“Debtor-Creditor Provisions in the Uniform Commercial Code,” Debtor – Creditor Handbook, 12^th Edition, Minnesota CLE, 2021

“Secured Transactions in Personal Property,” Representing the Ongoing Business Deskbook, 3rd Edition, Minnesota CLE, 2021

Retirements Galore

Following last week’s release of new election maps, many more legislators have announced that they will not seek re-election. The repercussions are most notable in the Senate. For example, six of the ten members of the Senate Finance Committee have announced their retirement, including all five women who serve on the powerful committee. This includes Finance Chair Julie Rosen and Senate Minority Leader Melisa Lopez-Franzen. Additionally, Senate President David Osmek announced he will not be running for re-election either.

House Passes Frontline Worker Bonuses

On partisan lines, the Minnesota House passed H.F. 2900 (Rep. Cedric Frazier-DFL) on Thursday, which would authorize payments to frontline workers who continued working during the COVID-related peacetime emergency. The House allocated $1 billion to be split between workers identified within fifteen different sectors, with checks not to exceed $1,500. The Senate has not advanced this legislation.

Tax Proposals Take Center Stage

The House and Senate discussed competing tax proposals this week. The House Taxes Committee heard H.F. 3669 (Rep. Paul Marquart-DFL), which contains the Governor’s supplemental budget tax recommendations. Included in this proposal are one-time “Walz Checks,” refund checks that would be made available to 2.7 million Minnesota households. The bill was laid over for possible inclusion in the omnibus tax bill.

Meanwhile, the Senate Republican majority held a press conference announcing their tax proposal, which includes an elimination of the state’s tax on social security benefits and cutting the tax rate in half for the lowest tax bracket.

Special Election in CD 1

Following last week’s death of Congressman Jim Hagedorn, a special election has been called to complete the remainder of his term. A special primary will take place on May 24 (if needed) and the special election will be on the date of the state’s primary election, August 9. The winner of that election will complete the current term.

Easing of COVID Restrictions

With the number of COVID infections continuing to decline, restrictions that had previously been put in place are systematically being lifted. On Thursday morning, both St. Paul and Minneapolis announced that they were lifting their indoor mask mandates effective immediately. Additionally, the Minnesota Senate Building no longer requires staff members to escort visitors to the building and the House of Representatives has welcomed Capitol press members back to the House floor.

Tim Marx was profiled for Minnesota Lawyer‘s “Breaking the Ice” series. The Q&A format of the article, published February 17, 2022, explores Tim’s decades of public service include roles as president and CEO of Catholic Charities and commissioner of the Minnesota Housing Finance Agency, and his return to private practice with Winthrop & Weinstine.

“I was thinking through what I was going to do when I grew up and decided I was going to get my law license back,” said Marx, who hadn’t practiced for some time.

Marx joined the firm’s real estate finance/affordable housing, regulatory and government relations and nonprofit corporation practices. Read the full article about Tim here (subscription required).

Redistricting Day

At noon on Tuesday, the new boundary lines for Minnesota Legislative and Congressional districts were released. These boundaries are updated every ten years, following the census, to ensure districts maintain equal population. The court panel that drew the new lines stated that they attempted to minimize the amount of changes. While the implications of the new lines are still being studied, observers have noted that there are many current members of the Legislature paired up within new district boundaries.

State Office Building Set to Open

Speaker of the House Melissa Hortman announced this week that the State Office Building, which houses all offices for members of the Minnesota House of Representatives, will partially re-open to the public following two years of closure. Beginning March 21, the building will be open to the public from 8:30a.m. – 4:00p.m. on Mondays, Wednesdays and Thursdays.

Change to House Floor Protocol

In addition to opening the State Office Building, the House also announced that Representatives will no longer be required to wear a mask while on the House floor. Though the requirement is going away, masks are still recommended. In spite of this change in COVID protocol, Capitol media are still prohibited from accessing the House floor.

Sports Betting

Following years of speculation, the process to legalize sports betting has gained momentum in Minnesota. While many details need to be worked out, it appears that a possible path exists to pass legislation this year. Proposals include sports betting both in existing casinos and online.

Paid Family Leave Returns

A long-time priority for Minnesota Democrats, paid family leave was the subject of a press conference that included not just members of the Legislature, but also Lieutenant Governor Peggy Flanagan. The legislation also had a hearing in the House Workforce and Business Development Finance and Policy committee. The Senate is not expected to advance the legislation.

Recent changes to the attorney-client privilege mean Minnesota businesses should consider using additional caution and taking affirmative steps in order keep documents prepared by their lawyers safe from disclosure. The Minnesota Supreme Court recently adopted a more stringent standard—the Predominant Purpose test—for assessing whether the privilege keeps attorney-prepared documents confidential, and this test could result in more sensitive documents being exposed during lawsuits.

