HUGHES et al v. TD BANK, N.A.
Filing
13
OPINION. Signed by Judge Joseph E. Irenas on 4/19/2012. (dmr)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
CHRISTOPHER HUGHES and CARLA
CRESSMAN, individually and on
behalf of others similarly
situated,
HONORABLE JOSEPH E. IRENAS
CIVIL ACTION NO. 11-7257
(JEI/KMW)
Plaintiffs,
OPINION
v.
TD BANK, N.A.,
Defendant.
APPEARANCES:
SQUITTIERI & FEARON LLP
Caitlin Duffy, Stephen J. Fearon, Jr. and Olga Anna Pettigrew
32 East 57th Street
12th Floor
New York, NY 10022
Counsel for Plaintiffs
BROWN & CONNERY, LLP
Susan M. Leming and William M. Tambussi
360 Haddon Avenue
PO Box 539
Westmont, NJ 08102
Counsel for Defendants
IRENAS, Senior District Judge:
Plaintiffs’ claims arise from Defendant’s allegedly unlawful
banking practices.
Presently before the Court is Defendant’s
Motion to Dismiss for failure to state a claim.
I.
1
(Dkt. No. 4)
Plaintiffs Christopher Hughes and Carla Cressman opened
checking accounts with Defendant TD Bank.
To make purchases and
withdraw funds from the accounts, Defendant issued Plaintiffs a
debit card.
(Compl. ¶ 37) In connection with the accounts, TD
Bank automatically registered customers for its overdraft
protection program.
(Id. at ¶ 78) In other words, TD Bank did
not obtain Plaintiffs’ affirmative consent or opt-in to the
program.
(Id. at ¶ 82)
The overdraft protection program allowed customers to
withdraw funds in excess of their daily account balance - up to a
certain internally designated limit - but were charged a fee for
each transaction in the red.
Due to nearly instantaneous debit
transaction authorizations, TD Bank could have denied
transactions that would overdraw accounts instead of permitting
the transactions and charging a fee.
(Id. at ¶¶ 99-101)
The specific terms of TD Bank’s checking accounts and
overdraft protection programs are provided in the Personal
Deposit Account Agreement (“PDAA”).
13-14)
(See Cert. Leming, Ex. B at
Relevant here, the 2009 PDAA specifically reserves the
right to “establish different processing orders for checks and
other items.”
(Id. at 13) “[S]ome processing orders may result
in more insufficient funds items [sic] and more fees than others.
We may choose our processing orders in our sole discretion and
without notice to you, regardless of whether additional fees may
2
result.”
(Id. at 14)
Once an account has a negative balance,
each transaction, no matter how small, accrues a thirty-five
dollar fee up to five total fees per day.
(See Compl. ¶ 49)
Posting the checks from largest to smallest within any given
business day, regardless of the order in which they arrived at
the bank, exhausts account funds more quickly and is alleged to
result in more overdraft fees.
(Id. at ¶ 52)
Moreover, the
overdraft fee is often disproportionately larger than the size of
the offending transaction.
This is especially so considering
reordering the day’s transactions from high to low has the effect
of assigning overdraft fees to the smallest of the day’s
transactions.
The 2011 PDAA also reserves the right to reorder
transactions, but only within certain categories of items.
First, “deposits that have become available to you that Business
Day are added to your available Account balance.”
Ex. A at 12)
(Cert. Leming,
Next, pending debit card transactions are deducted
from the account.1
(See id.)
However, TD Bank does not deduct
the amount of pending debit card authorizations from the
“available Account balance for certain merchants that frequently
request authorization for amounts in excess of the likely
1
As explained in the PDAA, “[w]hen you use a debit card, ATM card, or
other electronic means to make withdrawals, we may receive notice of the
transaction before it is actually presented to us for payment. That notice
may be in the form of a merchant authorization request or other electronic
inquiry.” Id.
3
transaction amount (hereinafter “Undocumented Merchants”).” (Id.)
In other words, a purchase may post several days after the date
of the transaction despite TD Bank having received a request for
an authorization.
