Bank Advance Notice Required for Varying Electronic Funds Withdrawal
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
GRACE LAWRENCE, )
on behalf of herself and all )
others similarly situated, )
)
Plaintiff )
C.A. No. 08-00679
vs. )
)
L.A. FITNESS INTERNATIONAL, LLC, )
CLASS ACTION
)
Defendant. )
)
PLAINTIFF’S MEMORANDUM OF LAW IN SUPPORT OF HER RESPONSE
IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS
PLAINTIFF’S EFTA WAIVER CLAIMS
Plaintiff Grace Lawrence, through counsel, respectfully submits this memorandum of law in support of her response in opposition to Defendant L.A. Fitness International, LLC’s Motion to Dismiss Plaintiff’s EFTA Waiver Claims pursuant to Fed. R. Civ. P. 12(b)(6) (“Motion”) (Docket No. 7). Defendant’s Motion should be denied.
Plaintiff has properly pled a cognizable cause of action under the Electronic Funds Transfer Act, 15 U.S.C. §§ 1693, et seq. (“EFTA”) at section 1693e(b). This is not a “waiver” provision. Rather, the provision entitles consumers such as Plaintiff to 10 days advance “notice”
prior to the taking at regular intervals of certain preauthorized varying amounts of moneys from their bank accounts. Defendant takes such moneys without providing any advance notice. Because Plaintiff’s Complaint properly sets forth a cognizable claim under EFTA section 1693e(b), it should not be dismissed per Fed. R. Civ. P. 12(b)(6).
Plaintiff also asserts that Defendant unlawfully seeks to take away Plaintiff’s right to EFTA section 1693e(b) notice through certain waiver language in its standard agreement. Defendant’s attempt to obtain such a waiver violates EFTA section 1693l.
Defendant’s Motion all but ignores Plaintiff’s “notice” claim under EFTA section 1693e(b) and instead seeks to characterize Plaintiff’s entire case as a “waiver” case, which it is not. Paradoxically, Defendant then argues that the waiver language in its standard agreement is actually not waiving any rights under EFTA. If that is the case, then the waiver language is of no moment and there should be no doubt that Plaintiff’s EFTA section 1693e(b) claim should be allowed to proceed (for she has not waived such a right).
Of course Plaintiff finds Defendant’s argument in this regard to be specious, as Defendant’s standard agreement clearly seeks to waive some right for consumers such as Plaintiff. Plaintiff asserts that Defendant has attempted to obtain a waiver of Plaintiff’s EFTA section 1693e(b) right, and has thus also violated EFTA section 1693l.
Despite Defendant’s mischaracterizations, Plaintiff’s Complaint is not, at its core, about “waiver” claims; it is about Defendant’s failure to provide advance “notice” prior to helping itself to varying amounts of moneys directly from consumer bank accounts.
In sum, Defendant falls far short of meeting its burden of proving that Plaintiff cannot show that she would be entitled to relief under the facts pled in the Complaint. See Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989). Accordingly, Defendant’s Motion should be denied.
I. FACTS
Plaintiff Grace Lawrence is an adult individual and citizen of the Commonwealth of Pennsylvania who resides at 484 Redbud Court, Warrington, PA 18976. At all times relevant hereto, Plaintiff was a “consumer” as that term is defined by section 1693a(5) of the EFTA, and Defendant was a “person” subject to liability under section 1693m of the EFTA. Complaint, ¶¶ 4, 39.
Defendant L.A. Fitness International, LLC (“L.A. Fitness”) is a California limited liability company that regularly conducts business throughout Philadelphia and its environs, and maintains a place of business at 599 Paul Valley Road, Warrington, PA 18976. Complaint, ¶ 5. At all times pertinent hereto, Defendant was a “person” subject to liability under section 1693m of EFTA. Complaint, ¶ 40.
L.A. Fitness is a health club. It offers membership to individuals who seek to exercise at one or more of its clubs. L.A. Fitness requires individuals who seek membership to enter into a contract that is embodied within a document entitled “Membership Agreement.” The Membership Agreement incorporates “LA Fitness’ Membership Policies and Club Rules and Regulations” (collectively “Agreement”). The Membership Agreement is a standard form document that L.A. Fitness drafted. It uses the same form document for every consumer, without regard for the geographic location of the facility the consumer uses or the consumer’s address. Complaint, ¶¶ 6-7.
