Dana and Andrea Patterson wrote 115 checks that bounced over a two-and-a-half year period on their checking account at Boatmen's Bank, according to court records. This generated $1,725 in $15 "NSF" fees for the bank.

Boatmen's Bank, like many others, had a policy of clearing checks that came in on a given day from a given customer starting with the check for the largest amount, and continuing in descending order until reaching the check for the lowest amount. This "highest-to-lowest" policy maximizes, as a mathematical matter, the number of checks that will bounce in a given day.

The law appears to be on Boatmen's side: In Illinois, as in virtually every other state, a bank is entitled, by statute, to clear checks and make other debits to a customer's account "in any order," or alternatively, "in any order which is convenient to it." Deferring to the banks' judgment on these issues, the courts have decided that "it is not within the province of the court to look into the internal operational procedures of a bank and make its own determination of what is or is not convenient to the bank."

Was the policy of Boatman's--since acquired by NationsBank Corp., which, of course, is now Bank of America Corp.--a wise move to generate revenues?

It seems not. The bank agreed to pay approximately $9 million earlier this year to settle a class action spearheaded by the Pattersons, despite the fact that the law is fairly clear-cut in the bank's favor. To add insult to injury, while most bank customers involved in the lawsuit received only $50 each from the settlement, the Pattersons received an extra $8,000 from the defendants for stepping up as plaintiffs in connection with their 115 bounced checks.

Because the case did not go very far in court before the litigants settled it, it is hard to glean from court records why the defendant shelled out the substantial $9 million sum to be done with the lawsuit. Nor have the banks and their lawyers been anxious to give details. But several factors appeared to play a very significant role in the outcome.

As banking law expert Barkley Clark, a partner at the law firm of Shook, Hardy & Bacon, puts it, "a lot of consumers find this "high-to-low" policy to be an objectionable practice." More onerous for banks, Clark admonishes, even if consumers are not particularly upset about the practice," a plaintiffs' lawyer can take the issue and run with it" in class action litigation.

Class actions remain the rage among many lawyers who take cases on behalf of plaintiffs on a contingent fee basis. Banks make appealing targets, particularly on legal issues with "David and Goliath" consumer overtones. Clark perceives a herd mentality among many plaintiffs' class action lawyers. He notes that they have an active "network out there," meeting and discussing new avenues for bringing litigation against financial institutions and other large corporations. Usually there is not just "a single case," but the litigation "tends to come in clusters."

"High-to-low check clearing litigation has the highest visibility within the banking industry right now," observes Kurt Stertz, managing attorney at Bankers Systems Inc., an organization that compiles and analyzes information for the banking industry.

Tom Pareigat, also at Bankers Systems, says that despite pro-bank law on the subject, "our clients are still concerned," and "getting sued is expensive."

Certainly the cost of pursuing expensive class action litigation was a factor for Boatmen's Bank to weigh in deciding to pay the $9 million settlement. An Arthur Andersen study commissioned by the bank defendants in the Patterson case itself concluded that the process of retrieving and analyzing the relevant monthly bank statements alone "would take 400 man-years and would cost over $14 million"--and this number does not appear to include any lawyers' fees.

"The cost of litigation is so expensive that even though the law may be in the banking institutions' favor, the cost of defending litigation may force the institutions into substantial settlements," says Barkley Clark.

The language in some of the bank's customer deposit agreements in the Patterson litigation also may have become a problem in the litigation. One bank's agreement had simply stated: "You agree that when funds are insufficient to pay all items presented on a given day, we may pay one or more items, and return any dishonored items, in any order we deem appropriate." The agreement did not make any explicit mention of the bank's option to use a "high-to-low" procedure.

On this omission, U.S. Magistrate Judge Gerald B. Cohn, in his final approval of the parties' settlement, blessed additional language fleshing out that "[c]urrently we process checks with the highest dollar amount first. This method ... may also result in more insufficient funds fees."

Other banks have suffered similar fates. CoreStates Bank, since merged with First Union Corp., settled litigation on somewhat different high-to-low practices in 1998 for $2.2 million. [double check final settlement] In that case, the plaintiffs alleged that CoreStates' policy had been to take all of the checks presented on a given day and sum them up. If the total were greater than the available balance, the bank allegedly would bounce and collect a $30 fee for every single check presented that day, not just on the checks that brought the balance below zero.

Bank of America and numerous others have been hit by lawsuits on their check-clearing practices.

Most surprisingly, in the Patterson case the highest-to-lowest policy did not even yield significantly greater revenue than a policy of clearing checks sequentially, from lowest to highest check number received that day, would have yielded. Arthur Andersen determined that among the 115 bounced checks over a two-year-plus period, only two--for a total of $30 in additional NSF fees--would not have bounced had the bank cleared checks sequentially.

This finding in the Patterson case defies the conventional wisdom on the subject. While banks are reluctant to discuss their analyses on whether "high-to-low" is profitable, Barkley Clark has observed that banks have felt that "it's a lot more profitable" than clearing checks in sequence of check numbers, and the "difference can be fairly substantial."

But the Arthur Andersen study suggests that while it is mathematically true that a high to low check-clearing policy will necessarily generate equal or greater revenue than a sequential policy, the difference in most real-life situations may be negligible. It may be that many consumers who bounce checks do not pay much attention to the amount in their checking account, thereby minimizing the situations in which the order in which a bank cleares checks makes any difference.

To give an example, imagine that a customer with $500 in his checking account writes checks sequentially for $50, $75, $125, $150 and $375. If a bank cleares checks sequentially, it would clear the first four checks, drawing an aggregate $400 out of the account. It then would attempt to clear the highest, $375 check, which would at that point overdraw the $500 in the account, yielding one NSF fee of, say, $15.