We then post items to your Account by category, in the
following order:
i)
Outgoing wire transfers, deposit return
chargebacks, and debit adjustments to your
Account balance;
ii) Overdraft fees, other returned item fees, and
deposit return fees;
iii) All other Account fees (except as described
in (iv) below), and all other items including
checks, ATM transactions, and debit card
transactions; and
iv) Fees assessed at the end of the statement
cycle including, for example but not limited
to, monthly maintenance fees and non-TD Bank
ATM fees.
Within categories i, ii, and iii, we post items in
order from largest to smallest.
(Id.)
TD Bank does “not process transactions in the order in
which they occur.
The order in which items are processed may
affect the total amount of overdraft fees incurred.”
(Id.)
In one bizarre example, Plaintiffs allege that TD Bank
charged Cressman two overdraft fees on May 13, 2011 yet the
account displayed a positive balance.
Plaintiffs assert that “TD
Bank deducted pending transactions on subsequent days without
reflecting those transactions on Ms. Cressman’s statement.”
(Compl. ¶¶ 86-88)
Neither the parties nor the PDAA adequately
explains how overdraft fees could accrue with a positive balance.
4
On December 14, 2011, Plaintiffs filed the Complaint.
On
February 27, 2012, Defendant filed the present Motion to
partially dismiss for failure to state a claim.
This case is
currently subject to a Conditional Transfer Order (“CTO”) entered
by the MDL Panel on March 16, 2012.2
Defendant timely opposed
the CTO. “If any party files a notice of opposition with the
Clerk of the Panel within this 7-day period, the stay will be
continued until further order of the Panel.”
Conditional
Transfer Order, In re Checking Account Overdraft Litigation, MDL
No. 2036, Dkt. No. 654, (Mar. 16, 2012).
At this juncture,
therefore, this Court retains jurisdiction to decide this Motion.
II.
Federal Rule of Civil Procedure 12(b)(6) provides that a
court may dismiss a complaint “for failure to state a claim upon
which relief can be granted.”
In order to survive a motion to
dismiss, a complaint must allege facts that raise a right to
relief above the speculative level.
Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007); see also Fed. R. Civ. P.
8(a)(2).
While a court must accept as true all allegations in the
plaintiff’s complaint, and view them in the light most favorable
2
By March 16, 2012, the Multi-District Litigation Panel had transferred
approximately 80 cases that alleged facts substantially similar to the present
matter to the Southern District of Florida.
5
to the plaintiff, Phillips v. County of Allegheny, 515 F.3d 224,
231 (3d Cir. 2008), a court is not required to accept sweeping
legal conclusions cast in the form of factual allegations,
unwarranted inferences, or unsupported conclusions.
Morse v.
Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997).
The
complaint must state sufficient facts to show that the legal
allegations are not simply possible, but plausible.
515 F.3d at 234.
Phillips,
“A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged.”
Ashcroft v. Iqbal, 566 U.S. 662, 129 S.Ct.
1937, 1949 (2009).
When evaluating a Rule 12(b)(6) motion to dismiss, the Court
considers “only the allegations in the complaint, exhibits
attached to the complaint, matters of public record, and
documents that form the basis of a claim.”
Lum v. Bank of
America, 361 F.3d 217, 221 n.3 (3d Cir. 2004).
A document that
forms the basis of a claim is one that is “integral to or
explicitly relied upon in the complaint.”
Id. (quoting In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir.
1997)).
The parties do not dispute that the Court may examine
the PDAAs attached to Defendant’s motion papers.
III.
6
Of Plaintiffs’ six claims, Defendant moves to dismiss the
following five: (1) unconscionable commercial practices under the
New Jersey Consumer Fraud Act (“CFA”); (2) common law
unconscionability; (3) breach of contract and the covenant of
good faith and fair dealing; (4) conversion; and (5) unjust
enrichment.3
There are two lines of non-binding persuasive precedent with
facts remarkably similar to the case at bar.
arrived at opposite conclusions.
