Perdue v. Crocker National Bank

California Supreme Court
216 Cal. Rptr. 345, 702 P.2d 503, 38 Cal. 3d 913 (1985)

ELI5:

Rule of Law:

A bank depositor's signature card creates a valid contract authorizing charges for non-sufficient funds (NSF) checks, but the amount of such charges is subject to judicial review under state law principles of unconscionability and the implied covenant of good faith and fair dealing, which are not preempted by federal banking law.

Facts:

Plaintiff Perdue opened a checking account with defendant Crocker National Bank.
To open the account, Perdue signed a pre-printed signature card provided by the bank.
The signature card contained language in extremely small print stating the account was subject to the bank's 'present and future rules, regulations, practices and charges.'
The card did not specify the amount of the charge for processing non-sufficient funds (NSF) checks, nor was Perdue provided with a copy of the bank's rules and regulations.
Crocker National Bank unilaterally set and increased its NSF charge, which was $6 per check at the time the lawsuit was filed.
Perdue alleged that the actual cost for the bank to process an NSF check was approximately $0.30.

Procedural Posture:

Plaintiff Perdue filed a class action lawsuit against Crocker National Bank in California superior court (the trial court of first instance).
Crocker National Bank filed a general demurrer, arguing that Perdue's complaint failed to state a valid cause of action.
The superior court sustained the bank's demurrer without leave for Perdue to amend the complaint.
A final judgment was entered in favor of Crocker National Bank.
Perdue appealed the trial court's judgment to the Supreme Court of California.

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Issue:

Does California's common law doctrine of unconscionability, which allows a court to invalidate excessively high prices in contracts of adhesion, apply to service charges set by a national bank for processing checks drawn on accounts with non-sufficient funds (NSF), or is such state-law regulation preempted by federal banking law?

Opinions:

Majority - Broussard, J.

No, California's doctrine of unconscionability is not preempted by federal law and may be used to challenge service charges set by a national bank for NSF checks. The court reasoned that while the signature card is a valid contract, it is a contract of adhesion, imposed by the party with superior bargaining power. The bank's discretion to set fees is therefore limited by the implied covenant of good faith and fair dealing. A plaintiff can challenge a price term as unconscionable, and the allegation of a 2,000% disparity between the bank's cost ($0.30) and the price ($6) is sufficient to warrant a factual hearing to determine if the fee is oppressive. The court rejected the argument that the fee was a penalty for breach of contract, finding that writing an NSF check is not a breach. Finally, the court held that federal banking law does not create a comprehensive regulatory scheme that preempts the application of general state contract law principles, like unconscionability, to national banks, as these principles do not impair the banks' ability to perform their functions.

Analysis:

This decision significantly empowered consumers by affirming that bank-set fees are not immune from judicial scrutiny under state contract law. It established that the doctrine of unconscionability can be applied to price terms, particularly in adhesion contracts like bank signature cards, preventing powerful entities from imposing exorbitant fees without justification. Most importantly, the court's rejection of the federal preemption argument was a major check on the power of national banks, preserving the state's role in consumer protection and ensuring that general principles of commercial fairness apply to banking services.

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