Lawsuit Targets Major Credit Card Lender Over Alleged Excessive Charges
Plaintiffs sue Capital One over increase in finance charges on accounts that were in good standing
Law.Com, Fulton County Daily Report
October 16, 2009
An Atlanta attorney has sued one of the nation's largest credit card distributors on behalf of a potential class of credit card holders in a complaint that reflects the public frustration with credit card lender practices that have already prompted some congressional reforms.
The suit filed by E. Adam Webb, a partner with Webb, Klase & Lemond in Atlanta, challenges a decision by Capital One Bank (USA) N.A. to raise interest rates on many of its existing credit card accounts following Wall Street's crash last year.
The suit -- filed in federal court in Atlanta on behalf of Navy Lt. Commander Kevin S. Barker, Florida resident Eric W. Baxter, Massachusetts resident Michael A. Gaffney and Kansas resident Rebekah L. Kautz -- seeks restitution and damages for what it claims were excessive finance charges that Capital One began levying earlier this year on credit card accounts that were current and in good standing.
The suit claims that Capital One -- known for its commercials that feature barbarians garbed in animal skins demanding, "What's in your wallet?" -- doubled, tripled or quadrupled cardholders' annual interest rates without cause and applied the new rates retroactively to existing balances. The cardholders, according to the suit, could avoid the new interest rates only by closing their accounts.
Capital One's counsel in Atlanta, H. Wayne Phears of McGuireWoods, declined to comment on the case.
The suit opens up a second front in a legal war Webb and his law partners are waging against the banks on behalf of consumers who claim they have been subjected to excessive finance charges and fees. Last year, Webb began filing a series of complaints against some of the nation's largest, surviving banks, seeking restitution for what the suits claim were practices that improperly maximized overdraft fees billed to consumers whose accounts were overdrawn.
Pending suits specifically accuse the banks of paying transactions that post to customer accounts from largest to smallest, a practice which often results in multiple overdraft fees for smaller checks and debits that otherwise could have been paid.
Webb's firm is one of six representing multiple plaintiffs in multidistrict litigation in federal court in Florida's Southern District that challenges the banks' practices governing overdraft fee charges. The defendants include Wachovia Bank N.A., JP Morgan Chase Bank NA, Bank of America Corp., Citibank N.A. and U.S. Bank N.A.
Last year, Bank of America set aside $35 million to settle a California suit with bank customers who claimed the bank had manipulated payments on bank transactions in order to maximize overdraft fees.
Webb said that despite the settlement with California customers, in which the bank admitted no wrongdoing, Bank of America has continued the same overdraft practices in other states. "They made no change in their conduct whatsoever," he said.
Webb said that pressure from the Florida suits, many of which are potential class actions, prompted some of the defendant banks this week to introduce new overdraft fee policies that limit how overdraft fees are assessed.
Two federal judges in Atlanta have also entered orders in two overdraft fee abuse cases here that rejected lender arguments that broad policy statements provided to consumers when they opened accounts gave the banks the right to manipulate account transactions as they chose while effectively barring consumers from seeking redress in court.
Bank of America spokeswoman Shirley Norton said Thursday that she could not comment on the pending Florida litigation. But, she said, "We are committed to ensuring that all of our fees are transparent and predictable."
Norton added that Bank of America did not make changes in its overdraft fee policies in response to the lawsuits. "We continually listen to our customers, consult with policymakers, elected officials and consumer advocates to stay abreast of what the consumer needs," she said.
"Our firm, like a majority of the American populace, has been disgusted by practices of the large financial firms over the last couple of years," Webb said Wednesday. "It's a natural connection from the bank overdraft litigation to move into some of the abuses that have been well publicized in the credit card arena."
Since he sued Wachovia over overdraft fees last year, Webb said that people "are coming out of the woodwork because of their sense of outrage. ... People are just delighted to hear that somebody is willing to take on these issues. ... They had felt like there was nothing they could do."
Wachovia settled that case confidentially last year. A Wachovia spokeswoman has previously declined to discuss the settlement or a second, similar suit that is now part of the multidistrict litigation in Florida.
REPRESENTING FRIENDS
Earlier this year, Webb filed a potential class action complaint seeking restitution for credit card rate hikes against Capital One -- listing his law partners, G. Franklin "Frank" Lemond Jr. and Matthew C. Klase, as the named plaintiffs. The suit alleged that Capital One had made an "arbitrary decision" to increase Lemond's fixed 4.99 percent interest rate (for an account that had been in good standing since he opened it in 2003) and Klase's variable interest rate, which had never exceeded 6.99 percent (and which had also remained in good standing since its inception in 2004) by nearly 14 percentage points.
Webb said he and his partners voluntarily dismissed that suit in favor of the current potential class action naming the Florida naval commander as one of four plaintiffs.
"There's nothing wrong with pursuing litigation on behalf of friends who happen to be attorneys and law partners," Webb said. "But it was obviously a distraction and we wanted to represent the class in the best manner possible."
Lemond declined to comment on the dismissed litigation.