The two lines
One line comes from an
unpublished Third Circuit decision affirming the district court’s
decision to grant a motion to dismiss for failure to state a
claim.
See Hassler v. Sovereign Bank, 644 F.Supp.2d 509, 514
(D.N.J. 2009), aff’d, 374 Fed.Appx. 341 (3d Cir. 2010); see also
Grau v. New Kensington Arnold School Dist., 429 Fed.Appx. 169,
171 n.3 (3d Cir. 2011) (noting that unpublished “opinions are not
regarded as precedents that bind the court because they do not
circulate to the full court before filing. Third Circuit Internal
Operating Procedure 5.7.”).
The other comes from the multi-
district litigation proceeding, which denied defendants’ motion
to dismiss.
See In re Checking Account Overdraft Litigation, 694
F.Supp.2d 1302 (S.D.Fla. 2010) (hereinafter “MDL”).
3
The one claim Defendant does not move to dismiss is an alleged
violation of the Electronic Fund Transfer Act, 15 U.S.C. § 1693.
7
A.
Defendant argues that Hassler controls the outcome of this
case.
See Hassler, 374 Fed.Appx. at 343.
In Hassler, Plaintiff
alleged that Defendant Sovereign Bank’s practice of reordering
charges to maximize overdraft fees were misleading and unfair.
Hassler, 374 Fed.Appx. at 344.
Hassler claimed Defendant: (1)
violated the CFA, (2) breached the covenant of good faith and
fair dealing, and (3) was unjustly enriched.
See Hassler, 644
F.Supp.2d at 513, aff’d, 374 Fed.Appx. 341.
First, “[u]nder the CFA, to constitute consumer fraud . . .
the business practice in question must be ‘misleading’ and stand
outside the norm of reasonable business practice in that it will
victimize the average consumer.”
Hassler, 644 F.Supp.2d at 514,
aff’d, 374 Fed.Appx. 341 (quoting New Jersey Citizen Action v.
Schering-Plough Corp., 367 N.J.Super. 8, 13 (App.Div. 2003)). The
Hassler Court found that the terms of the PDAA disclosure were
not misleading or unfair.
See Hassler, 374 Fed.Appx. at 344.
Second, “[a] good faith performance doctrine may be said to
permit the exercise of discretion for any purpose - including
ordinary business purposes - reasonably within the contemplation
of the parties.”
Id. at 345 (quoting Wilson v. Amerada Hess
Corp., 168 N.J. 236, 246 (2001)).
The Hassler Court held that a
mere economic disadvantage, through a process clearly accounted
for in the PDAA, could not form the basis of a breach of the
8
covenant of good faith and fair dealing.
Hassler, 374 Fed.Appx.
at 345.
Finally, unjust enrichment requires a plaintiff to establish
that a defendant received a benefit and retention of the benefit
would be inequitable.
Id.
“Satisfying the second prong of the
test requires Hassler to demonstrate that Sovereign was ‘enriched
. . . beyond its contractual rights.’” Id. (quoting VRG Corp. v.
GKN Realty Corp., 135 N.J. 539, 554 (1994)).
However, in
Hassler, the Court held that Sovereign Bank merely exercised its
contractual rights.
374 Fed.Appx. at 345.
After dismissing the
claims on state law grounds, the Hassler Court declined to reach
defendant’s federal preemption argument.
B.
Plaintiff favors the MDL decision.
There, the Court denied
defendants’ motion to dismiss in all respects analogous to the
present case.
There, plaintiffs claimed defendants: (1) violated
state consumer protection laws, (2) enforced unconscionable
contract terms, (3) breached the covenant of good faith and fair
dealing, (4) was unjustly enriched, and (5) converted plaintiffs’
account funds.
First, and relevant to this case, plaintiffs alleged
defendants engaged in unconscionable business practices by
reordering debit transactions from high to low, issuing overdraft
9
fees far in excess of any reasonable commercial risk, and failing
to notify plaintiffs of their right to opt out of the overdraft
protection program.
See MDL, 694 F.Supp.2d at 1326.