If, however, the bank cleares checks starting with the highest amount and continuing to the lowest, it would first clear the $375 check, and then attempt to clear the next $150 check, which would bounce and generate one $15 NSF fee. The bank would then try to clear the next highest $125 check, which would clear and bring the total for the day up to $500. It then would attempt to clear, and would bounce, the remaining two checks for $75 and $50, yielding two more NSF fees. At the end of the day, the bank would reap three $15 fees from a highest to lowest procedure, compared to only one from a sequential (and in this example low-to-high) procedure.

But it takes a special set of numbers to generate these significantly different results, as Arthur Andersen's study suggested in the Patterson lawsuit.

Not only may the profits of using a high-to-low policy be less substantial than expected, but a high-to-low check clearing policy may persist as a public relations problem with bank customers. To be sure, some banks justify a high-to-low check clearing policy by essentially saying, "That's what the customers want." According to Eloise Hale, a spokesperson for Bank of America, BofA opted for a high-to-low check clearing policy in the mid-1990s as a result of polling bank customers through feedback surveys, focus groups and telephone surveys.

Hale claims that because customers' biggest checks tend to be for important items such as mortgages, rent or car payments, customers tend to want those checks to be cleared first. Kurt Stertz of Bankers' Systems also surmises that some customers might prefer a high-to-low policy because using available funds to clear the highest check first, typically a mortgage payment, lessens the chance that those types of checks will bounce, which could have an adverse affect the customer's credit rating.

Moreover, several banks have stressed that as a threshold matter, it is a customer's obligation to make sure there are enough funds in his or her checking account to pay all checks. Hale and others note that customers can and do take extra special precaution against being hit by NSF fees by obtaining overdraft protection for their accounts, which eliminates all NSF fees unless the customer runs through the overdraft protection.

Hale says that she isn't aware of any complaints about Bank of America's current policy. But when asked whether the bank has ever determined whether adopting a high-to-low policy would be profitable, Hale said, "I don't know that that was a part of it," and that if a profitability study were done, it would be a private "proprietary" matter for the bank. Bank of America also did not respond to several requests for information about the Patterson lawsuit, in which it became a party through its acquisition of NationsBank.

Still, some observers remark that banks' "high-to-low" check-clearing policies are an affront to some consumers--even though the customers arguably have only themselves to blame for writing checks on insufficient funds. These consumers may "feel abused because institutions are engaging in a practice that maximizes fees," says Stertz of Bankers Systems, and their class action lawyers have been eager to pursue the issue in the courts.

Citibank has bucked the recent trend among the big players. Citibank, like a good number of smaller community banks throughout the country, cleares checks from lowest to highest amounts. Citibank's account agreement says that "we pay your checks in the order of smallest to largest dollar amount." Mark Rodgers, a spokesperson for Citibank, says that the policy is "designed to cut down on overdraft fees the bank charges," and therefore the number of unhappy, and perhaps litigious, customers.

Some of the plaintiffs in other check-chasing litigation have been infrequent check bouncers. In one class action brought against PNC Bank, none of the plaintiffs was a "habitual check bouncer," according to plaintiffs' lawyer Mark Fischer.

Ironically, despite the better spending habits of the named plaintiffs in the case against PNC Bank, PNC prevailed in its litigation, generating the most recent published judicial decision blessing banks' high-to-low check clearing practices.

In that court opinion, issued in March of this year, Judge Robert H. Gorman of the First District County Court of Appeals in Ohio sided with the bank. Affirming the trial court's dismissal of the plaintiffs' claims at the lawsuit's outset, Judge Gorman ruled that the applicable Ohio statute allowed banks to clear checks "in any order." He also found that PNC's customer agreement essentially parroted the statute by specifying that PNC would debit accounts "in any order convenient to us."

Pitted against these obstacles, the plaintiffs faced "the insurmountable task of persuading us that a statutorily authorized procedure constitutes an act of bad faith and unfair dealing." Judge Gorman also made short shrift of the plaintiffs' complaints that PNC Bank's NSF fee policy represented an unenforceable penalty and an "unconscionable" contract term.

Judge Gorman's concluding observation, like that of a judge in a prior litigation he cited, was that "a person who chronically writes bad checks does not have clean hands to seek equitable relief from the resulting fees, since such a person is engaged in bad banking practices and is merely experiencing the intended deterrent effect of those fees." First Union National Bank of Tennessee also prevailed in a similar case in 1997, as did Colonial Bank in a more recent lawsuit in an Alabama court.

Even the Comptroller of the Currency has weighed in on the subject, promulgating a regulation confirming that national banks have wide discretion in setting their different service fees. That regulation is consistent with an July 2000 decision in an Alabama case brought against Amsouth Bank. The court in that case found that the federal Truth in Savings Act does not require that banks specifically disclose that they are using a high-to-low procedure for clearing checks.

While the legal precedent on the topic generally favors banks, it may not be air-tight. Even though the version of the Uniform Commercial Code adopted in virtually every state allows banks to clear checks in any order they wish, banks may face liability for breach of contract--using so-called "unconscionable" terms in their contracts--or for fraud or violation of various unfair and deceptive practices statutes, if their customer agreements do not spell out clearly that they may clear checks in high-to-low order.

Finally, three states--California, Massachusetts and Texas--have adopted commentary to their versions of the Uniform Commercial Code suggesting that if a bank's only motive in adopting a "high-to-low" policy is to generate additional revenue from additional NSF fees, the practice may be unkosher.


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