U.S. Second Circuit - The FindLaw 2nd Circuit Court of Appeals Opinion Summaries Blog

Capital One Loses Appeal of Overdraft Case

The Second Circuit Court of Appeals has reversed the dismissal of a potential class action lawsuit related to Capital One's practice of charging "overdraft fees." Fortunately for the credit giant, only the breach of contract claim and one other statutory claim under New York law were revived.

The plaintiff in the case alleges that the contractual agreement and the bank's actual practices do not line up, which results in customers being unfairly charged overdraft fees. However, despite this win on appeal, the case is far from over as the plaintiff, Tawanna Roberts, will still need to proceed through litigation and trial.

What's in Your Contract?

The crux of the claim centers around the timing of a payment that would cause an account to be overdrawn. While Capital One maintains that an overdraft occurs when they settle the transaction with the merchant, the plaintiff alleges that the contract states the overdraft occurs at the time of the customer's payment to a merchant.

The Appellate Court did not actually say which position is correct, but rather explained that this ambiguity creates a genuine dispute of a material fact for a fact finder to decide. It explained further that this ambiguity means that dismissal on a 12(b)(6) motion is inappropriate, especially since the basic presumption is that contract ambiguity should be construed against the drafter, until proven otherwise.

The actual language states that Capital One will charge an overdraft fee at the time it "elects to pay" a merchant. However, the phrase "elects to" and the term "pay" are not defined, and as such, it is rather ambiguous if Capital One "elects to pay" at the time of authorization (when a transaction is approved) or at the time of settlement (when the merchant actually received the money from Capital One).

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