Webb said that, so far, he is not aware of any other suits in Georgia or elsewhere seeking restitution from credit card companies that have since September 2008 raised interest rates, often dramatically, on cardholder accounts that were in good standing.
But he added, "I don't pretend to know how widespread it is."
Complaints similar to those of Webb's plaintiffs prompted the U.S. Congress last May to pass new credit card rules that limit when credit card interest rates may be increased on existing balances, prohibit overlimit fees without the express consent of cardholders to authorize charges that exceed their credit limits, and regulate other practices that maximized fees and interest at credit card holders' expense. Most of those provisions, however, do not take effect until next year.
Webb said that Navy Lt. Commander Barker and his co-plaintiffs are just four of "millions of cardholders" whom Webb suggests have found themselves facing similar exorbitant interest rate increases on their credit cards.
Until August, Barker's Capital One credit card carried a 7.9 annual percentage rate on purchases. But in August, four months after President Barack Obama signed the credit card reform bill into law, Capital One increased Barker's interest rate to 17.9 percent, doubling Barker's monthly minimum payment.
Baxter faced a similar interest rate hike on a Capital One card that charged him 4.3 percent until May, when his annual finance charge more than tripled to 15.9 percent.
Co-plaintiffs Gaffney and Kautz had similar experiences with their Capital One cards, according to the suit. In August, Capital One increased Gaffney's annual finance charge from 5.3 percent to 24.9 percent for cash advances, including those already on the books. Kautz's annual interest rates rose on two Capital One cards, one from 9.9 percent to 12.9 percent and the other from 9.9 percent to 17.9 percent.
In each case, according to the suit, the interest rate increases were applied retroactively to the existing balances. In each case, the accounts were current and in good standing when the increases were applied.
The suit claims that Capital One's decision to raise interest rates on accounts in good standing and customers who had excellent credit scores was arbitrary, deceptive and "totally one-sided."
"Here, plaintiffs and those similarly situated are consumers, not bankers," the suit alleges. "Plaintiffs, like most consumers, were not in a position to bargain for more favorable contract terms ... . The absence of equality of bargaining power, open negotiation, full disclosure, and a contract which fairly sets out the rights and duties of each party demonstrate that the transaction lacks those checks and balances which would inhibit the unilateral changing of interest rates. Each rate imposed by Capital One should be rescinded and plaintiffs and those similarly situated be refunded the excess interest paid."
Webb called Capital One's decision to raise interest rates particularly unconscionable because the bank "advertised that its customers would enjoy low interest rates on their credit card balances and their annual percentage rates would not increase unless they defaulted or otherwise established a poor account history."
Webb said that banks facing litigation over excessive and allegedly improper overdraft fee charges are already bowing to pressure from pending litigation and less-than-sympathetic rulings by federal judges here.
Pending suits accuse the banks of paying checking account transactions that post in a single day in order of largest to smallest. On accounts with insufficient funds, that practice causes multiple small checks that could otherwise have been paid to bounce and generates multiple overdraft fees.
The suits allege that overdraft fees also are often assessed on electronic notices of debits, even if customers have sufficient funds in their accounts to cover the debits when they are actually presented to the bank. The suits also claim the banks intentionally delay or rearrange the posting of transactions to checking accounts in order to generate additional fees.
Last year, Wachovia confidentially settled an overdraft fee suit with one of Webb's clients after U.S. District Judge Beverly B. Martin -- who is awaiting confirmation to the 11th U.S. Circuit Court of Appeals -- refused to dismiss the case. Martin ruled that nothing in Wachovia's customer services agreements expressly gave the bank the right to manipulate account transactions to maximize overdraft fees.
This week, U.S. District Judge Charles A. Pannell Jr. rejected a motion by Branch Banking & Trust Co. to send a bank overdraft fee suit to arbitration, finding that the bank's services agreement with its customers contained "vague, highly discretionary language" and was unenforceable because a class action waiver in favor of arbitration effectively precluded a customer from suing to recover improperly assessed fees.
The cost of either arbitration or litigation on an individual basis to recover relatively small amounts of fees, Pannell ruled, "is simply too great to justify the instigation of an action by the individual consumer. ... [N]o attorney would have the incentive to represent a customer in a dispute over the overdraft fees because the damages recoverable would not justify his or her fees.
Pannell added that none of the statutes on which the suits were based "guarantee the payment of attorneys' fees to the prevailing customer, further undercutting an attorney's incentive to take such a low-value case."
This week, six banks who are defendants in the multidistrict litigation pending in Florida issued new policies governing the application of overdraft fees, according to the banks' Web sites. Beginning Monday, Bank of America will no longer charge overdraft fees when a customer's account is overdrawn by less than $10 for one day, will not charge overdraft fees on more than four items in a single day, and will give customers the ability to opt out of a bank policy that routinely honors transactions on overdrawn accounts while attaching overdraft fees. U.S. Bank is also eliminating fees on account overdrafts that are less than $10, beginning next year.
Wells Fargo/Wachovia, Regions Bank, JP Morgan Chase, and BB & T are eliminating overdraft fees for customers on purchases less than $5 and are also limiting overdraft charges to only four a day.
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