Margolis v. Sandy Spring Bank

ARTHUR, J. When a bank processes a customer’s ATM and debit-card transactions, it can proceed in at least two different ways. It can process the transactions in chronological order, by which it debits the amount of the first transaction first and the last transaction last. Or it can engage in what is called “batch-processing,” by which it organizes the transactions by dollar amount and then debits the largest transactions first and the smallest transactions last. By engaging in batch-processing ⁷⁰⁸ and processing the largest transactions first, the bank increases the likelihood of overdrafts — and of overdraft fees.

In this case, Daniel J. Margolis, as the representative of a putative class, brought a Consumer Protection Act challenge to Sandy Spring Bank’s practice of batch-processing debit-card transactions (a.k.a. “point-of-sale” or “POS” transactions) and ATM transactions. The Circuit Court for Montgomery County dismissed his complaint for failure to state a claim upon which relief can be granted. Questions Presented Margolis presents two questions for our review, which we have consolidated and rephrased as follows: did the trial court err by granting Sandy Spring’s motion to dismiss 1 For the reasons that follow, we answer in the negative and affirm the judgment of the circuit court. A. The Complaint Margolis maintained a checking account with Sandy Spring.

The account had overdraft protection, under which the bank would pay for a transaction despite an overdraft of available funds, but would charge a fee of $37.00. Margolis claimed that he incurred overdraft fees because the bank reordered ATM and debit-card transactions in his account, debiting the largest transactions first. On June 20, 2013, he filed suit against Sandy Spring, claiming that the bank had committed unfair and deceptive trade practices in violation of Maryland’s Consumer Protection Act (“CPA”), ⁷⁰⁹ Code (1975, 2013 Repl.Vol), Commercial Law Article (“CL”), § 13-301. 2 The complaint alleged that the bank reorders transactions at the end of each business day, deducting the largest debits or withdrawals first and continuing thereafter from largest to smallest in descending order. The complaint specifically alleged that Sandy Spring manipulated the order of transactions to increase overdraft fees — and the resulting profits.

By way of example, suppose a Sandy Spring customer’s account contained $100.00, and the customer used her debit card for a $10.00 transaction, followed by a $20.00 transaction, and finally a $90.00 transaction. If Sandy Spring processed the transactions in chronological order, the customer would overdraw her account only when she made the final $90.00 debit, and the bank would charge only a single overdraft fee. However, when the bank batch-processes these same transactions and reorders them from largest to smallest, the bank first deducts $90.00, then $20.00, and lastly $10.00. Under batch-processing, therefore, the account becomes overdrawn at the second transaction, for $20, and the customer incurs two overdraft fees.

In his complaint, Margolis principally alleged that the bank violated the CPA because its Deposit Account Agreement did not disclose, or did not adequately disclose, the practice of batch-processing transactions by reordering them from largest to smallest. He also alleged that the bank did not adequately inform its customers of their ability to opt out of overdraft-protection services, under which the bank pays a transaction despite an overdraft, but charges an overdraft fee. At various points, he also alleged that the bank processes debits before credits. Finally, he alleged that the bank did not adequately identify overdraft fees. ⁷¹⁰ Margolis invoked three provisions of the CPA: section 13-301(2)(i), concerning representations that “consumer services have a sponsorship, approval, accessory, characteristic, ingredient, use, benefit, or quantity which they do not have”; section 13-301(3), concerning the “[flailure to state a material fact if the failure deceives or tends to deceive”; and section 13 — 301(9)(i), concerning “[deception, fraud, false pretense, false premise, misrepresentation, or knowing concealment, suppression, or omission of any material fact with the intent that a consumer rely on the same in connection with ... [t]he promotion or sale of any ... consumer service.” 3 B. The Deposit Account Agreement The bank’s Deposit Account Agreement contains a number of provisions that bear on the adequacy of its disclosures. 4 On the subject of overdrafts, the section captioned “Fees for Checks and Other Items or Incoming Collections” lists the fees that the bank may charge in case of overdrafts: Overdraft, NSF Return or Unavailable Funds (UAF) Overdraft Item: a withdrawal or an order presented for payment that would overdraw an account or is drawn against unavailable funds (fee not applicable to commercial checking UAF items that are paid or returned) $35 per withdrawal or order paid or returned....

