Smith v. Wells Fargo Bank, N.A., D045487 (CA 1/26/2006)

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SEAN M. SMITH et al., Plaintiffs and Appellants, v. WELLS FARGO BANK, N.A. et al., Defendants and Respondents.

D045487

Court of Appeal of California, Fourth District, Division One

December 29, 2005

January 26, 2006

Appeal from a judgment of the Superior Court of San Diego County, No. GIC802664, Ronald S. Prager, Judge. Reversed and remanded with directions.

The attorneys of record are:

Finkelstein & Krinsk, Howard D. Finkelstein, Mark L. Knutson and C. Michael Plavi, II, for Plaintiffs and Appellants.

Pillsbury Winthrop Shaw Pittman, Daniel G. Lamb, Jr. and Brian D. Martin for Defendants and Respondents.

McDONALD, J.

Plaintiff Sean M. Smith, individually and on behalf of a class similarly situated, appeals a judgment following an order granting the motions for summary adjudication and a no-merit determination filed by defendants Wells Fargo Bank, N.A. and Wells Fargo & Company (together Bank) in his action alleging causes of action for unfair business practices (Bus. & Prof. Code, § 17200 et seq.) (UCL),¹ false and misleading advertising (§§ 17200 et seq., 17500 et seq.), and violation of the Consumer Legal Remedies Act (Civ. Code, § 1750 et seq.) (CLRA). On appeal, Smith contends: (1) the trial court erred by concluding federal regulations preempt his state causes of action; (2) because violations of federal regulations and breaches of contract may constitute predicate acts for his causes of action and there are triable issues of material fact regarding those predicate acts, the trial court erred by granting Bank's motions for summary adjudication and a no-merit determination; and (3) the trial court abused its discretion by excluding part of his expert witness's declaration.

FACTUAL AND PROCEDURAL BACKGROUND

Bank customers can make merchant or point-of-sale (POS) transactions with their checking accounts using paper checks, automated teller machine cards (ATM Cards), or ATM and check cards (Check Cards). In August 1997, Smith opened a personal checking account with Bank and received a Check Card related to that account. At that time, Smith received Bank's consumer disclosure statement, which stated:

"You agree that the accounts you open and our practices are subject to the terms of the Wells Fargo Consumer Disclosure Statement regarding the accounts and our policies. All relationships between us are governed by applicable federal law and regulation and California law (except when otherwise required by applicable law), and are subject to our policies and the rules described in this disclosure. [¶] You agree to pay all fees and follow all practices described in the Consumer Disclosure Statement . . . . [¶] . . . [¶] "You agree to abide by all future changes to the terms and fees for your accounts. . . . We agree to notify the first signer of the account in advance of any such fee changes." (Italics added.)

Before May 2002, it was Bank's practice to deny a POS transaction using either an ATM Card or a Check Card if, at that time, there were insufficient funds in the customer's account to cover the transaction.² In contrast, if the customer used a paper check for which there were insufficient funds to cover the POS transaction, Bank would take one of three actions: (1) pay the paper check under any existing overdraft protection agreement with customer; (2) pay the paper check and create an overdraft on the customer's account (and charge the customer an overdraft fee); or (3) return the paper check unpaid for insufficient funds (and charge the customer a fee for the returned check).

In late 2001, as part of Bank's "balance sheet engineering" program to increase revenues, Bank decided to extend its "shadow line" overdraft feature for paper checks to also cover all Check Card POS transactions, thereby potentially increasing Bank's annual revenues between $120 million and $145 million based on additional overdraft fees charged to customers' accounts.

On March 19, 2002, Smith's monthly account statement from Bank included the following notice (Notice):

"IMPORTANT ACCOUNT INFORMATION: TO APPROVE AS MANY OF YOUR POINT-OF-SALE (POS) TRANSACTIONS AS POSSIBLE, WELLS FARGO IS CHANGING OUR APPROVAL CRITERIA. IF YOU PERFORM A POS TRANSACTION AND DO NOT HAVE SUFFICIENT

FUNDS IN YOUR ACCOUNT TO COVER THE TRANSACTION, WELLS FARGO MAY COVER THE ITEM IF YOU HAVE OVERDRAFT PROTECTION, PAY THE ITEM AND CREATE AN OVERDRAFT TO YOUR ACCOUNT, OR DECLINE THE TRANSACTION. IF WE AUTHORIZE THE TRANSACTION, YOU MAY BE ASSESSED A FEE, WHICH WILL VARY DEPENDING UPON THE ACTION TAKEN. OVERDRAFT PROTECTION IS AVAILABLE TO HELP YOU AVOID THE INCONVENIENCE AND EXPENSE OF OVERDRAFTS AND RETURNED ITEMS. WE ENCOURAGE YOU TO CONTACT YOUR LOCAL BANKER, CALL OUR PHONE BANK OR VISIT US ONLINE TO SIGN UP FOR OVERDRAFT PROTECTION OPTIONS."³

In May Bank implemented the change in its practice described in the Notice.

