Banking – Credit union fails to dismiss overdraft fee policy suit

Where a customer pleaded facts making it plausible that a credit union did not properly inform its customers about its overdraft policy, leading to then incurring overdraft fees without their affirmative consent, the credit union’s motion to dismiss was denied.

Background

Donna Burton filed this purported class action, alleging breach of contract and violation of a federal consumer-protection regulation against URW Community Federal Credit Union. URW filed a motion to dismiss.

Regulation E

Regulation E requires financial institutions to use a standalone opt-in form to convey information to consumers about the institution’s overdraft policy. Here, Burton has plausibly alleged that identical language in URW’s opt-in form is ambiguous and, hence, does not adequately describe its overdraft policy. To be sure, it identifies that URW uses the available-
balance method to assess overdraft fees. But that language alone does not call for dismissal of Burton’s complaint.

Rather, URW’s repeated disclosure that it will “authorize and pay overdrafts” on certain transactions plausibly suggests to consumers that overdraft fees are paid at authorization rather than at settlement and, consequently, on “authorize positive, settle negative,” or APSN, transactions. The opt-in form lacks sufficient information about how and when overdraft fees are assessed, which, as Burton alleges, is material to a consumer’s understanding that URW may charge overdraft fees on APSN transactions.

URW nevertheless argues that Burton’s Regulation E claim should be dismissed because: (1) the Federal Reserve Board specifically rejected requiring the opt-in form to contain material that plaintiff demands; (2) the regulations, in fact, bar the inclusion of the material; (3) when read together with the membership agreement, plaintiff was in fact well-informed; (4) the Electronic Funds Transfer Act’s safe-harbor bars her claims and (5) plaintiff cannot show causation. The court rejects these arguments, at least at this preliminary stage.

Breach of contract

Burton alleges that the accountholder contract states that it will not charge overdraft fees on purchases made with sufficient funds; however, URW charges overdraft fees on APSN transactions — transactions that were authorized on sufficient funds — without an unambiguous explanation of how or why.

When a plaintiff alleges ambiguity as the basis of a defendant’s violation of a contractual duty, as Burton has done here, courts consider whether the language “may be understood in more than one way or when it refers to two or more things at the same time.” If a plaintiff plausibly identifies ambiguity, the contract language is interpreted against the drafter.

Here, the ambiguity does not center on whether URW charges overdraft fees on APSN transactions; that much is undisputed. Burton alleges, however, that URW’s contract does not unambiguously describe its process of charging overdraft fees at settlement, which is a key aspect of an APSN transaction.

To the contrary, she alleges that the language of the contract — like the opt-in form — suggests that URW actually determines overdrafts at authorization. As with Regulation E claims, courts have found that contractual language connecting the terms “authorization” and “pay” is ambiguous when, in actuality, overdraft fees are assessed at settlement and may constitute a basis for a breach-of-contract claim.

Moreover, contractual language that underscores that a financial institution has discretion to pay overdrafts, without more, does not clearly convey to consumers that overdraft fees are assessed at settlement rather than at authorization. Here, the contract (as well as the opt-in form) contains several, similar examples of language that reasonably convey that overdraft fees are assessed when URW pays, allows or declines the transaction and that URW has the discretion to pay overdraft fees.

This language is ambiguous, at best, in its description of a key component of URW’s overdraft policy, i.e., that APSN transactions may incur overdraft fees when the initially authorized transaction settles into a negative account. Construing the language in the contract against URW, Burton has plausibly alleged ambiguity in the material contractual terms and, thus, dismissal of her complaint is inappropriate at this stage.

Insofar as URW argues that the terms “presentment” and “posted” unambiguously convey that overdraft fees are assessed at settlement, it misses the mark. Most courts have rejected this exact argument, holding that these terms lack a plain meaning and “can be interpreted to mean that a transaction is ‘posted’ and ‘presented’ at authorization, not . . . only at settlement.” Likewise, these terms (and even the longer contractual provisions cited by URW) fail to give consumers a clear or commonsensical idea of when overdraft fees are assessed.

Defendant’s motion to dismiss denied.

Burton v. Community Federal Credit Union, Case No. 4:25-cv-00033, March 20, 2026. WDVA at Danville (Cullen). VLW 026-3-126. 26 pp.

Full-Text Opinion

VLW 026-3-126
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