of Navy

15

Federal’s alleged misrepresentations.

16

(“Plaintiffs must state ‘the who, what, when, where, and how’ of the misconduct

17

charged. . .” (quoting Vess, 317 F.3d at 1106)).

See Letizia, 267 F. Supp. 3d at 1244

18

Although the FAC sufficiently identifies what Plaintiffs contend were Navy

19

Federal’s alleged misrepresentations, as the Court has already determined, the FAC

20

is

21

misrepresentations, including when Plaintiff read the alleged misrepresentations in

22

the Opt-In Form. See id. at 1244–45 (stating that “the law of actual reliance . . .

23

dooms Plaintiffs’ UCL claim under Rule 9(b)’s heightened pleading requirement . .

24

.”) (citing In re 5-Hour Energy Mktg. & Sales Practices Litig., No. MDL 13-2438

25

PSG (PLAx), 2014 WL 5311272, at *16 (N.D. Cal. Sept. 4, 2014)). Accordingly,

26

the Court grants Navy Federal’s motion to dismiss Plaintiffs’ UCL claim on the

27

ground that Plaintiffs have failed to adequately plead reliance on Navy Federal’s

28

alleged misrepresentations. As Plaintiffs have requested and Navy Federal does not

otherwise

deficient

regarding

Plaintiffs’

– 38 –

exposure

to

those

alleged

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1

oppose, the Court will grant Plaintiffs leave to amend the FAC to provide additional

2

allegations to show reliance and satisfy Rule 9(b)’s pleading strictures for the named

3

Plaintiffs.

4

G.

California CLRA Claim

5

The FAC pleads a claim under the California Consumer Legal Remedies Act

6

(“CLRA”), CAL. CIV. CODE §§1770, et seq., on behalf of a sub-class of California

7

plaintiffs. (FAC ¶¶138–144.) The CLRA prohibits certain “unfair methods of

8

competition and unfair or deceptive acts or practices in a transaction intended to

9

result or that results in the sale or lease of goods or services to any consumer.” CAL.

10

CIV. CODE §1770(a). Plaintiffs allege that they are consumers within the meaning of

11

the CLRA and allege that “[Navy Federal’s] checking accounts and debit card

12

services were transactions” covered under the CLRA. (FAC ¶¶139–40.) Navy

13

Federal allegedly violated the CLRA “by misleading consumers to believe that

14

[overdraft fees] will not be charged when sufficient funds exist to ‘cover’

15

transactions, when [overdraft fees] are in fact charged in such circumstances.” (Id.

16

¶142 (citing CAL. CIV. CODE §1770(a)(5).) Plaintiffs allege that this conduct violates

17

the CLRA’s prohibition on “[r]epresenting that goods or services have sponsorship,

18

approval, characteristics, ingredients, uses, benefits, or quantities that they do not

19

have.” CAL. CIV. CODE §1770(a)(5). Navy Federal argues that, as a threshold matter,

20

the CLRA is inapplicable to claims concerning debit cards and overdraft and,

21

therefore, Plaintiffs’ CLRA claims must be dismissed. The Court agrees with Navy

22

Federal.

23

The scope of the CLRA turns on its express terms, including how it defines

24

those terms. A plaintiff pleading a CLRA claim must plead sufficient facts to show

25

that his or her claim satisfies these statutory definitions, as applicable, in addition to

26

identifying the prohibited practice in which the defendant allegedly engaged.

27

Plaintiffs implicitly recognize this by pleading that their CLRA claims satisfy certain

28

terms defined by the CLRA, such as the terms “consumer” and “transaction.” (FAC
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¶¶139–40.) The CLRA defines “consumer” as “an individual who seeks or acquires,

2

by purchase or lease, any goods or services for personal, family, or household

3

purpose.” CAL. CIV. CODE §§1761(d). A transaction is defined as “agreement

4

between a consumer and another person . . .” CAL. CIV. CODE §§1761(e). Although

5

the FAC does not expressly state that Navy Federal’s debit card services satisfy the

6

CLRA’s definition of “services,” it is the only type of service to which the CLRA

7

claim refers. The CLRA defines “services” as “work, labor, and services for other

8

than a commercial or business use, including services furnished in connection with

9

the sale or repair of goods.” CAL. CIV. CODE §1761(b). Navy Federal’s challenge

10

turns on this provision.

11

The California Supreme Court has not spoken on the issue of whether the

12

CLRA applies to debit card transactions or overdrafts. “If the state [S]upreme [C]ourt

13

has not spoken on the issue, we look to intermediate appellate courts for guidance,

14

although we are not bound by them if we believe that the state [S]upreme [C]ourt

15

would decide otherwise.” Radcliffe v. Hernandez, 818 F.3d 537, 543 (9th Cir. 2016)

16

(citing In re KF Diaries, Inc. & Affiliates, 224 F.3d 922, 924 (9th Cir. 2000)). Navy

17

Federal points this Court to guidance from the California Court of Appeal decision

18

in Berry v. American Express Publishing, Inc., 54 Cal. Rptr. 3d 91 (Cal. Ct. App.