The types of withdrawals or Orders subject to an overdraft, NSF ⁷¹¹ Return or UAF fee include negotiable orders of withdrawal, checks, substitute checks, electronified checks, “counter/in-person” withdrawals, drafts, ATM withdrawals, point of sale purchases.... In addition, paragraph 2 of the General Rules of the Deposit Account Agreement states: We reserve the right at our discretion to pay or refuse to pay any Order executed by you if the balance in the Account is insufficient or uncollected. In either case, we will charge you a fee for each of such Orders to your Account.... You may not be notified prior to our payment of any Order that may result in an overdraft....

On the crucial subject of batch-processing, the Deposit Account Agreement had this to say: We may accept, pay or charge to your Account your Orders in any order we choose even if (a) paying a particular Order results in an insufficient balance in your Account to pay one or more other Orders that otherwise could have been paid out of your Account; or (b) using a particular order results in the payment of fewer Orders or the imposition of additional fees. In general, we currently process your Orders, including but not limited to ATM and POS transactions and community office withdrawals, at the end of each business day in high to low dollar amount. If there are insufficient funds to cover all of your Orders processed on any given day, this method may result in additional overdraft fees. We may establish different processing priorities or categories for some Orders (i.e., wire transfer requests, automatic loan payments or automatic transfers).

We reserve the right to change our policy at any time without notice to you. Finally, the Overdraft Disclosure and Confirmation Notice, which is incorporated into the Deposit Account Agreement, states: At any time if you decide that you no longer want to have our standard overdraft services for ATM and one-time debit card transactions, please contact us.... ⁷¹² On the basis of the disclosures in the Deposit Account Agreement, Sandy Spring argued, among other things, that the complaint failed to state a claim for unfair and deceptive trade practices under the CPA. 5 C. Motion to Dismiss On November 15, 2013, the Circuit Court for Montgomery County held a hearing on Sandy Spring’s motion to dismiss. At the hearing, Sandy Spring argued that it had fully disclosed its practice of batch-processing and its customer’s right to opt out of overdraft protection and also that section 4-303(b) of the Uniform Commercial Code, Code (1975, 2013 RepLVol.), § 4-303(b) of the Commercial Law Article (“CL”), expressly permitted banks to reorder transactions. The latter argument appeared to register with the circuit court, which asked Margolis’s counsel, “[HJasn’t the Maryland legislature approved [batch processing] by saying that the bank can order [the transactions] or re-order [the transactions] in any order that it wants under the commercial law article that’s cited by the defendants herein?” 6 At the conclusion of the hearing, the court granted the motion for “the reasons set forth in [the defendant’s] motion and in [the defendant’s] reply.” The court added: [W]hile I may not personally be thrilled about the process or the practice of the bank making all this money at the expense of the customers, it appears to me that the Maryland legislature has, ... said it’s okay, when they specifical ⁷¹³ ly authorized the bank to go ahead and re-order them in any fashion that they want.

The court issued a written order entered December 11, 2013. The order does not provide any additional explanation of the court’s rationale; it incorporates the reasoning “more fully discussed during the hearing” on November 15, 2013. On January 3, 2013, Margolis noted this timely appeal. Discussion A. Standard of Review In deciding a motion to dismiss a complaint, a circuit court assumes the truth of the complaint’s factual allegations and of any reasonable inferences that can be drawn therefrom.