Although this ruling introduces uncertainty—will documents with dual purposes of providing both legal and non-legal advice be subject to disclosure in litigation—businesses that are attuned to this development can tailor the way they interact with their lawyers to achieve the broadest possible application of the attorney-client privilege, and ensure the greatest confidentiality of their communications with counsel.

The context for the Minnesota Supreme Court’s ruling arose after Polaris, Inc. was sued in a product liability lawsuit. During the litigation, In re Polaris, Inc.,[1] Polaris inadvertently gave an audit report to the opposing party. This report had been prepared by a Polaris attorney in response to a government safety investigation and was marked throughout as “PRIVILEGED AND CONFIDENTIAL: Protected by Attorney Client Privilege and Attorney Work Product.” When Polaris learned of its mistake, it asked the opposing party to return the report, and destroy all copies (i.e., to clawback the report). When this request was refused, Polaris filed a motion seeking similar relief. The district court likewise denied the requested clawback, although it did require portions of the report embodying legal advice to be redacted. Polaris next sought a Writ of Prohibition from the Minnesota Court of Appeals. After the Writ was also denied, a final appeal brought Polaris before the Minnesota Supreme Court.

Facing the Supreme Court was the issue of “whether the report in its entirety is protected by the attorney-client privilege.” The court reiterated that the “threshold inquiry in a privilege analysis is determining whether the contested document embodies a communication in which legal advice is sought or rendered[,]” and formally adopted the Predominant Purpose test, under which attorney-client privilege applies to the entirety of a document only if communicating legal advice is the “predominant” purpose of the document. In applying this test, the court listed five factors to consider:

• the purpose of the communication;
• the content of the communication;
• the context of the communication;
• the recipients of the communication; and
• whether legal advice permeates the document or whether any privileged matters can be redacted.

While there was no dispute that the report contained both legal and business advice, Minnesota Supreme Court looked to these factors to determine the report’s “predominant purpose,” and whether the privilege applied to it as a whole or only in part.  Polaris argued that the legal and business advice contained in the report were “inextricably intertwined,” but the court dismissed this argument because (in its view) the report primarily addressed Polaris’s organizational culture and discussed product design, engineering, and manufacturing practices, with an end goal “of improving the process Polaris uses to assess safety risks.” The report’s focus on Polaris’s business supported the lower court’s determination that the primary purpose of the report was setting corporate policy, and not providing legal advice. Accordingly, the court affirmed the lower courts’ rulings that the report did not “pass” the Predominant Purpose test, and that only portions containing legal advice were privileged. The task of determining which portions those were was left to the lower courts on remand.

Many businesses and clients incorrectly assume that  all communications with their attorneys, and the advice and recommendations conveyed by those attorneys, are automatically privileged.  However, this is not the case. While the communication must run between an attorney and client, in order for the privilege to apply, the communication must also be for the purposes of requesting or providing legal advice.  Indeed, Wigmore’s “classic” formulation of the privilege requires eight factors to establish a privileged communication:

(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived.

Simply demonstrating that communication was between attorney and client is never enough by itself to establish the privilege.

Moving forward, the In re Polaris, Inc. decision potentially creates significant difficulties for businesses in establishing that the subject of the communication was “legal advice.”  Businesses must now question further whether their communications with their attorneys, and vice versa, will be protected by the attorney-client privilege, and whether a court will second guess the parties’ understanding and intent in generating the communication at issue. Effectively, courts now have the authority to look much more closely at the nature of the communication and find fewer communications to fall within the protected category of “legal advice.” For example, the court in Polaris, Inc. noted that “the attorney-client privilege does not apply if the client seeks regulatory advice for a business purpose[,]” placing immense importance on the tenuous distinction between advice that is “legal” and advice that is for a regulatory or business purpose. The dissent emphasized the difficulty of drawing such a distinction. In the future, the ambiguity surrounding whether audit reports and emails, or any of the many other communications between client and lawyer, will remain confidential could impede open communication between businesses and their lawyers for fear of confidential information being disclosed later during litigation.

To address this newfound threat to confidentiality, businesses can make several changes to the process they use when engaging and communicating with attorneys. At the beginning of an engagement, it is important to set out that the attorney will provide legal (not business) advice; this should be done by putting down in writing, with as much detail as is practical, which legal services and advice the attorney will provide, which laws caused the business to hire the attorney, and (as applicable) by connecting the lawyer’s work to ongoing litigation or investigations. Prominent disclaimers that the attorney is communicating his or her legal analyses are advisable, and should be included in formal reports, audits, etc. Finally, it may be necessary to assess whether documents being drafted by attorneys create risk of future disclosure, and to redefine the scope of those documents to ensure they won’t be used against the business during future litigation—as happened to Polaris. Simply engaging a lawyer and marking documents “Privileged” has never been a guaranty of confidentiality, but the chances of it being sufficient are even less so now.