19

2007).

20

Because Berry is fundamental to resolution of Navy Federal’s challenge, a

21

relatively closer review of this decision is warranted. The Berry court held that credit

22

transactions, separate and apart from any sale or lease of goods or services, are not

23

covered under the CLRA. Id. at 97. The court arrived at this conclusion by reviewing

24

the legislative history of the CLRA’s definition of the term “consumer.” The court

25

observed that an earlier draft of the CLRA defined “consumer” as “an individual who

26

seeks or acquires, by purchase or lease, any goods, services, money, or credit for

27

personal, family or household purposes.” Id. at 95 (citing Cal. Assem. Bill No. 292

28

(1970 Reg. Sess.)) (emphasis in original). Prior to the CLRA’s enactment, however,
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1

the California Legislature removed references to “money” and “credit,” with the

2

current version of the CLRA omitting any reference to such terms. Id.; see generally

3

CAL. CIV. CODE §§1770, et seq. Earlier drafts of the CLRA identified the extension

4

of credit as a separate activity from purchasing or leasing goods or service, with the

5

final version of the CLRA deleting prior specific references to coverage for any

6

consumer who obtains credit. 54 Cal. Rptr. 3d at 96. This confirmed to the Berry

7

court that the deletion of the terms “money” and “credit” “narrowed the act’s scope.”

8

Id. More generally, the Berry recognized that the California Legislature narrowed

9

the scope of the CLRA from covering unlawful acts or practices “undertaken by any

10

person in the conduct of any trade or commerce” to only those practices “undertaken

11

by any person in a transaction intended to result or which results in the sale or lease

12

of goods or services to any consumer . . . ” Id. (citing CAL. CIV. CODE §§1770(a)).

13

Thus, under the court’s view, CLRA liability is limited to transactions involving the

14

actual or contemplated sale or lease of goods and services. Id. The court rejected

15

the plaintiff’s argument that the CLRA’s instruction to apply its provisions liberally

16

could be used to “rewrite the statute . . . beyond its express terms.” Id. at 96–97.

17

Federal district courts in the Ninth Circuit have applied Berry to dismiss CLRA

18

claims concerning credit cards provided by a defendant, including cases involving

19

fees associated with credit cards. See Van Slyke v. Capital One Bank, 503 F. Supp.

20

2d 1353, 1359 (N.D. Cal. 2007) (dismissing with prejudice CLRA claims concerning

21

credit cards, including defendant’s alleged misleading disclosures regarding fees);

22

Augustine v. FIA Card Servs., N.A., 485 F. Supp. 2d 1172, 1175 (E.D. Cal. 2007)

23

(“California law provides that the CLRA does not apply to credit card transactions”)

24

(dismissing CLRA claims regarding defendant’s alleged retroactive increase of

25

interest rates on credit cards).

26

Although Berry did not concern debit cards or overdrafts, its reasoning has

27

been applied by federal courts to these issues. In Gutierrez v. Wells Fargo &

28

Company, the court granted summary judgment against the plaintiffs’ CLRA claim
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1

on the ground that the plaintiffs had failed to identify the purported good or service

2

received from the bank. 622 F. Supp. 2d 946, 957 (N.D. Cal. 2009) (“[P]laintiffs

3

likely bought goods and services in many instances with the money extended because

4

of overdrafts. But not from the bank.”). Analogizing the extension of money through

5

an overdraft to the extension of credit via a credit card, the court determined that the

6

bank’s activities with respect to overdrafts and overdraft fees did not fall within the

7

meaning “goods” or “services” under the CLRA. Id. (citing Berry, 54 Cal. Rptr. 3d

8

91).

9

multidistrict overdraft litigation concerning debit cards, check cards or ATM cards

10

provided by defendant banks to the plaintiffs. See In re Checking Account Overdraft

11

Litig., 694 F. Supp. 2d 1302, 1326–27 (S.D. Fla. 2010). The court rejected the notion

12

that a bank’s decision to extend funds to cover a client’s overdraft is a service and

13

dismissed the plaintiffs’ CLRA claims. See id. These authorities point toward

14

dismissal here.

