Lloyd v. Navy Fed. Credit Union

JENNA LLOYD, et al., Plaintiffs, v. NAVY FEDERAL CREDIT UNION, Defendant.

Case No. 17-cv-1280-BAS-RBB

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

April 12, 2018

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS

[ECF No. 9]

Presently before the Court is Navy Federal's motion to dismiss the First Amended Complaint ("FAC") in its entirety. (ECF No. 9.) Plaintiffs have opposed the motion (ECF No. 11) and Navy Federal has replied in support of dismissal (ECF No. 12). For the reasons herein, the Court grants in part and denies in part Navy Federal's motion to dismiss.

I. BACKGROUND

A. Factual Background

Navy Federal is a national bank with its headquarters and principal place of business located in Vienna, Virginia. (FAC ¶27.) Navy Federal's banking services include the issuance of debit cards associated with its customers' checking accounts. (Id.) The debit cards allow Navy Federal's customers to have electronic access to their checking accounts for purchases, payments, withdrawals, and other electronic debit transactions. (Id. ¶29.) Plaintiffs Lloyd and Plemons are citizens of California who have accounts and debit cards with Navy Federal and patronized its banking centers located in southern California. (Id. ¶¶26, 28.) They seek to represent a national class of Navy Federal customers charged overdraft fees on transactions authorized into a positive account balance and a sub-class of Navy Federal customers in California. (Id. ¶84.)

1. Navy Federal's Debit Card Transaction Procedure

Integral to Plaintiffs' FAC is Navy Federal's debit card transaction procedure. Plaintiffs allege Navy Federal maintains a running account balance in real time, which tracks funds consumers have for immediate use, which is adjusted in real time to account for debit card transactions when they are made. (Id. ¶5.) This procedure occurs in two steps. First, a merchant instantaneously obtains authorization for the purchase amount of a debit card transaction from Navy Federal, which verifies that a customer's account is valid and has sufficient funds to cover a transaction amount. (Id. ¶31.) Second, for an approved transaction, Navy Federal immediately decrements the amount of the funds in a customer's account and sequesters the funds, but does not yet transfer the funds to a merchant. (Id. ¶¶2, 5, 32, 50, 52.) At a later point, which can be several days after the transaction, the sequestered funds are transferred from the customer's account to the merchant's account, a process known as settling. (Id. ¶34.) Plaintiffs allege that the purpose of sequestering the funds is to ensure there are sufficient funds in the account to pay for the transaction when it settles. (Id. ¶33.) The sequestered funds are not available for any other use by the customer. (Id. ¶2.)

2. Navy Federal's Account Agreements and Alleged Unlawful Imposition of Overdraft Fees

Navy Federal allegedly charges and collects overdraft fees on debit card transactions for which there were sufficient available funds to cover the transactionsin violation of the Account Agreements¹, resulting in millions more dollars of profit to Navy Federal. (Id. ¶¶3, 10, 18, 20, 22, 48-49, 51.)

The key agreement on which the FAC focuses is the Opt-In Form, titled "What You Need to Know About Overdrafts and Overdraft Fees." (FAC ¶36; Ex. A ("Opt-in Form").) This document is Navy Federal's standardized contract dealing with overdraft fees and Navy Federal's "Optional Overdraft Protection Service" ("OOPS"). (Id. ¶37.) An individual may opt into OOPS by completing the form. (See Opt-in Form.) The form identifies the terms and conditions of OOPS, including that Navy Federal charges a $20 fee each time Navy Federal pays an overdraft. (FAC ¶¶3, 30; Opt-in Form at 1.)

Plaintiffs identify certain provisions of the Opt-in Form at issue here. First, the Opt-in Form provides that: "[a]n overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway." (FAC ¶12; Opt-in Form at 1.) Plaintiffs allege that this provision means that Navy Federal promises it will only charge an overdraft fee on a given transaction for which there are insufficient funds to cover. (FAC ¶¶12, 38.) Plaintiffs allege that when a debit card transaction is approved on a positive account balance and funds are sequestered, there are always sufficient funds available to cover the transaction when it settles. (Id. ¶¶2, 8, 13, 20, 39-40.) Navy Federal allegedly violates this contractual promiseby authorizing transactions on positive funds and setting the funds aside to pay those transactions when they settle, but then failing to use those funds when the transactions settle. (Id. ¶¶17, 18, 44.) Acknowledging that the term "to cover" is not defined, Plaintiffs further allege that Navy Federal abuses its contractual discretion to define the term so that a transaction is not covered when it settles even if sufficient funds existed for the transaction when it was authorized. (Id. ¶61.)