The Complaint alleges that in or about February 15, 2007, L.A. Fitness provided to Plaintiff an Agreement that sets forth, inter alia, the initiation fee and monthly dues for membership (collectively “dues”). Complaint, ¶¶ 8-9. The Complaint further alleges that L.A. Fitness enters into membership agreements such as the Agreement that it entered into with Plaintiff Lawrence with hundreds and probably thousands of individuals. Complaint, ¶ 10. The Complaint alleges that, as documented in the Agreement, L.A. Fitness requires that a consumer’s monthly dues must be collected directly by L.A. Fitness electronically from the member’s bank account through Electronic Fund Transfers (“EFT”) or credit card. The entire written notice that L.A. Fitness provides to members concerning dues and the EFT payment process is set forth in the Agreement. The Agreement sets a date on which L.A. Fitness will collect a set amount of monthly dues via EFT. Complaint, ¶¶ 11-13.
The Complaint further alleges that in the case of Plaintiff Lawrence, monthly dues of $34.99 plus applicable tax were due April 1, 2007, and the same day each month thereafter until the termination of the Agreement. Pursuant to the Agreement, L.A. Fitness was to directly withdraw the monthly dues via EFT from Plaintiff Lawrence’s bank account with Wachovia Bank. Complaint, ¶¶ 14-15. By way of EFTs, L.A. Fitness electronically withdraws moneys directly from the bank accounts and credit cards of members. Complaint, ¶ 16.
The Complaint sets forth that EFTA provides that businesses which make EFTs in varying amounts “ . . . shall, prior to each transfer, provide reasonable advance notice to the consumer, in accordance with regulations of the Board [of Governors of the Federal Reserve System], of the amount to be transferred and the scheduled date of the transfer.” 15 U.S.C. § 1693e(b). Complaint, ¶ 22. The Complaint alleges that L.A. Fitness knows that for various reasons the monthly membership charges and dues to be collected via EFT can be different from one month to the next. The Complaint further alleges that L.A. Fitness also knows that members are entitled to advance notice of any such varying charges and dues before it electronically withdraws money from member bank accounts. Complaint, ¶¶ 17-18.
The Complaint alleges that despite the clear and unambiguous requirements for notice of varying withdrawals under the EFTA, L.A. Fitness places the following waiver clause in its agreements with members, who it calls “buyers,” including its Agreement with Plaintiff Lawrence: “Buyer understands that Buyer is entitled to notice of all varying charges and withdrawals under EFT, but Buyer waives the right to receive prior notice for charges or withdrawals with respect to any uncollected monthly dues payments or portions of the balance due described above and the corresponding service charges, both of which Buyer agrees are not varying charges or withdrawals” (hereinafter, the “waiver clause”). Complaint, ¶ 19.
In direct violation of the EFTA, the Complaint alleges that upon information and belief, and without any prior or advance notice, L.A. Fitness makes EFTs at its discretion from member accounts in amounts varying from the monthly dues specified in those Membership Agreements. Complaint, ¶ 23. With respect to Plaintiff, the Complaint alleges that L.A. Fitness made unauthorized, varying EFT withdrawals from Plaintiff’s Wachovia Bank account in at least April 2007, for $60.00 in two separate $30.00 EFT withdrawals, which was in addition to the regular April monthly dues of $34.99, and also in August 2007, when it made unauthorized varying EFT withdrawals of $10.00 and separately of $20.00. Complaint, ¶ 24. Furthermore, the Complaint alleges that between February and April 2007, L.A. Fitness electronically withdrew well over $1,000 from Plaintiff Lawrence’s Wachovia Bank account for monthly dues, other undefined and unauthorized charges, and also for dues for personal fitness training services that Plaintiff Lawrence was supposed to receive. Complaint, ¶ 26. Ironically, Plaintiff Lawrence almost never visited the club after she sustained certain injuries in a car accident in March 2007. Complaint, ¶ 27. In no instance did L.A. Fitness provide any advance notice to Plaintiff Lawrence of any varying EFT withdrawals from her Wachovia Bank account. Complaint, ¶ 25.
