A federal appeals court in San Francisco today overturned a lower court order requiring Wells Fargo Bank to pay its California debit card customers $203 million restitution for allegedly excessive overdraft fees.

The 9th U.S. Circuit Court of Appeals said the San Francisco-based bank’s former practice of processing debits in a way that maximized overdraft fees was “a pricing decision authorized by federal law.”

But the court also left the door open for the customers to go back to a federal trial judge to seek restitution under a state law that bans business fraud.

The appeals court ruled in a class-action lawsuit filed in federal court in San Francisco on behalf of California debit card customers in 2007 to challenge the bank’s procedure for posting debit purchases to customers’ checking accounts.

Attorney Richard McCune estimated there are more than one million California debit card holders in the class approved by U.S. District Judge William Alsup, the trial judge in the case.

Between 2001 and 2010, the bank used a “high-to-low” system of posting, or processing, the most expensive items in a given day first.

If the highest purchase overdrew the account, the remaining smaller items, such as a $4 coffee drink, would do the same, and the bank charged an overdraft fee for each one. The current fee is $35.

The procedure meant that customers could have multiple overdrafts, instead of just one, in a single day, and brought Wells Fargo $1.4 billion in overdraft fees between 2005 and 2007, the court said.

In 2010, Alsup issued a permanent injunction blocking the practice and ordered the bank to pay its California debit card holders $203 million in compensation.

Alsup concluded the bank’s procedure violated the U.S. Banking Act because it wasn’t based on sound business principles.

But a three-judge panel of the appeals court overturned both the injunction and the restitution order, saying the federal law and related regulations permitted the procedure.

At the same time, the court upheld another part of Alsup’s decision in which he said Wells Fargo had violated anti-fraud provisions of California’s Unfair Competition Act by misleading consumers about its system for posting debits.

The panel sent the case back to Alsup to determine whether an injunction against misleading statements is needed, whether restitution is justified under the California law, and if so, how much.

Wells Fargo issued a statement saying, “We are pleased with the decision that largely reaffirms Wells Fargo’s position and vacates the monetary award against us.

“We look forward to resolving the remaining issues and we will continue to serve the financial needs of our customers,” the bank said.

Wells Fargo has $1.4 trillion in assets and is the nation’s largest bank in market value, according to its website.

McCune said he hopes Alsup will decide that customers should be granted restitution and that it will be the same $203 million amount.

He said of the ruling, “It’s disappointing from the consumer protection standpoint of being able to hold banks accountable – that was weakened.

“But it’s a win in that the court affirmed that the bank had misrepresented its policy, so we can go ahead and get compensation for the class. That’s a positive result,” McCune said.

The ruling could be appealed to an expanded panel of the 9th Circuit or to the Supreme Court. McCune said the customers’ lawyers have made no decision on whether to do so.

Wells Fargo spokeswoman Julia Bernard said that after Alsup’s injunction went into effect in November 2010, the bank changed to posting debits in chronological order, if that order is known, or otherwise in a low-to-high sequence.

If there are no further appeals, the bank could resume using the former high-to-low procedure. But “we don’t have plans to make any changes,” Bernard said.

The appeals court said Alsup’s conclusion that Wells Fargo made misleading statements “is amply supported by the court’s factual findings.”

The bank implied that debits were processed in chronological order because the debits were shown that way in customers’ online accounts and because customers were told that debit transactions were generally taken out of their accounts immediately, the court said.

In addition, customers were misleadingly told that “if you don’t have enough money in your account to cover the withdrawal, your purchase won’t be approved,” the appeals panel said.

Alsup wrote in his 2010 ruling that Wells Fargo constructed a “trap” by processing debits in descending order and “then exploited that trap with a vengeance, racking up hundreds of millions off the backs of the working poor, students and others without the luxury of ample bank balances.”

Julia Cheever, Bay City News

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