Second, Plaintiffs allege that the Opt-in Form links authorization of a transaction with payment. The Form states that Navy Federal "may authorize and approve" certain transactions under OOPS. (Id. ¶41.) Plaintiffs allege that this statement reflects a contractual promise that transactions are only OOPS transactions when they are authorized and approved into a negative balance. (Id. ¶¶15, 42.) Navy Federal allegedly links authorization and payment of a transaction in the Opt-in Form's statement that: "We pay overdrafts at our discretion, which means that we do not guarantee that we will always authorize and pay any type of transaction. If we do not authorize and pay an overdraft, your transaction will be declined and/or your check/ACH will be returned." (Id. ¶¶16, 43; Opt-in Form.) Plaintiffs allege that despite sequestering funds for payments of debit card transactions authorized into positive balance, Navy Federal re-debits the amount to an account during a "secret batch posting process." (FAC ¶¶19, 53, 56.) By doing so, Plaintiffs allege that Navy Federal assays the same debit card transaction twice to determine if the transaction overdraws an account—both at the time the transaction is authorized and at the time it settles. (Id. ¶54.) Plaintiffs allege that the available balance does not change for transactions previously authorized into positive funds. (Id. ¶55.) However, Navy Federal allegedly abuses its contractual discretion by knowingly authorizing transactions that consume funds previously sequestered for debit card transactions. (Id. ¶¶10, 62.) Consequently, Navy Federal assesses overdraft fees on the debit card transaction when it settles. (Id. ¶57.)

Plaintiffs further allege that Navy Federal's representations and promises inthe Account Agreements are untrue in light of Navy Federal's alleged conduct. (Id. ¶¶11, 18, 45.) They allege that reasonable consumers are likely to understand that funds for a debit card transaction are likely to be debited immediately such that they cannot be depleted by intervening transactions. (Id. ¶¶64-71.)

3. Allegations Concerning the Named Plaintiffs

Neither Lloyd, nor Plemons disputes Navy Federal's assessment of overdraft fees on their ATM withdrawals, but rather whether Navy Federal properly charged overdraft fees on debit card transactions that Navy Federal authorized into sufficient funds. (Id. ¶¶74, 77-78, 81-82.)

Plaintiff Lloyd alleges that she was assessed improper overdraft fees on two occasions. First, on October 27, 2014, Plaintiff Lloyd was assessed three overdrafts for six transactions which settled that day, five of which were debit card transactions initiated on or prior to October 26, 2014. (Id. ¶72.) Positive funds allegedly were deducted immediately for at least three of the debit card transactions for which she was assessed overdraft fees. (Id.) Lloyd alleges that overdraft fees for these debit card transactions were assessed solely because of a $260 ATM withdrawal she made after her debit card transactions were initiated. (Id. ¶73.) Second, on January 31, 2014, Lloyd was assessed three overdrafts for four transactions, three of which were debit card transactions. (Id. ¶75.) Positive funds were allegedly deducted for at least two of the debit card transactions on which she was assessed overdraft fees. (Id.) Lloyd alleges that overdraft fees for these debit card transactions were incurred solely because of a $400 ATM withdrawal she made after "some or all" of the debit card transactions were initiated. (Id. ¶76.)

Plaintiff Plemons alleges that he was assessed improper overdraft fees on February 18, 2014. Navy Federal allegedly assessed three overdraft fees for three transactions, two of which were debit card transactions initiated on or prior to February 15, 2014. (Id. ¶79.) Positive funds were allegedly deducted immediately for at least two of the debit card transactions on which Plemons was assessedoverdraft fees. (Id.) Plemons alleges that overdraft fees for these debit card transactions were assessed solely because of an $82.75 withdrawal that he made after the debit card transactions were initiated. (Id. ¶80.)

B. Procedural Background

On June 22, 2017, Plaintiffs filed a putative class action complaint against Navy Federal for breach of contract, breach of the implied covenant of good faith and fair dealing, conversion and unjust enrichment on behalf of a national class of Navy Federal customers. (ECF No. 1.) On behalf of a California sub-class, Plaintiffs alleged claims under California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code §17200, et seq., and Consumer Legal Remedies Act ("CLRA"), Cal. Civ. Code §1750, et seq. (Id.) Plaintiffs filed the First Amended Complaint two months later, asserting the same causes of action against Navy Federal. (ECF No. 4.) Navy Federal filed its motion to dismiss the FAC under Rule 12(b)(6) on September 5, 2017. (ECF No. 9.) After completion of the motion to dismiss b...