Furthermore, the Complaint sets forth that EFTA provides as follows: “No writing or other agreement between a consumer and any other person may contain any provision which constitutes a waiver of any right conferred or cause of action created by this subchapter.” 15 U.S.C. § 1693l. Complaint, ¶ 21. Despite this clear anti-waiver provision under the EFTA, the Complaint alleges that Defendant includes in the Agreement the following language: “L.A. Fitness makes no warranties or representations, express or implied, other than those set forth herein, and your sole and exclusive remedy in the event of any breach of this Agreement shall be cancellation of this Agreement. IN NO EVENT SHALL L.A. FITNESS BE LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES.” Complaint, ¶ 20 (emphasis in original).
Plaintiff Lawrence requested that L.A. Fitness let her cancel her Agreement, but L.A. Fitness refused. Thereafter, L.A. Fitness improperly withdrew varying amounts from Lawrence’s bank account without giving her any advance notice. Complaint, ¶ 28. Contrary to Defendant’s false contention that Plaintiff does not allege actual damages, Plaintiff does allege that Defendant is liable to Plaintiff and the Class for the full amount of damages that the law allows for its violations of the EFTA, and seeks actual damages as a result of Defendant’s EFTA violations. Complaint, ¶ 42.
II. LEGAL STANDARD
A claim will survive a Rule 12(b)(6) motion to dismiss if “stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint.” Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1969 (2007). As described by this Court in a recent decision denying a motion to dismiss, “[i]n considering a Rule 12(b)(6) motion, ‘we do not require heightening pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face.’ ” Erheart v. Lifetime Brands, Inc., 2007 WL 2141979 at * 755 (E.D. Pa. July 20, 2007) (quoting Twombly, 127 S. Ct. at 1960).
The court must determine whether the plaintiff may be entitled to relief under any reasonable reading of the complaint. See Twombly, 127 S. Ct. at 1969. A claim for relief having been stated, a plaintiff “receives the benefit of imagination so long as the hypotheses are consistent with the complaint.” Twombly, 127 S. Ct. at 1969 (quoting Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994)). Although a plaintiff may expect to prove all of his/her allegations, in considering a Rule 12(b)(6) motion, the court does “not inquire whether the plaintiff[ ] will ultimately prevail, only whether [she is] entitled to offer evidence to support” her claim. Watson v. Abington Twp., 478 F.3d 144, 150 (3d Cir. 2007); see Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989).
III. ARGUMENT
A. Plaintiff Has Pled A Proper Cause Of Action Under EFTA Section 1693e(b)
The primary objective of the EFTA is the protection of individual consumer rights. Johnson v. Tele-Cash, Inc., 82 F.Supp.2d 264, 278 (D. Del. 1999). EFTA section 1693e(b) provides that:
In the case of preauthorized transfers from a consumer’s account to the same person which may vary in amount, the financial institution or designated payee shall, prior to each transfer, provide reasonable advance notice to the consumer, in accordance with regulations of the Board, of the amount to be transferred and the scheduled date of the transfer.
15 U.S.C. § 1693e(b).
As set forth in EFTA subsection 1693a(9) and in the Official Staff Interpretations of the regulations promulgated hereunder, 12 C.F.R. § 205.2 — 2(k)(1), the type of “preauthorized” withdrawals covered by section 1693e(b) recur at regular intervals:
Advance authorization. A “preauthorized electronic fund transfer” under Regulation E is one authorized by the consumer in advance of a transfer that will take place on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer. In a bill-payment system, for example, if the consumer authorizes a financial institution to make monthly payments to a payee by means of EFTs, and the payments take place without further action by the consumer, the payments are preauthorized EFTs. In contrast, if the consumer must take action each month to initiate a payment (such as by entering instructions on a touch-tone telephone or home computer), the payments are not preauthorized EFTs.
The regulations promulgated under the EFTA regarding notice of transfers of money varying in amount state as follows:
When a preauthorized electronic fund transfer from the consumer’s account will vary in amount from the previous transfer under the same authorization or from the preauthorized amount, the designated payee or the financial institution shall send the consumer written notice of the amount and date of the transfer at least 10 days before the scheduled date of transfer.
