The United States Court of Appeals for the Ninth Circuit has held that federal law preempts a state consumer protection statute related to the posting of overdrafts to consumers’ bank accounts, but does not preempt state law prohibiting fraudulent and misleading representations. Plaintiffs filed a class action against defendant, a bank, alleging that defendant’s use of high-to-low posting of overdrafts was unfair and fraudulent under the California Unfair Competition Law, among other claims. The practice of high-to-low positing is a bookkeeping method in which debit and credit card transactions are posted to a consumer’s bank account from highest to lowest, regardless of the order the transactions are presented to a bank. The lower court held that defendant’s high-to-low posting method was an unfair practice in violation of California law; permanently enjoined the bank from the use of high-to-low posting of overdrafts; and awarded $203 million in restitution to plaintiffs. Defendant appealed, arguing that the National Bank Act preempted the use of a state law to dictate its posting method.
In finding that the NBA and OCC regulations preempt state regulation of the posting order, the Ninth Circuit noted that “the ‘business of banking’ and the power to ‘receive deposits’ necessarily include[s] the power to post transactions.” Further, the Ninth Circuit noted that OCC interpretive letters have considered high-to-low posting and associated overdraft fees to be a “pricing decision authorized by federal law.” Concluding that the “ability to choose a method of posting transactions is a useful and necessary component of a posting process that is integrally related to the receipt of deposits,” the Court reversed the lower court’s ruling. The Ninth Circuit also rejected plaintiff’s argument that defendant’s posting practice should be considered safe and sound banking principles under OCC regulations, holding that whether such practices are safe and sound banking principles “is an inquiry that falls squarely within the OCC’s supervisory powers.”
However, the Ninth Circuit rejected defendant’s argument that California law prohibiting misleading statements was preempted by OCC regulations, noting that in warning banks that they may be subject to state laws prohibiting unfair or deceptive acts or practices, the OCC cited to the California UCL. The Ninth Circuit held that because California’s prohibition on misleading statements did not significantly interfere with the bank’s ability to offer checking accounts or choose a posting method, the law was not preempted. Ultimately, the Ninth Circuit vacated the injunction and the award of $203 million in restitution, but remanded the issue of fraudulent or misleading representations concerning defendant’s posting order back to the lower court to determine the appropriate relief.