Court Allows Suit on Bank-Imposed Bad Check Fees

In a ruling that could cost banks hundreds of millions of dollars, the state Supreme Court on Thursday opened the way for challenges to fees levied on customers for bounced checks, and perhaps other bank charges as well.

One lawyer involved said the ruling gives a “green light” not only for challenges to excessive charges for bounced checks, but also for other penalties imposed on bank customers, including late charges on credit card payments.

The unanimous opinion written by Justice Allen Broussard reversed a San Francisco Superior Court judge who threw out the suit brought on behalf of attorney Paul Perdue against Crocker National Bank over its $6-per-rubber-check charge, which Perdue alleged was unconscionable.

While the $6 charge by Crocker in 1978, the year the suit was brought, may not seem exorbitant, “small charges applied to a large volume of transactions may yield a sizable sum,” the court said.

Noting that it cost the bank less than $1 to process bounced checks, the court said “such profit percentages may not be automatically unconscionable, but they indicate the need for further inquiry.”

“It (could mean) a $5 windfall for Paul Perdue. For Californians, it could mean $1 billion,” Gary Near, one of Perdue’s lawyers, said, adding that the ruling suggests that other bank charges also will be open for challenge.

The Supreme Court stopped short of banning fees in excess of the cost of processing bounced checks, which is what Perdue’s lawyers had sought. But by ordering a trial on the issue, the court is allowing a lower court to gather evidence to determine whether the fees are too high. If the fees are unreasonable, courts could order banks to lower them and issue refunds to customers who have been charged for overdrafts.

Crocker and other banks now typically charge $10 for each bounced check. Lawyers involved said they are uncertain how many checks are bounced annually and do not know the amount at issue. But Near estimated that $200 million a year is charged to bank customers for bounced checks. The class-action suit covers several years worth of charges.

In a similar pending case, lawyers for several banks recently described a motion asking a trial judge to throw out the suit a “billion-dollar motion,” indicating the amount they believed could be involved, said Stephen Kaus, another of Perdue’s lawyers and the son of Supreme Court Justice Otto Kaus. Justice Kaus did not participate in Thursday’s decision.

In a statement similar to one made recently by Gov. George Deukmejian that the California Supreme Court is anti-business, Crocker said the ruling could contribute to “an anti-business reputation for the state which could affect jobs.”

“Courts in other states have wisely left price-setting to the competitive market response and to knowledgeable consumers and to government regulators,” the statement said.

Crocker spokesman David Sanson said the ruling suggests that any bank charge--including interest on credit card accounts--could be open to challenge.

Crocker, maintaining that its charges are fair, said the ruling sets a “disturbing precedent, which would enable any person to sue any firm over the price of any product even years after the product is bought and used.”

“Hundreds of judges could be involved in setting prices,” the statement said.

Reading the Fine Print

The bank contended that signature cards filled out when customers open accounts amount to a contract allowing banks to charge fees as they see fit. But the court said the cards do not indicate the amount of the charges for overdrafts, and added that the print “is so small that many could not read it.”

“In short, the bank structured a totally one-sided transaction,” the court said. “The absence of equality of bargaining power, open negotiation, full disclosure and a contract which fairly sets out the rights and duties of each party demonstrates that the transaction lacks those checks and balances which would inhibit the charging of unconscionable fees.”

The California Bankers Assn. joined Crocker in the suit, pointing out that state and federal law preclude banks from unsafe or unsound business practices. It argued that it is good business practice to charge fees of several dollars to discourage people from bouncing checks.

The court responded by saying that “surely sound banking practices would rarely, if ever, require the enforcement of oppressive contracts.” (Perdue v. Crocker National Bank, S.F. 24591)