See, e.g., Patton v. Wells Fargo Fin. Md., Inc., 437 Md. 83, 95 , 85 A.3d 167 (2014) (citing Bobo v. State, 346 Md. 706, 708 , 697 A. 2d 1371 (1997)). A court, however, need not accept the truth of pure legal conclusions. See, e.g., Shepter v. Johns Hopkins Univ., 334 Md. 82, 103 , 637 A.2d 1223 (1994); John B. Parsons Home, LLC v. John B. Parsons Found., 217 Md.App. 39, 69 , 90 A.3d 534 (2014) (quoting Shenker v. Laureate Educ., Inc., 411 Md. 317, 335 , 983 A.2d 408 (2009)) (“ ‘[m]ere conclusory charges that are not factual allegations need not be considered’ ”).

Moreover, “[a]ny ambiguity or uncertainty in the allegations bearing on whether the complaint states a cause of action must be construed against the pleader.” Shenker, 411 Md. at 335 , 983 A.2d 408 ; John B. Parsons, 217 Md.App. at 69 , 90 A.3d 534 . A court should dismiss a complaint for failure to state a claim only if the alleged facts and reasonable inferences would fail to afford relief to the plaintiff. Bobo, 346 Md. at 709 , 697 A.2d 1371 . This Court conducts a de novo review of the circuit court’s granting of a motion to dismiss, see Gomez v. Jackson Hewitt, Inc., 427 Md. 128, 142 , 46 A.3d 443 (2012), applying the same standard as the circuit court and determining whether that decision was legally correct.

See Reichs Ford Rd. Joint Venture v. State Roads Comm’n, 388 Md. 500, 509 , 880 A.2d ⁷¹⁴ 307 (2005) (citing Adamson v. Corr. Med. Servs., 359 Md. 238, 246 , 753 A.2d 501 (2000)). “The appellate court accords no special deference to the circuit court’s legal conclusions.” Patton, 437 Md. at 95 , 85 A.3d 167 .

B. CL § 4-303(b) Margolis argues that the circuit court erred in relying on CL section 4-303(b) to conclude that the General Assembly has authorized batch-processing of electronic debits. He argues that section 4-303(b) relates only to tangible negotiable instruments, such as checks, and does not apply to the debit and ATM transactions that are at issue in this case. Sandy Spring concedes that section 4-303(b) does not apply to electronic transactions, but argues that the court’s reliance on the statute amounted to harmless error. We agree that section 4-303(b) does not apply to electronic transactions, but also agree that the court’s reliance on the statute was ultimately immaterial.

Section 4-303(b) provides, in pertinent part, that “items may be accepted, paid, certified, or charged to the indicated account of its customer in any order.” This provision is a word-for-word adoption of section 4-303(b) of the Uniform Commercial Code (“U.C.C.”). See U.C.C. § 4-303(b) (2014). 7 Whereas the language of section 4-303(b) seems to bestow discretion on the banks to use the posting order of their choice, the courts have interpreted Article 4 of the U.C.C. not to apply to ATM and debit transactions. See In re Checking Account Overdraft Litig. (MDL), 694 F.Supp.2d 1302 , 1315 n. 9 (S.D.Fla.2010) (“[t]he banks rely on [section] 4-303(b) of the UCC....

The UCC drafters however did not include transactions initiated by means of a credit card or debit cards in its endorsement of high-to-low posting”); Hospicomm, Inc. v. Fleet Bank, N.A., 338 F.Supp.2d 578, 586 (E.D.Pa.2004) (hold ⁷¹⁵ ing that “Article 4 does not contemplate electronic -withdrawals”). In reaching this conclusion, courts have reasoned that U.C.C. Article 4 applies only to an “item,” see, e.g., Hospicomm, 338 F.Supp.2d at 586 ; Sinclair Oil Corp. v. Sylvan State Bank, 254 Kan. 836, 843 , 869 P.2d 675 (1994), which means an “instrument or a promise or order to pay money handled by a bank for collection or payment.” U.C.C. § 4-104(a)(9); accord CL § 4-104(a)(9). An “instrument,” in turn, means “a negotiable instrument,” see U.C.C. § 3-104(b); CL § 3-104(b); such as a check. By its terms, therefore, Article 4 does not apply to electronic-funds transactions, such as ATM withdrawals or debit-card or POS purchases.