Berry and Gutierrez were applied by another federal court overseeing a

15

Nevertheless, Plaintiffs contend that Navy Federal’s reliance on Berry and

16

Gutierrez is erroneous. (ECF No. 11 at 21.) Plaintiffs argue that debit card services

17

are a covered “service” under the CLRA by relying on the single federal court

18

decision holding so: Hawthorne v. Umpqua Bank, No. 11-cv-06700-JST, 2013 WL

19

5781608 (N.D. Cal. Oct. 25, 2013). (ECF No. 11 at 21.) While acknowledging

20

Berry, Gutierrez and In re Checking Account Overdraft Litigation, the Hawthorne

21

court determined that debit cards are a “service” for the purposes of the CLRA on

22

reasoning this Court finds unpersuasive. First, the court pointed to the CLRA’s

23

instruction that its provisions must be “liberally construed.” Hawthorne, 2013 WL

24

5781608, at *10 (quoting Cal. Civ. Code §1760). The instruction to liberally interpret

25

the CLRA, however, does not resolve the question of the statute’s scope. The Berry

26

court expressly rejected the notion that this provision grants a court license to expand

27

the CLRA beyond its text, appropriately informed by its legislative history. Berry,

28

54 Cal. Rptr. 3d at 96. This Court similarly finds Hawthorne’s reliance on this
– 42 –

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1

provision unhelpful.

2

Second, the Hawthorne court also determined “the debit card relationship is

3

best understood as encompassing convenience services that go beyond those

4

associated with a simple checking account.” Hawthorne, 2013 WL 5781608, at *10.

5

To reach this conclusion, the Hawthorne court relied on Hitz v. First Interstate Bank,

6

44 Cal. Rptr. 2d 890 (Cal. Ct. App. 1995), which determined that the convenience

7

feature of credit cards was a service, independent of borrowing. Hawthorne, 2013

8

WL 5781608, at *11. As is evident from the very text of the Hitz decision on which

9

the Hawthorne court relied, however, Hitz interpreted the term “service” under a

10

different California statute, California Civil Code §1671(c). Id. (quoting Hitz, 44

11

Cal. Rptr. 2d at 898–99). As another California Court of Appeal decision observed,

12

“Hitz did not involve the CLRA . . . . That court’s interpretation of Civil Code section

13

1671. . . does not inform the interpretation of provisions of separate sections in the

14

Civil Code containing the CLRA.” Ball v. FleetBoston Fin. Corp., 79 Cal. Rptr. 3d

15

402, 405 (Cal. Ct. App. 2008) (affirming dismissal of CLRA claim premised credit

16

card despite plaintiff’s allegation that defendant bank provided payment services

17

because “the act of extending credit alone is not covered by the CLRA” ). Regardless

18

of whether debit cards may be a service for the purposes of a different statute, the

19

question is whether they are a covered service under the CLRA. Plaintiffs identify

20

no authority showing this to be the case.

21

This Court is persuaded that Plaintiffs cannot pursue CLRA claims here. The

22

CLRA does not apply to claims involving debit cards or overdrafts associated with

23

those cards, separate and apart from any transaction involving, or intended to result

24

in, a sale or lease of goods or services. See In re Checking Account Overdraft Litig.,

25

694 F. Supp. 2d at 1326–27; Gutierrez, 622 F. Supp. 2d at 957; cf. Van Slyke, 503 F.

26

Supp. 2d at 1359. Plaintiffs identify no goods or services covered under the CLRA,

27

which they received from Navy Federal. As another federal district court has

28

recognized, “[m]uch like credit cards provide an extension of credit, an overdraft
– 43 –

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1

provides an extension of money.” Gutierrez, 622 F. Supp. 2d at 957. Beyond this

2

recognition is the Berry court’s review of the CLRA’s legislative history, which

3

shows that a reference to “money” was removed from an earlier CLRA draft—much

4

like the reference to “credit.” Berry, 54 Cal. Rptr. 3d at 95. This legislative history

5

convinces this Court that the overdraft protection at issue here does not constitute a

6

“service” under the CLRA. Accordingly, the Court grants Navy Federal’s motion to

7

dismiss Plaintiffs’ CLRA claims with prejudice.

8

IV.

CONCLUSION & ORDER

9

For the foregoing reasons, the Court GRANTS IN PART AND DENIES IN

10

PART Navy Federal’s motion to dismiss the First Amended Complaint (ECF No. 9)

11

as follows:

12
13
14
15
16

1.

The Court DENIES the motion to dismiss Plaintiffs’ breach of contract

claim (claim 1) and conversion claim (claim 3).
2.

The Court GRANTS WITH PREJUDICE the motion to dismiss

Plaintiffs’ unjust enrichment claim (claim 4) and CLRA claim (claim 6).
3.

The Court GRANTS WITHOUT PREJUDICE the motion to dismiss

17

Plaintiffs’ breach of the implied covenant of good faith and fair dealing claim (claim

18

2) and UCL claim (claim 5).

19

4.

Plaintiffs are GRANTED LEAVE TO AMEND the FAC consistent

20

with this Order. Plaintiffs may file a Second Amended Complaint no later than

21

May 4, 2018. Failure to file a SAC by this date will result in the case proceeding

22

only as to the claims not dismissed by this Order.

23
24

IT IS SO ORDERED.
DATED: April 12, 2018

25
26
27
28
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