ODP Litigation: The Significance of the Gardner v. Flagstar Bank Decision

This week, we’re taking a second to break down the recent Gardner v. Flagstar Bank decision and its impact on the overdraft practices of financial institutions, including credit unions. Overdraft protection (ODP) lawsuits continue to surface across the country. Tracking these cases can offer credit unions valuable lessons — both in what to do, and what to avoid. So, let’s jump right in!

What are the Facts?

The Plaintiff in the case had opened a joint checking account with her spouse at Flagstar Bank and in 2016 Flagstar charged her with two different types of overdraft fees. First, she was charged an overdraft fee for a transaction that was higher than her available balance at the time the transaction was settled but it was not higher than her available balance at the time it was authorized. This is a classic example of an authorized-positive, settle-negative (APSN) transaction. The second overdraft fee that she was charged was a non-sufficient funds fee (NSF) which was assessed every time the merchant tried to reprocess the transaction which had been denied and was once again denied.

The Plaintiff claims that she was caught off guard by the fees — though she also acknowledged never fully reading the account agreement when opening the account. Furthermore, she stated that she didn’t believe that Flagstar was authorized to assess both the authorized positive, settle negative and NSF fees because these fees were not disclosed before the transactions occurred. She brought this to Flagstar and when they didn’t address her complaints she sued them in federal court.

What Happened and Where are We Now?

The lower court initially sided with Flagstar Bank, granting its motion for summary judgment. In simple terms, this means the judge agreed to end the case before trial, concluding there were no disputed material facts. However, the Sixth Circuit Court of Appeals disagreed and reversed that decision.

Why Did the 6th Circuit Reverse?

The 6th Circuit in its opinion laid out a number of reasons why they felt that Flagstar Bank’s motion for summary judgement was ultimately defeated. One of the reasons being that Flagstar Bank in 2017 sent an updated “disclosure guide” to its customers which updated the original Terms and Conditions and allegedly it was meant to communicate with its customers that Flagstar would be charging its fees to customers for authorized positive, settle negative transactions. As a reminder, Gardner’s transactions that led to this case happened in 2016, prior to this updated disclosure.

There were also different interpretations of the word “item” in the contract language provided to the Plaintiff by Flagstar and the district court had held that both were considered reasonable interpretations, however, as we all know multiple interpretations can and do create ambiguity. This ambiguity in the eyes of the court was one of the reasons that they felt that summary judgment was not proper.

Flagstar also tried to argue that the Plaintiff herself stated that she had not fully read the contract provided to her by the bank, but the court felt that due to the ambiguity of the contract that this was not strong enough of an argument to warrant summary judgment.

The 6th Circuit Court ultimately decided that because the Plaintiff was not made aware of the fee for authorized positive, settle negative until at the time the transactions occurred in 2016 that a rational factfinder could have determined that Flagstar breached its own terms and conditions and remanded the case.

Why Does This Matter?

This case is particularly relevant for Michigan credit unions, since the Sixth Circuit covers Michigan and its decisions carry binding precedent in federal cases. Even as the CFPB steps back from aggressively enforcing NSF and overdraft fee issues, financial institutions remain vulnerable to lawsuits from consumers. This case underscores the importance of transparent, timely disclosures—and the legal risks when ambiguity exists.

To sum it up…

ODP fee litigation isn’t going away any time soon. Even with the CFPB dialing back its enforcement activity, private litigation around ODP and NSF fees is still going strong. Credit unions should stay vigilant by regularly reviewing account agreements, disclosures, and fee practices with their legal counsel.

As always, this article is intended for general information only and does not constitute legal advice. If you have any questions about this topic and/or possible implications, you should contact your attorney for advice.

Hope to see you next time when we take a second to discuss another legal topic in the financial services industry!

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