In December 2021, the Consumer Financial Protection Bureau (CFPB) released research critiquing banks for charging overdraft and related fees to consumers, and the CFPB director, Rohit Chopra, stated the agency would renew its focus on investigating these fees.[1] As I predicted at that time, this regulatory focus on overdraft fees inspired civil litigation and increased legal risk for banks and financial institutions.[2] Plaintiffs filed several lawsuits in Minnesota (and elsewhere) against large and small institutions alike. Since then, Minnesota courts have issued their first decisions, each time handing victory to the banks.

The first Minnesota state court decision was issued in Stubbs v. Spire Credit Union,[3] followed shortly thereafter by Palfi v. Spire Credit Union.[4] In both cases, the plaintiffs alleged claims for breach of contract and breach of the implied covenant of good faith and fair dealing. In Stubbs, the plaintiff also alleged a violation of the Minnesota Deceptive Trade Practices Act. The allegations in each case were similar: Spire Credit Union assessed improper overdraft fees on what are called “authorized positive, purportedly settled negative” (known as “APPSN” or “APSN”) transactions.[5] These are fees charged on debit transactions that are authorized by the bank based on sufficient available account balances at the time of the request from the merchant, but later settled when there are insufficient funds. The plaintiffs alleged that Spire Credit Union also improperly charged fees each time that a merchant initiated a transaction, including “retries,” but there were insufficient funds (known ass “non-sufficient funds” or “NSF” fees).

Recently, in the first Minnesota federal court decision, Churlik v. Gate City Bank,[6] the plaintiff alleged claims for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violations of the Minnesota Consumer Fraud Act.[7] The plaintiff challenged the same kinds of fees as the plaintiffs in Stubbs and Palfi.

In each case, the court’s reasoning and decision centered on the contractual language governing the plaintiffs’ accounts. The Spire Credit Union account documents fully disclosed the processes and mechanisms the credit union would use when implementing overdraft services, including that it would charge fees based on available, not actual, balances. Thus, the agreements specifically allowed APPSN fees when an account’s available balance was sufficient at the time of the merchant’s transaction, even though the account’s actual balance was insufficient at the time the credit union settled the same transaction. Further, the agreements specifically stated the credit union could charge NSF fees when the available balances were insufficient at the time of a transaction, including on a merchant’s “retry” transaction. In Stubbs, the court specifically noted that there was no “regulatory or governing agency advisory opinion…prohibiting or otherwise criticizing Spire’s fee practices.”[8] Because Spire Credit Union acted consistent with the account agreements, it was not liable to the plaintiffs.

Similarly, in Churlik, the “Account Agreement” distinguished between authorization of a transaction and later payment at settlement.[9] The agreement did not contain any promise that the bank would only assess fees based on the account balance at the time of authorization, rather than settlement, or to sequester held funds to pay specific transactions that were authorized. The court focused on the use of the words “pay” and “payment” in the agreement, which referenced when fees would be assessed, along with language distinguishing “holds” from payment. The court held that the agreement expressly permitted Gate City Bank to charge APSN fees, as well as NSF fees. Because there was no breach of contract, the other claims failed as well.

These are the first overdraft decisions in Minnesota state and federal courts since the CFPB set its sights on regulating overdraft fees, but they likely will not be the last. The CFPB earlier this year proposed a rule requiring large banks (over $10 billion in assets) that offer overdraft credit services to comply with the Truth in Lending Act (TILA), which would require additional disclosures to consumers.[10] Plaintiffs can bring private actions under TILA.[11] As an alternative to complying with TILA, the CFPB is also proposing maximum overdraft fees of $3, $6, $7, or $14—or the actual cost for providing overdraft services if the bank discloses its cost data. These changes, if adopted, would go into effect on October 1, 2024, and could inspire new lawsuits. As such, banks should continue to stay abreast of any new CFPB regulations and continue to evaluate their overdraft programs for regulatory compliance and litigation risk.

Winthrop & Weinstine is grateful to have represented financial institutions in these kinds of matters and obtained successful dispositions, including at the early motion to dismiss phase. Members of our team who have experience in this area of law include Matthew R. McBride, Joseph M. Windler, Quin C. Seiler, and Kyle R. Kroll.

We express special thanks to Abby Sokolowski for her research assistance and contributions to this update.

[1] CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees, CFPB (Dec. 1, 2021), https://www.consumerfinance.gov/about-us/newsroom/cfpb-research-shows-banks-deep-dependence-on-overdraft-fees/; Prepared Remarks of CFPB Director Rohit Chopra on the Overdraft Press Call, CFPB (Dec. 1, 2021), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra-overdraft-press-call/.

[2] Kyle R. Kroll, CFPB Renews Focus on Bank Overdraft Fees, Likely Increasing Litigation Risk, Winthrop & Weinstine (Dec. 8, 2021), https://winthrop.com/bold-perspectives/cfpbs-renews-focus-on-bank-overdraft-fees-likely-increasing-litigation-risk/.

[3] No. 62-CV-22-2282, 2023 WL 1460269 (Minn. Dist. Ct. Jan. 31, 2023).

[4] No. 62-CV-22-1831, 2023 WL 2589186 (Minn. Dist. Ct. Mar. 16, 2023).

[5] See also supra note 2 (describing APPSN and related transactions).

[6] No. 23-CV-0637, 2024 WL 453606 (D. Minn. Feb. 6, 2024)

[7] Id. at *1.

[8] Stubbs, 2023 WL 1460269, at *6.

[9] Churlik, 2024 WL 453606, at *1-2.

[10] See CFPB Proposes Rule to Close Bank Overdraft Loophole that Costs Americans Billions Each Year in Junk Fees, CFPB (Jan. 17, 2024), https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-close-bank-overdraft-loophole-that-costs-americans-billions-each-year-in-junk-fees/.

[11] See 15 U.S.C. § 1640.