Taking
those allegations as true, the Court denied the motion to dismiss
because plaintiffs adequately alleged unconscionable business
practices.
Second, “[a]s a general proposition, most matters of defense
can be raised affirmatively in a declaratory judgment action, so
long as there is an actual controversy between the parties.”
Id.
at 1318 (quoting Eva Midwest Nat’l Mortg. Banc, Inc., 143
F.Supp.2d 862, 895 (N.D.Ohio 2001).
The MDL Court held, however,
that the case raised the unusual circumstance where the banks had
direct access to customer funds, thereby avoiding the need to
ever sue for unpaid overdraft fees.
1318-19.
See MDL, 694 F.Supp.2d at
If there could be no suit, then bank customers would
never have the opportunity to raise the affirmative defense
without seeking declaratory relief.
Moreover, the MDL Court found that plaintiffs adequately
alleged both procedural and substantive unconscionability.
“[T]he disparity in sophistication and bargaining power between”
the parties constituted procedural unconscionability.
1319.
Id. at
Moreover, defendants did not notify customers that they
had the right to opt out of the overdraft protection program.
See id.
On the other hand, plaintiffs established substantive
10
unconscionability with allegations that defendants reordered
debit transactions for the sole purpose of gouging customers.
Furthermore, the fees “bear no reasonable commercial relationship
to the costs or risks associated with providing the overdraft
service.”
Id. at 1320.
Therefore, plaintiffs were not precluded
from asserting a claim for declaratory relief on a theory of
unconscionability.
Third, “[a]s a general principle, there can be no breach of
the implied promise or covenant of good faith and fair dealing
where the contract expressly permits the actions being
challenged, and the defendant acts in accordance with the express
terms of the contract.”
Id. at 1314 (quoting 23 Williston on
Contracts § 63:22 (4th ed.).
The MDL Court held that plaintiffs
did not want to change the terms of the contract, but instead
wanted defendants to reasonably exercise their contractual
discretion.
Id. at 1315 (citing Amoco Prod. Co. V. Heimann, 904
F.2d 1405, 1411-12 (10th Cir. 1990) (where discretion exists in
one of two parties to a contract, that discretion must be
exercised in good faith).
As a result, the MDL Court denied the
motion to dismiss on the claim for a breach of the covenant of
good faith and fair dealing.
Fourth, “Plaintiffs have alleged sufficient facts - that,
among other things, Defendants manipulated the posting order of
debit transaction in bad faith so as to maximize the number of
11
overdraft fees incurred - which could lead a reasonable factfinder to conclude that it would be unjust to retain the benefit
of those fees.”
Id. at 1322.
Therefore, the MDL Court denied
the motion on the unjust enrichment claim.4
Finally, defendants argued that the tort of conversion
cannot lie where plaintiffs do not have ownership due to the
debtor/creditor nature of the parties’ relationship.
However,
the MDL Court held that plaintiffs only needed to show the right
to possess the funds in their bank account, which they
unquestionably alleged.
Id. at 1323 (citing White v. Wachovia
Bank, N.A., 563 F.Supp.2d 1358, 1371 (N.D.Ga. 2008) (a plaintiff
must show “title to the property or the right of possession.”).
In all analogous respects to the case at bar, the MDL Court
denied defendants’ motions to dismiss.
Defendants also argued that national banking federal
regulation preempted state law thereby barring all of plaintiffs’
state law claims.
“[T]o determine preemption the Court must look
at whether the federal and state statutes are in irreconcilable
conflict.”
Id. at 1311 (citing Barnett Bank of Marion, N.A. v.
Nelson, 517 U.S. 25, 30 (1996) (emphasis omitted).
The MDL Court
held that federal regulation did not irreconcilably conflict with
4
The Court also dispensed with defendants’ argument that unjust
enrichment cannot lie where such enrichment is permissible by the express
terms of a contract. Id. at 1321. Fed.R.Civ.P. 8(d) expressly provides for
alternative theories of liability, even if such theories are inconsistent.
12
common law contract and tort principles.
Id. at 1313.