[1] A20-0427, 2021 WL 5913633 (Minn. Dec. 15, 2021)

Shooting Death of Amir Locke

Minnesota finds itself at the center of another controversial death at the hands of Minneapolis police following the shooting death of 22-year old Amir Locke. Using a no-knock warrant, police shot Mr. Locke within seconds of entering the apartment where he was sleeping. The event has led to renewed efforts to either ban or significantly limit the use of no-knock warrants. Legislation was introduced this week that adds another dimension to an already robust discussion regarding public safety reforms.

Influx of Broadband Funds

This week, the House Capital Investment committee heard presentations regarding both state and federal broadband investments. Minnesota is expected to receive $103 million in broadband funding through the Infrastructure Investment and Jobs Act (IIJA). Prior to the funds being distributed, the federal government will be updating maps that show existing broadband coverage. While some have advocated for state bonds to fund broadband infrastructure, Minnesota Management and Budget (MMB) has determined that it isn’t an eligible use of bond funds.

Unemployment Insurance / Hero Pay

Just a week into session, the Legislature started advancing legislation on two top-tier issues. Committees heard bills to replenish—at least in part—the unemployment insurance trust fund and to provide bonus pay to essential workers who continued in-person working through the pandemic. While both the House and Senate have stated these are priority issues, at this point they continue to advance their own versions of the legislation and have yet to find agreement.

Committees in Full Swing

In addition to the issues highlighted above, the Legislature held dozens of hearings this week. Many hearings were broader themed overviews and updates, but some committees have started hearing and advancing specific legislation. With just six weeks until the first committee deadline, expect the pace of hearings on bills to increase as overviews taper off.

St. Paul and Minneapolis Lift “Vaccine or Test” Mandates

Following pressure from businesses, falling COVID case counts, and days of rumors, both Minneapolis and St. Paul announced on Thursday that they were dropping the requirements put in place last month that required patrons at establishments serving food and drink to show proof of vaccination or a negative COVID test. Establishments may still independently impose such a rule for patrons if they choose, but it is no longer required by either City.

4 Hamline L. Review 19 (1984)

19 Current Municipal Problems 418 (1993)

The hottest topic in banking this month is overdraft fees. On December 1, 2021, Capital One bank announced it would be eliminating all overdraft fees for consumer accounts, ending a practice that once netted the bank over $150 million in revenue each year.[1] It is perhaps no surprise that later that same day, the Consumer Financial Protection Bureau (CFPB) released new research critiquing banks “deep dependence” on overdraft fees for revenue,[2] and CFPB Director Rohit Chopra stated that the agency would renew its focus on investigating overdraft fees.[3]

Capital One is not the first bank to drop overdraft fees; it joins a growing trend led by banks such as Ally Bank and smaller community banks and credit unions. Reasons for dropping these fees vary from institution to institution. Some banks may see the lack of an overdraft fee as a way to compete with rival banks. Others may seek to avoid regulatory scrutiny, which in recent years has led to settlements for amounts ranging from $30 million to $122 million.[4] Currently, overdraft regulation focuses on the way in which such fees are disclosed to consumers, rather than the actual terms or procedures of overdraft programs.[5] The CFPB’s recent activity implies additional regulation and scrutiny is coming.

Litigation Risk Related to Overdraft Fees

One factor likely driving the decision to drop overdraft fees is litigation risk. In addition to regulator interest, we have seen an increase in class action and deceptive trade practice litigation against banks (large and small) related to overdraft fees in recent years.

Overdraft litigation has so far challenged three primary categories of practices: (1) assessment of multiple fees on a single transaction, which is resubmitted or reprocessed multiple times, (2) assessment of multiple fees due to timing or prioritizing of some transactions over others, and (3) inadequate disclosure of the voluntary nature of overdraft programs. The third category is often challenged alongside practices involving the first and second categories.

In cases involving resubmission and reprocessing, the plaintiff often alleges that the bank improperly assessed multiple overdraft fees on a single transaction. For example, the bank might assess an overdraft or “non-sufficient funds” (NSF) fee and convey the NSF status to a vendor or the consumer attempting to complete a transaction. The vendor or consumer resubmits the same transaction, and the bank assesses another fee for the identical transaction. Alternatively, a bank may attempt to reprocess the same transaction again on a subsequent day on its own initiative, leading to multiple overdraft fees. Plaintiffs have alleged these kinds of practices as unfair and deceptive, leading to multi-million dollar settlements.[6]