Reg. E, 61 FR 19669, May 2, 1996 § 205.10(d)(1).
Here, the standard Agreement provides that the Buyer (i.e., the consumer, such as Plaintiff) authorizes L.A. Fitness to make periodic charges to or withdrawals from Buyer’s bank account by automatic EFTs for monthly membership dues and other service charges, on a specific date, without any further action by the Buyer to initiate such transfers:
*EFT/CC REQUEST. Buyer (individually and as agent or guardian of Member) hereby authorizes L.A. Fitness to make periodic charges to or withdrawals from (a) the account used to pay the initial payment described above, or (b) a replacement account hereafter used for payment of any sums due L.A. Fitness under this Agreement, including but not limited to Buyer’s balance due if not paid by the due date, or for any other use by Buyer of L.A. Fitness facilities or services (the “EFT”), as follows:
Monthly membership dues will begin on either the 1st or 15th of the month following your membership sign up date, as described above. In the event sufficient funds are not available in Buyer’s account or debits are otherwise not accepted, L.A. Fitness may resubmit the charge. If the resubmittal is returned uncollected, the rejected amount plus a $10.00 service charge may be added to Buyer’s next regularly scheduled debit. (Emphasis added.)
See copy of Agreement attached to Complaint as Exhibit A. See also Complaint, ¶¶ 13-15.
Defendant’s own Agreement, as set forth above, explicitly categorizes and describes the above EFTs (for membership fees and other charges) as “periodic charges to or withdrawals from” a consumer’s bank account. The withdrawals here occurred on a monthly basis. It is simply misguided for Defendant to now claim in its Motion that these charges/withdrawals are somehow not preauthorized (i.e., authorized in advance to recur at substantially regular intervals).
Just as misguided is Defendant’s argument that the EFTs are somehow not varying. Defendant clearly contemplated and acknowledged that these EFTs are indeed varying and that the EFTA mandates advance notice of varying preauthorized EFTs. It is the only reason why Defendant would put in its Agreement that “[b]uyer understands that Buyer is entitled to notice of all varying charges and withdrawals under the EFT, but Buyer waives the right to receive prior notice for charges or withdrawals with respect to any uncollected monthly dues payments or portions of the balance due described above and the corresponding service charges, both of which Buyer agrees are not varying charges or withdrawals.” (Emphasis added). “Varying” withdrawals are “varying,” no matter what Defendant unlawfully attempts to call them.
Here, the Complaint alleges that although there were varying periodic charges taken out of Plaintiff’s account approximately once per month that required advance notice, Defendant failed to provide any advance notice to Plaintiff. See Complaint, ¶¶ 14-18, 23-26. The charges were not exclusively for the regular monthly fee or for the service charge, but for other charges as well and fluctuated between $10 and $30. See Complaint, ¶¶ 24-26. Therefore, the Complaint sufficiently pleads Defendant’s violation of section 1693e(b) of the EFTA.
B. Defendant Also Violates EFTA Section 1693l By Attempting To Secure An Unlawful Waiver Of Plaintiff’s Right Under Section 1693e(b)
In further support of her Complaint, Plaintiff alleges that, even though Defendant was fully aware of Plaintiff’s right to receive advance notice of varying preauthorized EFTs, Defendant nevertheless unlawfully sought to obtain a waiver of Plaintiff’s right to receive such advance notice. See Complaint ¶¶ 18-22. Section 1693l of the EFTA, which prohibits obtaining a waiver of any rights conferred under the EFTA, states:
No writing or other agreement between a consumer and any other person may contain any provision which constitutes a waiver of any right conferred or cause of action created by this subchapter.