Specifically, nothing in federal regulation suggests that banks
may issue overdraft fees in bad faith.
Id.
C.
This Court agrees with the MDL Court’s opinion and adopts
its reasoning in full.
At this stage in the litigation,
Plaintiffs have plausibly pled facts that, if developed through
discovery, state a claim for relief.
To the extent the MDL Court
relied on law not applicable in this jurisdiction, the Court
supplements its analysis below.
1.
To state a claim under the CFA, Plaintiff must allege “1)
unlawful conduct by defendant; 2) an ascertainable loss by
plaintiff; and 3) a causal relationship between the two.”
Hassler, 374 Fed.Appx. at 343 (quoting Bosland v. Warnock Dodge,
Inc., 197 N.J. 543, 964 (2009).
Unlawful conduct can include any
unconscionable commercial practice, which is defined as “the
standard of conduct contemplating good faith, honesty in fact and
observance of fair dealing.”
N.J.S.A. 56:8-2.
The practice must
be misleading and outside the norm of a reasonable business
practice.
See Turf Lawnmower Repair, Inc. v. Bergen Record
Corp., 139 N.J. 392, 430 (1995).
13
This standard is “amorphous”
and the New Jersey Supreme Court expected courts to “pour content
into the concept on a case-by-case basis.”
Meshinsky v. Nichols
Yacht Sales, Inc., 110 N.J. 464, 473 (1988).
Defendant argues that the decision in Hassler requires
dismissal in this case because Plaintiffs have not alleged
Defendant engaged in unlawful conduct.
The Court disagrees.
Plaintiffs allege that TD Bank rearranged debit
transactions, and obscured account balance information, in order
to maximize overdraft fees.
Although TD Bank attempts to justify
this behavior through the discretion afforded by the PDAA - a
contract of adhesion - the practice is allegedly “outside the
norm of reasonable business practice in that it will victimize
the average consumer.”
Turf, 139 N.J. at 430.
Moreover, TD Bank
did not notify Plaintiffs of their right to opt out of the
overdraft protection program.
See Boyes v. Greenwich Boat Works,
Inc., 27 F.SUpp.2d 543, 547 (D.N.J. 1998) (“Courts have declared
that the Consumer Fraud Act should be construed liberally in
favor of protecting customers.”).
Accordingly, Defendant’s
Motion will be denied on the CFA claim.
2.
Defendant argues that the affirmative defense of
unconscionability normally “acts as a shield against enforcement
of an unreasonable contract and not a sword on a claim for
14
affirmative relief.”
See Hunter v. Sterling Bank, Inc., 2011 WL
5921388, *8 (D.N.J. 2011) (quoting Stogum Holdings, Inc. v.
Ropes, 352 N.J.Super. 555, 566 n.14 (Ch.Div. 2002).
However,
affirmative defenses may also be raised through declaratory
relief.
See MDL, 694 F.Supp.2d at 1318 (collecting cases where
declaratory relief under the theory of unconscionability was
permitted as a procedural matter).
Here, Plaintiff seeks a declaratory judgment that certain
contractual terms are unconscionable.
Should Plaintiff be
successful, “a declaration of unconscionability may affect the
legal status of the contractual terms that Defendants seek to
enforce, which may, in turn, affect the analysis of the other
causes of action that Plaintiffs assert.”
Id.
Accordingly, the
Motion will be denied on this basis.
Defendant also argues that Plaintiffs have failed to
adequately allege a claim for unconscionability.
“Plaintiff must
demonstrate unconscionability by showing some overreaching
imposition resulting from a bargaining disparity between the
parties, or such patent unfairness in the contract that no
reasonable person not acting under compulsion or out of necessity
would accept its terms.”
230 (App.Div. 1990).
Howard v. Diolosa, 241 N.J.Super. 222,
Plaintiffs allege that Defendant used its
superior bargaining position and sophistication to develop a
counterintuitive system of gouging those customers least able to
15
afford overdraft fees - those with low bank account balances.
At
this juncture, Plaintiffs have alleged sufficient facts to
overcome Defendant’s Motion.
3.
