ATM Litigation Stoked by Legal Opportunism
Law firms seeking relatively easy settlements have helped fuel the numbers of lawsuits against both credit unions and community banks over alleged failures to comply with ATM regulations.
One of the latest CUs to have been caught in the ATM litigation web is the 36,000-member LA Financial Credit Union, a federally chartered CU headquartered in Pasadena, Calif. Class action litigation that charged the CU's ATMs violated contract law wrapped up last week.
According to court documents and the plaintiff's counsel, LA Financial agreed to pay people who had made transactions at its six ATMs between May 5, 2007 and May 28, 2009 at least 50 cents plus interest, per person, per transaction, but no more than $10.
The settlement amount in any case will not exceed the $33,889 that the CU has placed into a court-administered escrow account, according to the settlement order and Michael Martinez, a lawyer with Martinez & Charles, a Pasadena law firm that represented plaintiff Dennis Minkler.
Other press reports had placed the settlement account at $10 million.
"If everyone who made a transaction at one of the ATMs comes forward, they will all get 50 cents plus interest. If fewer come forward, they will get more, but the amount per person will be capped at $10,” Martinez said.
“We didn't want to give anyone a huge windfall from this. We thought $10 from a 50-cent transaction was enough of a windfall," he said.
According to the settlement documents, the law firm will receive $8,000 and Minkler $1,000 as part of the settlement.
Minkler sued the credit union in 2010, alleging that he had been charged $2.00 for withdrawal at one of the credit union’s six ATMs when the sign on the machine said the cost would be $1.50.
The credit union did not return calls for comment as of press time.
Legal sources said these sorts of cases often come in waves and are often sparked by law firms that see ways to obtain fairly easy money from credit unions and community banks that will settle the cases rather than fight them. In most cases, the plaintiffs and members of the class generally make only small amounts of money.
CUNA Mutual reported that ATM litigation specifically aimed at CUs over alleged violations of the Federal Reserve's Regulation E has snared 44 CUs in 14 states as of June 30.
Regulation E requires that credit unions and other ATM deployers both post notices on their machines that a fee may be required if a cardholder from another financial institution makes a withdrawal or checks a balance at the ATM and disclose the fee amount to the cardholder before they are committed to paying it.
“The lawsuits typically involve missing signage on or at the ATM and incorrect fees disclosed on the sign at the ATM,” said Brad Mundine, CUNA Mutual senior manager of credit union protection risk management. “In addition, many of the lawsuits involve remote ATMs serviced by third-party vendors. Many credit unions involved in the lawsuits erroneously believed the fee notice sign was not necessary since the fee was disclosed on the terminal screen of the ATM.”
One legal expert, speaking on background, recounted how one law firm in his area filed 24 such lawsuits against banks and other ATM deployers in his area and garnered roughly $10,000 a piece from each of them. “Litigation is very expensive,” the attorney noted, and a financial institution can feel fortunate to be able to settle a case for relatively little money, but taken as group the lawyers do fairly well.
CUNA Mutual laid the responsibility for many of the cases involving alleged Regulation E violations on a “retired Michigan couple” that, according to reports CUNA Mutual cited, has “combed the state” searching for out of compliance ATMs whose deployers could be sued. This couple has filed 40 lawsuits against CUs in 18 months, the insurer reported.
“The sad thing is that almost all of these lawsuits are avoidable,” said Andy Keeney, partner in the Norfolk, Va., firm of Kaufman and Canoles, who serves as general counsel for a number of credit unions. “If credit unions take some simple steps, they can protect themselves from many of these cases.”
Keeney and CUNA Mutual recommended that credit unions review and inspect their ATMs regularly for compliance. To protect themselves from Regulation E violations, credit unions should post signs that indicate that users of the ATM that are not account holders will or may face fees for withdrawals and balance inquiries. The rule does not require the credit union to post the exact amount of the fee on the sign, CUNA Mutual said, though it does require the user be notified of the exact fee amount before they commit to the transaction.
The most handy time for such inspections, CUNA Mutual said, is when the CU is serviced, a weekly occurrence at many CUs. The insurer recommended as well that the inspection process include taking a digital picture of the ATM and keep a log of the inspections. Doing so will help the credit union defend itself in court against potential lawsuits, CUNA Mutual said.
The log should include the location of the ATM inspected, the date of the inspection, whether the fee notice is present, whether any action (such as replacing the sign) was taken and the identification of the employee conducting the inspection.
The credit union should also consider giving the inspector a supply of new disclosure stickers so that the employee could easily replace any damaged, defaced or missing notices.