Calif. Supreme Court Sides With BofA on Bounced Checks
Mike McKeeThe Recorder
June 2, 2009
Bank of America dodged what might have been a $2 billion bullet on Monday when the California Supreme Court unanimously ruled that a practice used by many banks for covering overdrafts and penalty fees is perfectly legal.
The long-awaited ruling will be welcomed by the banking industry, with several agencies -- including the American Bankers Association and the U.S. Attorney's Office -- arguing in amici curiae briefs that an unfavorable opinion could have forced financial institutions nationwide to undertake a "massive overhaul" of their practices.
Bank of America was sued in 1998 by Paul Miller, a disabled man who accused the institution of fraud for collecting overdraft fees and penalties as high as $32 per transaction out of customers' Social Security benefits, disability pay or other public benefits directly deposited into their accounts. BofA responded by arguing that the practice is a time-honored tradition conducted by banks all over the country.
Three years after the suit was filed, a San Francisco Superior Court judge certified a class action comprised of all California residents whose public benefit payments had been deposited with BofA after Aug. 13, 1994. The size of the class was estimated to be about 1.1 million people.
Following trial in 2004, San Francisco Judge Anne Bouliane awarded the class $284 million in damages and restitution for violations of the Consumer Legal Remedies Act, the Unfair Competition Law and the False Advertising Act. With additional statutory damages and 10 years of interest, the financial hit, if upheld, could have been about $2 billion, plaintiffs' lawyer James Sturdevant said Monday.
In its ruling, the California Supreme Court rejected Sturdevant's argument that Bank of America's practice for collecting insufficient fund fees, or NSFs, violated the court's own ruling in Kruger v. Wells Fargo Bank, 11 Cal.3d 352. That 1974 opinion held that financial institutions can't take public benefit money -- so-called "exempt funds" such as Social Security payments -- out of bank accounts to cover credit card debt.
But BofA contended that Kruger dealt only with what's called the banker's setoff, in which banks collect a debt unrelated to the underlying bank account. By charging overdraft fees, the bank's lawyers argued, BofA was only balancing debits against deposits in a single account.
The bank's argument proved more persuasive.
"Here, unlike in Kruger, the bank is not setting off independent, past debt," Justice Carlos Moreno wrote for the court in Miller v. Bank of America, 09 C.D.O.S. 6677. "Instead, the transaction occurs within a single account and is triggered by a customer's overdraft, causing the bank to recoup those funds from a subsequent deposit, and charge an NSF fee."
"We do not agree with plaintiffs," he added, "that there is no meaningful difference between satisfying a debt external to an account and recouping an overdraft of an account from funds later deposited into that same account."
The ruling stated that the Legislature recognized the distinction in 1975 by adopting Financial Code §864, "which completely regulates the manner in which banks may exercise their right of setoff."
Moreno said the court's ruling isn't intended to "diminish" the importance of preserving public benefit funds for the poor and needy.
"However, it is far from clear that this policy is undermined when banks recoup overdrawn balances from subsequently deposited public benefit funds," he wrote. "Indeed, an overdraft may be the result of the bank honoring, rather than bouncing, a rent or utility payment made prior to the deposit of benefit funds."
Sturdevant, who heads up The Sturdevant Law Firm in San Francisco, called the ruling "disgraceful" and "disingenuous."
"There is not a word in the entire legislative history of that statute," he said, "that says there was any indication by the Legislature to reverse the portion of Kruger that said exempt funds are exempt -- cannot be seized by banks through the internal procedure of setoff."
"This is simply the latest example," Sturdevant added, "where the life-support system of the most vulnerable of the poor in this country [is] sacrificed to the altar of greed."
Bank of America's lawyer, Walter Dellinger, the Washington-based chairman of O'Melveny & Myers' appellate practice, didn't return a call seeking comment. Charles Miller, the Washington-based spokesman for the U.S. Department of Justice, which argued before the court, wasn't able to locate anyone to comment for the agency.