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Freeman v. Hawthorn Bank

Court of Appeals of Missouri, Western District, Second Division

April 18, 2017

LAURIE FREEMAN and MARTIN REID, Individually and on Behalf of Themselves and All Persons Similarly Situated, Appellants,
HAWTHORN BANK, Respondent.

         APPEAL FROM THE CIRCUIT COURT OF JACKSON COUNTY The Ho norable Charles H. McKenzie, Judge.

          Before Cynthia L. Martin, Presiding Judge, Lisa White Hardwick and Alok Ahuja, Judges.


         Laurie Freeman and Martin Reid (collectively, "Appellants") appeal from the judgment in favor of Hawthorn Bank ("Hawthorn") on their class action petition alleging that Hawthorn's automated debit card overdraft program violates Missouri's usury law. Appellants contend the circuit court erred in holding that Hawthorn's debit card overdraft fee is a statutorily-permitted service charge imposed on a deposit account and, therefore, is not subject to the state's usury law. For reasons explained herein, we affirm.

         Factual and Procedural History

         Hawthorn is a Missouri-chartered bank and member of the Federal Deposit Insurance Corporation ("FDIC"). Hawthorn offers checking account services to its customers, who can access funds in their checking account by check, debit and ATM card, or ACH.[1]

         This case concerns only debit and ATM card transactions, which the parties refer to collectively as "debit card transactions." Debit card transactions typically proceed in two steps: authorization and settlement. In the first step, the customer swipes a debit card through the merchant's card reader, which electronically submits an authorization request for the proposed transaction to Hawthorn. Hawthorn's computer system automatically determines whether the debit card transaction is payable under the customer's available checking account balance. A customer's available balance for a debit card transaction is the prior day's ending balance plus any pending credits and minus any debits. If there is a sufficient available balance, the transaction is authorized. For debit card transactions, authorization is generally an automated decision. If Hawthorn authorizes the transaction, it is obligated to honor that transaction when the merchant presents it for payment through the second step, which is the settlement process. Although Hawthorn's decision to authorize a debit card transaction occurs immediately, it can take two to three days before that transaction is presented to Hawthorn for settlement and is posted to the customer's checking account.[2]

         When Hawthorn initially offered debit cards in the 1990s, the bank did not have an overdraft program for debit card transactions and, instead, configured its computer system to automatically reject debit card overdrafts.[3] When Hawthorn's competitors began offering overdraft programs, however, Hawthorn became concerned that it might lose business because its customers were asking for such a program.

         Consequently, Hawthorn began providing customers with three options to protect against overdrawing their checking accounts. First, Hawthorn offers an account transfer service, which allows customers to link their checking account to another Hawthorn account from which the bank can transfer funds to prevent any overdrafts. Second, Hawthorn offers an overdraft line of credit from which the bank will lend funds to cover any overdrafts in the checking account. To use this option, the customer must apply for an overdraft line of credit. After a credit check, a loan officer will decide whether to approve the application. If the application is approved, then, in the event of an overdraft, Hawthorn will make a loan in increments of $100, as necessary, to prevent the checking account from being overdrawn. Hawthorn charges interest pursuant to the line of credit's terms on any amounts deposited into the checking account from the line of credit.

         The third overdraft protection option, and the one at issue in this case, is Hawthorn's Bounce Protection Program for debit card transactions.[4] Under this program, Hawthorn allows customers to overdraw their checking account up to a predetermined amount, which is $500. The Bounce program is offered only to bank customers for checking accounts for which the primary owner of the account is age 18 or older, has made deposits totaling $500 or more, and has had no overdrafts in the first 30 days after the account's opening.

         Before July 2010, Hawthorn customers who met the eligibility requirements were automatically enrolled in the Bounce program. Since July 2010 and pursuant to Federal Reserve Board Regulation E, Hawthorn has required customers to affirmatively opt in to the Bounce program for debit card transactions. If a customer does not opt in to the Bounce program for debit card transactions, then Hawthorn will not authorize any debit card transaction that would result in an overdraft.

         In general, when a customer opts in to the Bounce program, all debit card transactions that result in overdrafts are approved according to the program's parameters. However, Hawthorn does retain the discretion to not offer, to suspend, or to remove Bounce protection from the customer's account at any time. Also, the customer always has the option to remove Bounce protection from an account.

         Under the Bounce program, Hawthorn charges an overdraft fee to a customer's checking account for each overdraft item.[5] A checking account can be assessed a maximum of six overdraft fees per day. From 2007 to January 2013, Hawthorn's overdraft fee was $25. It was then raised to $30.

         Hawthorn set this overdraft fee after analyzing what its competitors in state and national banks in Missouri were charging. In 2011, Hawthorn's competitors' overdraft fees ranged from $17 to $38. Hawthorn set its overdraft fee at an amount that was not overly burdensome to the customer but was high enough to act as a deterrent against potential abuse of the Bounce program and to allow the program to operate in a safe and sound manner according to Hawthorn's regulators. The overdraft fee must also generate sufficient revenue to compensate for the risks and costs associated with the Bounce program. Costs of the Bounce program to the bank include: software, mailing, employee time, training, refunds of overdraft fees, and overdrawn checking account balances that must be charged off. There is no relationship between the flat overdraft fee charged and the amount of the overdraft or the period of time the overdraft exists in the checking account.

         Hawthorn does not charge an overdraft fee for payment of an overdraft item that causes a negative account balance of less than $10. Also, Hawthorn does not charge a fee for a non-authorized debit card transaction because that transaction was never presented for settlement. Customer service representatives, branch managers, and bank officers have the authority to refund or reverse an overdraft fee upon a customer's request, on a case-by-case basis. In considering whether to refund an overdraft fee, Hawthorn looks at the bank's overall relationship with the customer, whether the customer habitually overdrafts the account, and the situation that caused the overdraft. From 2008 to July 31, 2012, Hawthorn refunded or reversed in excess of $4.7 million in overdraft fees.

         Hawthorn expects its customers to make a deposit into their checking account to cover any overdraft within three to five business days. Customers who fail to bring their account to a positive balance within 49 days have their accounts closed and the closed account is reported to TransWorld for collection activity and to ChexSystems, a verification system that informs banks whether an individual has had excessive insufficient funds activity or charge-off accounts with other banks.

         Hawthorn offers the Fresh Start program to Bounce program customers who have had Bounce protection revoked due to their account's being overdrawn for 30 or more consecutive days. Under Fresh Start, the customer signs an agreement to repay the amount owed over a six-month or twelve-month period. The customer's account is then brought to a zero balance, and the customer may continue to use the account. No interest is charged to the customer under the Fresh Start agreement. Customers in the Fresh Start program are not reported to TransWorld for collection or reported to ChexSystems as a charged-off account.

         Hawthorn undergoes annual examinations either by the Missouri Division of Finance or the FDIC. No regulators have ever told Hawthorn that it should not permit overdrafts, that a fee charged for an overdraft is interest, that the usury law applies to checking accounts, or that Hawthorn should take any corrective action regarding the Bounce program.

         Appellants are former customers of Hawthorn and participants in the Bounce program. Freeman opened a checking account with Hawthorn in 2007 and applied for a debit card. Part of the reason she opened the account at Hawthorn was because she was interested in the Bounce program. Freeman wanted Bounce protection on her account and understood that she could cancel Bounce at any time. She used Bounce for both check and debit card transactions. Freeman tried to avoid overdrawing her account to avoid overdraft fees, but she occasionally ...

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