Banking and Finance Law Daily No breach of contract for processing ACH transactions in order received
Tuesday, July 10, 2018

No breach of contract for processing ACH transactions in order received

By Nicole D. Prysby, J.D.

There was no breach of contract between the consumer and a bank, because the bank processed automated clearing house (ACH) transactions against a consumer’s checking account in the order received from the ACH Operator, held the U.S. Court of Appeals for the Sixth Circuit. In addition, the court found no breach of the agreement by the bank when it initially debited the consumer’s account for eight overdraft fees related to the ACH transactions, because it reversed the charges for three of the fees the next business day, thus complying with the agreement term that limited overdraft fees to five per day (Lossia v. Flagstar Bancorp, Inc., July 6, 2018, Boggs, D.).

Background. A consumer brought class action claims against a bank, arising from the order in which the bank processed ACH transactions against checking accounts. Over a four-day period, the consumer authorized merchants to initiate 10 ACH transactions to be debited from his account. Nine of the transactions were $500 or less and the last one incurred was over $2,000. All of the transactions were processed on a Monday, but were not processed in the order the consumer authorized them. Instead, the two largest transactions were processed first, and the consumer incurred overdraft fees for the remaining eight transactions because of insufficient funds in his account. The bank also debited overdraft fees for the eight transactions, although it refunded three of the overdraft fees the next day pursuant to a term in the parties’ agreement that capped overdraft fees at five per day.

The consumer brought state law breach of contract claims, based on his agreement with the bank. The agreement stated that ACH transactions will be processed "as they occur on their effective date for the business day on which they are processed." The effective date was defined as the date specified by the originator to the transaction, which in practice is the date the merchant (who is the "originator") chooses to submit the transaction to the ACH Operator. The ACH Operator submits the files to the bank in a batch file and the bank processes them in the order received in the batch file. The consumer argued that the language of the agreement required the transactions to be processed in the order the consumer initiated them and alleged that had the bank processed the ACH transactions in the order incurred, he would only have incurred one overdraft fee because the largest transaction would have been processed last and his account had sufficient funds to process all of the other transactions.

Ordering of transactions. The consumer’s first breach of contract claim was based on his theory that the bank breached the agreement by failing to process his transactions in the order that he initiated them. The court rejected the consumer’s argument that the agreement required the bank to process ACH transactions in the order incurred by the consumer. The agreement stated that transactions would be processed on their effective date, not necessarily the actual date that the transaction was initiated. Although effective date was not defined in the parties’ agreement, it was defined in ACH guidelines, which were validly incorporated in the agreement. Under the ACH guidelines, the "effective date" is the date specified by the merchant. In other words, the date the merchant presents the transactions to the ACH Operator.

According to the court, the bank processed the transactions as required in the agreement, because it processed them in the exact order received from the ACH Operator. Although the bank could have had a policy to process transactions in a different order, failing to have a more magnanimous policy was not a breach of the existing agreement. The court also rejected the consumer’s argument that the bank had not produced adequate evidence that it processed the transactions in the order received. The bank produced the batch files and a corporate designee to confirm the evidence in the files. Even if some of the corporate designee’s statements were hearsay, all of the information could have been presented in an admissible form at trial and could therefore be considered by the court in granting summary judgment.

Overdraft fees. The consumer’s second breach of contract claim was based on his theory that the bank’s initial debiting of eight overdraft fees violated the parties’ agreement. The court rejected the consumer’s argument, because the parties’ agreement stated that the consumer would not be required to pay more than five overdraft fees per day. And the consumer was not required to pay all eight overdraft fees, because the bank reversed three of the charges the next business day. Even if the initial debiting of the charges constituted a breach, the next day reversal eliminated any damages. The court also found that because there was no breach of the agreement in his case, the consumer was not entitled to class-wide discovery to determine whether any prospective class members had not had their overdraft fees reversed.

The case is No. 17-1468.

Attorneys: Ronald G. Acho (Cummings McClorey Davis & Acho) for James Lossia, Jr. Sonal Hope Mithani (Miller, Canfield, Paddock & Stone) for Flagstar Banccorp, Inc.

Companies: Flagstar Bancorp, Inc.

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