In December Smith filed the instant complaint. The complaint alleged that Bank's account holder agreement and other materials "failed to adequately disclose that [Bank] unilaterally provide[s] account holders with involuntary overdraft protection in the event the account holder[s] [exceed] their checking account balance through the use of the [C]heck [C]ard for which they are charged a fee of approximately $30 per transaction. [¶]. . . This practice is in direct contravention to the marketing materials used by [Bank] which represent that overdraft protection is not involuntarily imposed by [Bank] on customer checking accounts. Under no circumstances will [Bank] permit [C]heck [C]ard holders to [cancel] this overdraft protection though the amount of the per transaction fee was never requested, agreed to, or disclosed to the checking account holder[s] when they were provided the [C]heck [C]ard." The complaint's first cause of action for false and misleading advertising alleged that:

"24. [Bank's] use of various forms of media to market, advertise, call attention to or give publicity to the terms and conditions of its financial services, including their checking accounts and [C]heck [C]ard program, deceptively misrepresented certain of its attributes and characteristics including, but not limited to, its use as a credit card-type account without extending credit and yet more convenient tha[n] using checks when, in fact, [Bank's] practices materially differed from that advertised by imposing 'overdraft protection' with an overdraft fee per transaction unlike either a credit card or check, constitutes unfair competition and unfair, deceptive, untrue or misleading advertising within the meaning of . . . § 17500, et seq."

The complaint's second cause of action for violation of the UCL alleged that:

"30. . . . [Bank has] violated . . . § 17500, et seq. and . . . numerous state case precedents, statutes, regulations and industry standards, which require [Bank] not sell or offer to provide financial services and products through deceptive or misleading advertisements and other marketing materials, including brochures.

"31. As detailed in the preceding paragraphs, the misrepresentations and nondisclosures by [Bank] of the material facts detailed above, including the fact that the unilaterally imposed 'overdraft protection' on their checking account holders in connection with their [C]heck [C]ard program (and thus subjecting such persons to improper account charges), at the time these financial services were being advertised, constitutes an unfair business act or practice within the meaning of [the UCL] because [Bank] knew or should have known that the services were represented in a false and deceptive manner and contrary to [Bank's] actual practices. . . .

"32. [Bank's] statutory violations and misrepresentations alleged herein were misleading and had a tendency to deceive the consuming public because they materially misrepresented the terms and conditions of [its] [C]heck [C]ard program."

The complaint's third cause of action for violation of the CLRA was based on the factual allegations previously described in the complaint.

The trial court granted Smith's motion for class certification of his action against Bank, defining the class as " 'All persons and entities who, while a California resident have been charged an overdraft fee as a result of using a [Bank] Check Card issued by [Bank] . . . .' "

In June 2004 Bank filed motions for summary adjudication of Smith's UCL and false and misleading advertising claims and for a no-merit determination on Smith's CLRA claim. Bank argued: (1) Smith's claims regarding the inadequacy of its disclosure of its May 2002 policy change were preempted by the National Banking Act (NBA) (12 U.S.C. § 24) and regulations issued by the Office of the Comptroller of the Currency (OCC); (2) Bank's disclosure was adequate as a matter of law; and (3) Smith's false and misleading advertising claim has no merit as a matter of law. In support of its motions, Bank submitted a separate statement of undisputed facts.

Smith opposed Bank's motions, arguing his claims were not preempted by the NBA or OCC regulations. He further argued there were triable issues of material fact whether Bank's account agreements and materials were misleading and deceptive because they did not adequately disclose the existence and terms of its Check Card involuntary overdraft policy and its resultant charges and fees, including its May 2002 policy change. In support of his opposition, Smith submitted a separate statement of undisputed and disputed facts. That separate statement asserted that: "The [N]otice does not explain the policy change in a clear and conspicuous manner and does not make any reference to [Bank's] Check Card and does not identify when the policy change takes effect. . . Nor does the [N]otice explain under what circumstances [Bank] will approve or deny a POS transaction when there are insufficient funds in the account." (Italics added.)

In reply to Smith's opposition, Bank, for the first time, cited...