Defendant argues that the claim for a breach of the implied
covenant of good faith and fair dealing must fail because the
covenant cannot vary an express contract term and Plaintiffs have
not alleged bad faith.
“Although the implied covenant of good
faith and fair dealing cannot override an express term in a
contract, a party’s performance under a contract may breach that
implied covenant even though that performance does not violate a
pertinent express term.”
Hunter, 2011 WL 5921388, *6 (quoting
Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001). “Various
courts have stated that a party must exercise discretion
reasonably and with proper motive when that party is vested with
the exercise of discretion under a contract.”
Id. at 247.
A
Party’s “performance under the contract is tempered by the
implied covenant of good faith and fair dealing and the
reasonable expectations of the parties.”
Id. at 250
Here, Plaintiffs do not want to vary express terms of the
contract, but want TD Bank to exercise its contractual discretion
reasonably. Plaintiffs allege that Defendant had the discretion
to both reorder debit transactions and deny transactions that
16
would overdraft the account.
Defendant allegedly exercised its
discretion solely to maximize fees, even when Plaintiffs were led
to believe they had a positive account balance.
Moreover, the
overdraft fees were disproportionately larger than the size of
the overdraft.
These allegations violate Plaintiffs’ reasonable
expectations under the contract and plausibly state a claim.
Accordingly, the Motion will be denied with respect to the breach
of the implied covenant of good faith and fair dealing.
4.
Defendant argues that Plaintiffs’ unjust enrichment claim
must fail because Defendant was not enriched beyond its
contractual rights.
“To establish unjust enrichment, a plaintiff
must show both that defendant received a benefit and that
retention of that benefit without payment would be unjust.”
135 N.J. at 554.
VRG,
As discussed previously, Plaintiffs have
alleged that Defendant exercised its discretion to reorder debit
transaction in bad faith.
See MDL, 694 F.Supp.2d at 1321-22.
Therefore, the Motion will be denied on the unjust enrichment
claim.
5.
Defendant makes three arguments to dismiss Plaintiff’s
conversion claim: (1) Defendant did not wrongfully assess
17
overdraft fees, (2) Defendant did not convert any property owned
by Plaintiffs when assessing fees, and (3) the economic loss
doctrine bars the claim.
First, the Court has discussed Plaintiffs’ allegations of
Defendant’s wrongful conduct at length.
Therefore, the Court
will not grant Defendant’s Motion on this basis.
Second, Defendant argues that the parties were in a
relationship of debtor/creditor; therefore, Plaintiffs could not
own the property, and the claim for conversion fails as a matter
of law.
However, Plaintiffs need only have a right to immediate
possession to establish a claim for conversion.
See Hunter v.
Sterling Bank, 588 F.Supp.2d 645, 650 (E.D.Pa. 2008) (analyzing
New Jersey law).
Here, “Plaintiffs unquestionably had the right
to possess the funds in their bank accounts upon demand to the
bank, and they have alleged that Defendant[] wrongfully took
funds from their accounts so that Plaintiffs were unable to
possess and use those funds.”
MDL, 694 F.Supp.2d at 1323.
The
same is true in this case.
With respect to Defendant’s final argument, “the economic
loss doctrine prohibits plaintiffs from recovering in tort
economic losses to which they are entitled only by contract.”
Arcand v. Brother Intern. Corp., 673 F.Supp.2d 282, 308 (D.N.J.
2009).
“To be barred by the economic loss doctrine, the claims
must be duplicative of those provided for under the U.C.C.”
18
Id.
(citing Alloway v. General Marine Indus., L.P., 149 N.J. 620, 641
(1997).
Here, Defendant does not identify a duplicative U.C.C.
claim.
Moreover, Plaintiffs allege that Defendant
misappropriated funds in ways not contemplated by the contract.
Accordingly, the Motion will be denied.
IV.
For the reasons set forth above, the Defendant’s Motion to
Dismiss will be denied.
Dated: 4/19/12
/s/ Joseph E. Irenas
JOSEPH E. IRENAS, S.U.S.D.J.
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