The nation’s largest issuer of credit cards, JPMorgan Chase & Co., has agreed to settle a major class action lawsuit that charged the bank with breaking a promise to more than 1 million customers — and overcharging them.
The company agreed Monday to pay $100 million in a case involving credit card customers who transferred balances from cards issued by other banks to Chase accounts in return for “fixed” interest rates that turned out to be anything but.
“After more than three years of hard-fought litigation, class representatives and class counsel are now pleased to report that the parties have agreed to settle this certified class action,” both sides reported to U.S. District Judge Maxine M. Chesney of San Francisco.
They described the proposed settlement as “an excellent result, particularly in light of the claims alleged and the risks and delay associated with ongoing litigation, trial and appeal.”
Suit filed 3 years ago
The lawsuit, filed July 24, 2009, alleged that Chase lured customers by promising monthly minimum payments of just 2 percent of the total balance until the full amount was paid or the customer defaulted. But, in January 2009, the bank unilaterally raised the minimum payment to 5 percent of the balance, according to the lawsuit.
The only way credit card customers could avoid payments that suddenly were 150 percent higher than promised: Agree to steeper interest rates, which would elevate their balances and, once again, their payments.
Either way, the bank boosted its fees and customers were compelled to spend more money, the lawsuit charged. “In short, Chase is using its superior position to breach its contracts and unlawfully deprive plaintiffs and class members of their long term loans,” the lawsuit said.
The plaintiffs called this practice coercive and its impact “not trivial.”
“Taking an example of a class member with a $20,000 account balance, her minimum monthly payment would increase from $400 to $1,000 in the span of a month,” the lawsuit noted. “Over the first 12 months, taking into account principal reduction, her total payments would be $9,352.77 instead of $4,383.71 — an increase of nearly $5,000.”
‘Implied covenant of good faith’
Chase’s action generated more than a dozen class actions suits, which eventually were consolidated into the case filed in San Francisco on behalf of 15 Chase customers and the class they represent.
Chase fought the lawsuit for years, asserting that it had done nothing illegal and that any actions it took were intended to reduce risk in response to the financial crisis that intensified in 2008. Many of the original charges were dismissed, though the judge allowed to stand a charge that Chase violated “the implied covenant of good faith and fair dealing.”
In the end, Chase and the plaintiffs’ lawyers decided to settle.
“This case involved what we view as very important issues between the credit card companies and other financial institutions and their customers, especially on the issue of how and when the companies can use what they call \u2018contractual discretion’ to change the terms of their agreements,” said Roger Heller, an attorney for Lieff, Cabraser, Heimann and Bernstein, one of the firms that filed the lawsuit.
“The point is that credit card companies should be careful to use their change in terms provision in an appropriate manner,” he said.
As is nearly always the case with settlements of class action lawsuits, lawyers will receive a significant chunk of the money. In this case, their fees could reach $27 million. In addition, certain administrative fees and taxes will be paid up front. That will leave about $70 million to be distributed to credit card customers under a complicated, pro-rata formula detailed in the proposed settlement.
According to the settlement document, the number of affected credit card owners could exceed the current 1,007,806 names on file. Under the proposed payment plan, some named plaintiffs will receive at least $7,500 and others will receive at least $1,000. Other affected credit card owners will receive a base payment of $25, with the rest of the money distributed according to the fees they were charged by Chase.
Paul Hartwick, a spokesman for JPMorgan Chase, said the company had no comment on the case or the settlement.
The judge is expected to rule on the proposed settlement in August.