Wells Fargo Sanctioned for Illegal Fees

Bankruptcy is designed to provide a fresh start for honest but unfortunate debtors and to ensure creditors are treated fairly. A federal bankruptcy court judge in Manhattan recently ruled that Wells Fargo failed miserably in its treatment of several of its business clients. By taking money to which it was not entitled, the bank also hurt other creditors. Like a hog at the feeding trough, Wells Fargo gluttony knows no bounds.


The case begins with several staffing companies, all related. For purposes of this post, we will refer to just one, TS Employment, Inc. (TSE). Wells Fargo provided receivable financing to some of the companies and cash management to others.


In January 2015, Wells Fargo learned that TSE failed to pay more than $100 million in payroll taxes. Days later the company filed a Chapter 11 bankruptcy. Several months later, the other companies filed for bankruptcy protection as well.


The court found that the company grew very quickly. By 2013 they had placed 150,000 temporary workers with 5,000 companies. Their rapid expansion would ultimately cause them to collapse. They were growing faster than they could pay their bills.


After missing payroll taxes, the companies sought to reorganize. For people not familiar with the Bankruptcy Code, a Chapter 11, often called a “reorganization plan,” allows a business to remain open while it reorganizes. The purpose of a Chapter 11 is to keep the business alive and pay creditors over time.


Businesses in a Chapter 11 operate under rigorous scrutiny from the court. The debtor must develop a plan and convince the court that it can continue to operate successfully. Creditors are entitled to be paid but can’t take certain collection actions without permission from the court. Certain fees charged immediately before the bankruptcy are voidable if the court finds the debtor received no value.


Court Says Wells Fargo Guilty of Millions of Dollars in Fraudulent Transfers


The bankruptcy trustee sought to declare $4.1 million in fees taken from the company as fraudulent transfers. $3.2 million of that sum was “Account Monitoring Fees.” In order to rule in the trustee’s favor, the court had to determine whether the company received any value at all in exchange for the transfer; i.e. any realizable commercial value as a result of the transaction, and whether that value was in fact reasonably equivalent to the fee.


The court took little time in finding that Wells Fargo had improperly charged fees. According to U.S. Bankruptcy Judge Martin Glenn,


“Because the $3.2 million in Account Monitoring Fees are excessive and punitive in nature, the Debtors received no discernable value, let alone reasonably equivalent value. The lack of relationship between these fees and Wells Fargo's monitoring costs leads the Court to find the Account Monitoring Fees to be grossly excessive. The evidence demonstrates that these fees are not proportional to Wells Fargo's actual account monitoring costs. Wells Fargo's only evidence to substantiate additional account monitoring was a two-page report, prepared each month by Ferrara, a Relationship Manager at Wells Fargo. Thus, the Court finds that the value of a two-page monthly report pales in comparison with the $3.2 million in Account Monitoring Fees and that the Debtors received little to no value from this report.


A two-page report and Wells Fargo charged a $3.2 million “account monitoring fee”? The testimony presented at trial showed that Wells Fargo couldn’t even explain the fee. The bank said it had to hire extra people to monitor the account but couldn’t name a single one. The arrogance of big banks never shocks us.


As to the other fees, the court was equally not impressed.


“Aggressive action by Wells Fargo designed to incentivize the Debtors to promptly exit their financing relationship with Wells Fargo was permissible, but that does not shield Wells Fargo from liability resulting from the enormous fees that Wells Fargo charged these insolvent debtors. Importantly, Wells Fargo imposed these fees while the Debtors experienced a shortage of liquidity as a result of business expansion. It defies logic that a financially distressed borrower could receive value from fees that are designed to be excessive and punitive.


We had hoped the court would have imposed punitive damages as requested by the trustee. Unfortunately, the court declined.


“The Court is troubled by some of Wells Fargo's conduct during this case—particularly its lack of transparency and failure to disclose charges it was imposing on the Debtors' accounts until the Trustee's diligent efforts disclosed what had been done. The Court views the issue whether to impose punitive damages under these circumstances to be a very close question.”


Duty of Good Faith and Fair Dealing


This case was decided under the Bankruptcy Code but similar logic applies in the non-bankruptcy context. Contrary to popular belief, banks ordinarily do not owe a fiduciary duty to their customers. They do have a duty to act of good faith and fair dealing, however, in virtually every state. Charging millions of dollars in unnecessary fees isn’t a sign of good faith, especially with a customer that is struggling to survive.


Banks don’t have a duty to rescue their customers, but they can’t kick them while they are down and attempt to extort excessive profits from them either.


The decision in this case was rendered in late February 2019. Unfortunately, we see cases like this every day. And many struggling businesses don’t have the money to fight back. Banks know this, that is one of the reasons they prey on financially distressed businesses.


For business like TSE and its affiliates, they had no choice but to pay the fees charged by the bank… even though they know the fees are extortionate. We see this daily, If you don’t pay the fees, the bank will threaten to foreclose or seize the business’ cash. Often, the bank will offer a short-term forbearance and a vague promise of working things out. Buried in the forbearance agreement, however, is a waiver of all liability claims against the bank.


There is sometimes a fine line between legitimate collection activity and what we call “economic duress.”


The lender liability lawyers at Mahany Law and Judge, Lang & Katers sue banks. Since the “money” is usually to be found on the banking side, there are few firms like us.


If you have suffered an out-of-pocket loss of $5 million or more, call us. We handle cases nationwide.


For more information contact us at [hidden email] and [hidden email]. All inquiries are kept confidential. We welcome opportunities to work with your existing counsel.


*For more about what we do, please visit our cases we handle page.


MahanyLaw and Judge, Lang & Katers – “We Sue Banks


Post by Brian Mahany


Related topics: bankruptcy (2) | breach of fiduciary duty (10) | fiduciary duty (12) | lawyers that sue banks (55) | lender liability (65) | overreaching (10) | suing banks (58) | Wells Fargo (14) | good faith (13) | fair dealing (9)