Instead, as other courts have recognized, electronic-funds transactions are governed by the federal Electronic Funds Transfer Act, 15 U.S.C. § 1693 et seq. See, e.g., Hospicomm, 338 F.Supp.2d at 586 . 8 Nonetheless, because the circuit court’s reliance on section 4-303(b) was in the nature of an alternative holding, the error does not require reversal unless the court also erred in holding that Margolis failed to allege violations of the CPA. Cf. Schneider v. Little, 206 Md.App. 414, 443 , 49 A.3d 333 (2012), rev’d on other grounds, 434 Md. 150 , 73 A.3d 1074 (2013) (quoting Barksdale v. Wilkowsky, 419 Md. 649, 657 , 20 A.3d 765 (2011)) (“ ‘[i]t has long been the policy in this state that [appellate courts] will not reverse a lower court judgment if the error is harmless’ ”).

C. The Consumer Protection Act Maryland’s CPA, CL section 13-303, proscribes businesses, including banks, from engaging in unfair or deceptive trade practices, as defined in CL section 13-301. Margolis argues that the circuit court erred by dismissing his CPA claim ⁷¹⁶ because, he says, his complaint sufficiently alleged that Sandy Spring violated the CPA by engaging in unfair or deceptive trade practices. Sandy Spring responds that it adequately disclosed its overdraft policies to its customers and therefore that the circuit court properly dismissed the CPA claim. Margolis identifies a number of banking practices that, in his view, violate the CPA: • reordering transactions from high to low; • charging overdraft fees when accounts had a positive balance; • reordering multiple days’ worth of transactions; • preventing customers from ascertaining their actual account balances; • charging fees which far exceed the amount by which an account is overdrawn and which are not reasonably related to Sandy Spring’s cost of covering the overdraft; • failing to obtain customer consent before processing debit transactions which overdraw customer accounts; and • failing to notify customers of their ability to opt-out of overdraft services and related fees.

In addition, at various points, Margolis alleges that the bank processes credits before debits, although he does not clearly claim to have suffered damages as a result of that alleged practice. Because Margolis’s CPA claims allege material misstatements or omissions in the Deposit Account Agreement, the language of that document is of paramount importance. Margolis can state a claim only if the agreement contains a false representation under section 13-301 (2)(i) (i.e., a “representation” that the bank’s services “have a ... characteristic which they do not have”); the “[flailure to state a material fact” under section 13-301(3); or “[djeception, fraud, false pretense, false premise, misrepresentation, or knowing concealment, suppression, or omission of any material fact,” under section 13-30K9). 9 ⁷¹⁷ Our examination of the language of the agreement leads us to conclude that Margolis did not sufficiently allege that the bank engaged in an unfair or deceptive trade practice in contravention of the Act. 1. Reordering Transactions from High to Low Margolis predicates a CPA violation on what he calls the bank’s alleged “concealment” of its practice of batch-processing.

Yet, the Deposit Account Agreement plainly provides that, “[i]n general,” the bank “currently process[es] [a customer’s] Orders, including but not limited to ATM and POS transactions ... at the end of each business day in high to low dollar amount.” In view of that explicit disclosure, there is simply no factual basis for the allegation that the bank somehow concealed its practice of batch-processing ATM and POS transactions “in high to low dollar amount.” See Hassler v. Sovereign Bank, 644 F.Supp.2d 509, 515-16 (D.N.J.2009), aff'd, 374 Fed.Appx. 341 (3d Cir.2010) (rejecting challenge to batch-processing under New Jersey Consumer Fraud Act because agreement contained very information plaintiff alleged to have been misrepresented, suppressed, or concealed). Margolis counters that the agreement is still misleading because the document states that Sandy Spring “generally]”