In a dramatic twist to a closely watched banking case, a Virginia federal judge has rejected Capital One’s proposed $425 million settlement, declaring that the deal shortchanges millions of customers who accuse the bank of deceptively marketing its 360 Savings accounts.

U.S. District Judge David J. Novak on Thursday refused to approve the agreement, saying that while the settlement was procedurally sound, it fell “neither reasonable nor adequate on substance.”

Less Than 10% Recovery for Customers, Court Finds

Judge Novak sharply criticized the proposed deal, noting that, depending on calculations, the consumer class could recover less than 10% of their actual damages. He also said the settlement offered no meaningful relief to roughly three-quarters of the affected class—current 360 Savings account holders—who continue to experience financial harm.

“Under the proposed settlement, these millions of class members would continue to experience the same financial harm that they have already experienced for years,” Novak wrote.

The judge emphasized that despite the case’s challenges—including class certification and the burden of proof—the strength of the plaintiffs’ claims warranted far greater compensation.

Breakdown of the $425 Million Deal

Under the now-rejected agreement, Capital One had agreed to pay $425 million, split between two pools:

• $300 million to compensate for lost interest based on what customers would have earned under the 360 Performance Savings rate, and

• $125 million for those who still hold 360 Savings accounts.

But the forward-looking relief was deemed woefully inadequate. Judge Novak noted that even with the added interest pool, the estimated 4 to 5 million account holders would earn roughly 0.8% interest for just 16 months—a rate one-fourth or even one-eighth of the promised “high-interest” Performance accounts.

State Attorneys General Push Back

The proposed settlement faced fierce opposition from 18 state attorneys general, representing nearly half of the U.S. population. Leading the charge was New York Attorney General Letitia James, who accused Capital One of bait-and-switch tactics—enticing customers with high-interest savings promises only to deliver subpar returns.

The coalition of attorneys general urged the court to strike down the deal, arguing it “fails to adequately redress the harms” and even saves Capital One money by masking the true value of restitution with inflated settlement figures.

Judge Novak credited their involvement heavily, calling their opposition “substantial,” despite fewer than 20 individual objectors and under 100 opt-outs from the class.

Marketing Missteps and Ongoing Negotiations

Novak also faulted Capital One’s misleading customer communication, stating that the bank’s emails promoting account conversions “read like a marketing pitch” rather than a genuine opportunity to shift into better-rate accounts. The notice provided as part of the settlement “failed to cure these obvious deficiencies,” he added.

The judge ordered both parties to resume negotiations to create a revised settlement that delivers meaningful compensation.

Wider Implications for Banking Transparency

The case, originally announced in May, has become a flashpoint for consumer banking practices, with regulators and consumer advocates calling it a warning shot to major financial institutions.

The lawsuit alleged Capital One withheld millions in earned interest by keeping customers in outdated, low-interest accounts even as it promoted newer, higher-yield options.

Counsel for the customers includes Matthew B. Kaplan of The Kaplan Law Firm and attorneys from Wolf Popper LLP, while Capital One is represented by lawyers from King & Spalding LLP and McGuireWoods LLP.

Neither Capital One nor the New York attorney general’s office immediately responded to requests for comment Thursday evening.

As Judge Novak’s order makes clear, the “capital one 425m settlement” may be far from settled, and a new chapter of consumer restitution may be on the horizon—one that forces banks to pay not just in dollars, but in accountability.