In timing or prioritization-based cases, the plaintiff often alleges that the bank’s practice causes assessment of one or more fees that were otherwise avoidable. The most common theory involves “authorized positive, purportedly settled negative” (APPSN) transactions. In APPSN cases, the plaintiff alleges that the bank approved a transaction when the consumer’s balance was sufficient, but that the bank delayed payment of the transaction until other debits or withdrawals were completed and the account no longer had a sufficient balance. Sometimes this occurs due to the bank’s internal posting and settlement process. In addition, the plaintiffs most frequently argue that the bank’s account contract and terms do not disclose this practice and do not permit the imposition of fees on charges that were approved when the consumer had a positive and sufficient account balance. These kinds of cases have also led to multi-million dollar settlements—including one involving Capital One.[7]

Similarly, banks have been sued over their ordering of transactions. For example, the bank may disregard chronology (e.g., first in, first out) in favor of prioritizing transaction size (e.g., highest to lowest) so that large transactions are completed before smaller transactions received in a certain time frame. Or a bank might prioritize intra-bank transfers or debits involving its own services (e.g., credit card bill payments) over those of third parties, which may lead to the assessment of more than one overdraft fee that otherwise could have been avoided if the bank had employed a different methodology. Again, the plaintiffs often concurrently allege that the bank’s practices regarding ordering of transactions were not properly disclosed to the consumer. These cases, as well, have led to multi-million dollar settlements.[8]

Based on recent developments in this space, it is certainly possible that courts could find that banks are liable for overdraft fee practices in civil litigation.

Key Takeaways for Banks

CFPB Director Chopra recently remarked that the agency would be focusing on overdraft practices that lead to fees based on “the difference between authorization and settlement, the significance of the timing gap between the two, the amount of time a credit may take to show up in the account, the use of one kind of balance over another for fee calculation purposes, or the order of transaction processing across different types of credit and debits.”[9] As explained above, plaintiffs have already begun to challenge these practices, and overdraft litigation may increase in the future if the CFPB establishes additional standards, providing new fodder for alleging class action and deceptive trade practice claims. Banks should stay abreast of new CFPB developments and continually evaluate their overdraft programs for regulatory compliance and litigation risk.[10]

Winthrop & Weinstine is grateful to have represented financial institutions in these kinds of matters and obtained successful dispositions, including at the early motion to dismiss phase. Members of our team who have experience in this area of law include Matthew R. McBride, Joseph M. Windler, Quin C. Seiler, and Kyle R. Kroll.

We also express special thanks to Chris Cerny for his research assistance and contributions to this update.

[1] Hugh Son, Capital One Says It Is Ditching All Consumer Overdraft Fees, Giving Up $150 Million in Annual Revenue, CNBC (Dec. 1, 2021), https://www.cnbc.com/2021/12/01/capital-one-says-its-ditching-all-consumer-overdraft-fees.html.

[2] CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees, CFPB (Dec. 1, 2021), https://www.consumerfinance.gov/about-us/newsroom/cfpb-research-shows-banks-deep-dependence-on-overdraft-fees/.

[3] Prepared Remarks of CFPB Director Rohit Chopra on the Overdraft Press Call, CFPB (Dec. 1, 2021), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra-overdraft-press-call/.

[4] Consumer Financial Protection Bureau Announces Settlement with TD Bank for Illegal Overdraft Practice, CFPB (Aug. 20, 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-settlement-td-bank-illegal-overdraft-practices/; Bureah of Consumer Financial Protection Settles with TCF National Bank, CFPB (July 20, 2018), https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-tcf-national-bank/.

[5] See 12 C.F.R. § 1005.17 (2016), https://www.consumerfinance.gov/rules-policy/regulations/1005/17/.

[6] See, e.g., Morris et al. v. Bank of America N.A., No. 3:18-CV-00157 (W.D.N.C.) ($75 million settlement); Lowe v. NBT Bank, N.A., No. 3:19-CV-1400 (N.D.N.Y.) ($5.75 million settlement); Marical v. BECU, No. 19-2-20417-6 (Wash. Super. Ct.) ($6 million settlement).

[7] See, e.g., Roberts v. Capital One, N.A., No. 1:16-CV-04841 (S.D.N.Y.) ($17 million settlement); Thompson v. Cmty. Bank, N.A., No 8:19-CV-00919 (N.D.N.Y) ($3.46 million settlement).

[8] See, e.g., Smith v. Bank of Hawaii, No. 1:16-CV-00513 (D. Haw.) ($8 million settlement); Dasher v. RBC Bank (USA), No. 1:09-MD-02036 (S.D. Fla.) ($7.5 million settlement).

[9] Supra note 3.

[10] One way to keep current with CFPB activity is to regularly visit https://www.consumerfinance.gov/about-us/newsroom/?topics=overdrafts and seek experienced legal counsel.