15 U.S.C. § 1693l.
Like the Defendant here, the defendants in Johnson v. Tele-Cash, Inc., supra, attempted to circumvent the EFTA by requiring borrowers to sign waivers of their rights to stop payment of transfers out of the borrowers’ bank accounts. Johnson alleged that, as a condition for obtaining a loan with defendants, he was required to sign a waiver of his right to stop payment of any pre-authorized electronic fund transfers out of an account created for him by the defendants. In response to these allegations, the defendants contended that these transfers were not pre-authorized electronic fund transfers because they were not “authorized in advance to recur at substantially regular intervals.” Johnson at 277-78. The defendants attempted to distinguish their transfer arrangements from pre-authorized electronic fund transfers by claiming that their loan agreement only authorized defendants to “effect a debit entry” of only “one payment” from a borrower’s account and therefore did not recur at substantially regular intervals. (Id.). In reality, however, the loans at issue were likely to roll over and thus the debt likely to recur at substantially regular intervals. The defendants argued that each loan roll over would result in a new loan agreement that would “make only one electronic fund transfer per note” and thus remain in technical compliance with the EFTA since the transfers, while possibly “recurring at substantially regular intervals,” would occur on different notes. (Id.).
The court rejected defendants’ arguments and denied their motion to dismiss plaintiff’s claims under the EFTA. “Were the court to adopt the defendant’s literal interpretation of the term ‘pre-authorized electronic fund transfer,’ the EFTA’s ‘primary objective,’ which ‘is the provision of individual consumer rights,’ would be undermined.” Id. at 278. See 15 U.S.C. § 1693(b) (1994). The court held that while literally, the agreement only authorized defendants to effect a debit entry of only one payment from a borrower account, every time a loan is rolled over, the “pre-authorized electronic fund transfer” arguably “recur[s] at substantially regular intervals” as a direct result. Johnson at 278.
Here, Defendant’s Agreement does not authorize a single one-time EFT payment, but instead, explicitly preauthorizes “periodic charges to and withdrawals from” bank accounts of Buyers that may vary in amount. Furthermore, Defendant clearly anticipated the varying nature of such preauthorized, periodic charges/withdrawals. Therefore, as sufficiently alleged in the Complaint, Defendant clearly violates the EFTA when it fails to provide advance notice to a Buyer/consumer of such varying preauthorized periodic charges/withdrawals pursuant to section 1693e(b) of the EFTA, and, like the defendant is Johnson, is prohibited by section 1693l from obtaining a waiver of such right to advance notice.
Defendant spends a good share of time arguing that what it calls the “damages waiver” (Complaint ¶ 20) does not, in fact, seek to waive Plaintiff’s rights under EFTA, but instead sought to limit other rights. That waiver, however, is very broadly written to be the “sole and exclusive remedy” and states that “in no event” shall Defendant be liable for “any special, incidental or consequential damages.” (Id.). Contrary to Defendant’s contention, Plaintiff here seeks both actual damages and statutory damages under EFTA section 1693m(a)(2)(B). More to the point, what Defendant calls the “notice waiver” (Complaint ¶ 19) appears directly tailored to “waive[] the right to prior notice” for varying preauthorized withdrawals under EFTA section 1693e(b), which Defendant says in the agreement are “not varying charges or withdrawals.” (Id.). If this language is not intended to take away the right to “prior notice” for “varying charges or withdrawals” (a right secured by EFTA section 1693e(b)) it is difficult to imagine what it was meant to do.
Although the parties have not yet taken any discovery as to the intent behind these waiver clauses or how Defendant has enforced them in practice, the face of Defendant’s standard Agreement with Plaintiff (Complaint ¶¶ 19, 20), together with the fact that Defendant never provided any advance notice to Plaintiff prior to withdrawing different amounts of money in different months (Complaint ¶¶ 24-26)), provides a sufficient basis for Plaintiff to allege that Defendant sought by agreement to take away her rights to advance notice for varying monthly withdrawals, in violation of EFTA section 1693l. Accordingly, her entire case should be allowed to proceed.
IV. CONCLUSION
For all of the reasons discussed above, Plaintiff respectfully requests that this Court deny Defendant’s Motion (Docket No. 7) and order Defendant to answer the Complaint within ten days.
Respectfully submitted,
Dated: May 19, 2008 /s/ John Soumilas
FRANCIS & MAILMAN, P.C.
JAMES A. FRANCIS
JOHN SOUMILAS
JOANNE Y. PARK
Land Title Building, 19th Floor
100 South Broad Street
Philadelphia, PA 19110
DONOVAN SEARLES, LLC
DAVID A. SEARLES
1845 Walnut Street, Suite 1100
Philadelphia, PA 19103
(215) 732-6067
Attorneys for Plaintiff and the Class