California Supreme Court Rules That Bank is Permitted to Collect Overdraft Fees from Accounts in which Social Security Benefits are Deposited

In June, the California Supreme Court unanimously overturned a 2004 class action award to Bank of America account holders whose government benefits had been directly deposited into their accounts and from which the Bank had withdrawn fees for overdrafts. In Miller, et al. v. Bank of America, 46 Cal. 4^th 630 (2009), the court considered whether the Bank’s actions had violated the law prohibiting set-offs against public benefits.

In the case of the named plaintiff, the bank had erroneously credited the plaintiff’s account with almost $1800. When it realized its error, the bank reversed the credit and without notice or authorization, withdrew the funds from the account. This action caused the account to have a negative balance. When the plaintiff’s next SSI check was deposited into the account—the plaintiff’s only source of income—the check was entirely depleted by the bank’s actions, leaving the plaintiff no funds to pay rent or other essential expenses. Although the Bank restored the funds after the plaintiff complained, the Bank repeatedly withdrew funds for the original overdraft and for occasional subsequent overdrafts from the plaintiff’s directly deposited SSI funds. The Bank made no distinction when assessing overdraft fees between its customers’ income derived from government sources and from other funds in overdrawn accounts.

The Court acknowledged that the benefits that were depleted by the bank’s actions were often provided to meet subsistence expenses and that set-offs of independent debts were not permitted. However, the Court determined that the recoupment of overdrafts and the assessment of related fees were an internal account balancing process that is different from the practice of setting off separate debt against a deposit account. Moreover, the Court determined that the California legislature specifically exempted overdraft payments and fees from its definition of debt.

Although the case was decided on the basis of California law, the court noted that the Office of the Comptroller of Currency had issued an interpretation of the analogous federal law that was consistent with the court’s decision:

The OCC concluded that a national bank may “honor items for which there are insufficient funds in depositors' accounts and recover the resulting overdraft amounts as part of the [b]ank's routine maintenance of these accounts; and … establish, charge and recover overdraft fees from depositors' accounts for doing so” (Letter, at p. 1) without running afoul of 12 United States Code section 24, par. Seventh, or 12 Code of Federal Regulations part 7.4002 or 7.4007 (2009). (Letter, at p. 7.) ⁷ The OCC explained that “the processing of an overdraft and recovery of an  [***42] overdraft fee by balancing debits and credits on a deposit account are activities directly connected with the maintenance of a deposit account. Fundamentally, the [b]ank is not creating a ‘debt’ that it then ‘collects’ by recovering the overdraft and the overdraft fee from the account.” (Letter, at p. 6.)

Miller at 644.

While advocates may have assumed that government benefits directly deposited into a bank account are protected from garnishment or other actions, the Millercase raises concerns about whether these funds in Michigan banks will be protected from the recoupment for overdrafts and related fees.