$360 Million-Plus Class Action Judgment Against Bank of America Properly Reversed by Court of Appeal because Offsetting Overdraft and Insufficient Funds Fees Against Public Benefit Deposits (such as SSI Benefits) does not Violate State Law California Supreme Court Holds
Plaintiff filed a putative class action against Bank of America alleging, inter alia, violations of California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA); the class action complained that BofA improperly offset Supplemental Security Income (SSI) from bank accounts to cover sums owed the bank. Miller v. Bank of America, NT & SA, ___ Cal.4th ___, 94 Cal.Rptr.3d 31 (Cal. 2009) [Slip Opn., at 4, 5]. Plaintiff opened an account with BofA in 1975; he began receiving SSI benefits in 1992, and in 1994 he began having those benefits deposited directly into his BofA checking account. Id., at 2. BofA erroneously placed $1800 in plaintiff’s account in January 1998, and a few months later it reversed the credit without notice to plaintiff or his consent. Id., at 2-3. In so doing, BofA created a negative balance in plaintiff’s account and, as soon as they were deposited into plaintiff’s account, BofA withdrew the entirety of his May, June and July 1998 SSI payments. Id., at 3. Each month, plaintiff complained that BofA’s conduct meant that he would not have the funds to live, and each month BofA returned the funds to his account, id. BofA also charged plaintiff insufficient funds fees that ranged from $14 to $32 each, up to a maximum of $160 per day. Id., at 3-4. Defense attorneys moved for summary judgment on the class action claims, but the trial court largely denied the motion on the grounds that triable issues of material fact exist, id., at 4-5. The trial court also granted plaintiff’s motion for class action certification; “the class consisted of all Bank customers who received directly deposited public benefit funds without regard to whether those class members had available alternate sources of income to cover their basic living expenses.” Id., at 5. At issue was the $284 million in NSF that BofA debited from customer accounts between January 1994 and May 2003. Id. In a bifurcated trial, a jury found against the bank, awarding $75 million in compensatory damages, plus $1000 in statutory damages to each class member. Id., at 5-6. After the bench trial, the trial court also found against the bank and awarded more than $284 million in damages as well as $1000 to each class member. Id., at 6. In so ruling, the trial court relied on Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 356, which held that “a bank may not satisfy a credit card debt by deducting the amount owed from a separate checking account containing deposits that ‘derived from unemployment and disability benefits’ and, thus, were ‘protected from the claims of creditors.’” Id., at 1. Immediately after Kruger, the California legislature enacted Financial Code section 864, which “comprehensively governs the manner in which banks may exercise the right to set off debts” and “expressly excludes overdrafts and bank charges from the statute’s definition of debt.” Id. The Court of Appeal reversed the judgments, “holding that Kruger did not apply to the Bank’s practice of debiting overdrafts and charging NSF fees to account holders who deposited public benefit funds.” Id., at 6. The California Supreme Court affirmed.
The Supreme Court summarized its holding at page 2 as follows, “We conclude that Bank of America’s practice of recouping overdrafts and charging insufficient funds fees is permissible in light of the Legislature’s unequivocal statement in Financial Code section 864 that overdrafts and bank charges are not debts and are therefore not subject to the limitations placed on a bank’s right of setoff set forth in that statute.” In rejecting plaintiff’s claim that Kruger governed this case, the Supreme Court explained, “Here, unlike in Kruger, the Bank is not setting off independent, past debt. 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. In Kruger, we concluded that the setoff of exempt funds to satisfy debts external to the bank customer’s checking or savings account was unlawful.” Id., at 8. The Court also rejected plaintiff’s public policy argument, explaining at page 10, “However, it is far from clear that [public] policy is undermined when banks recoup overdrawn balances from subsequently deposited public benefit funds. 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. Requiring banks to dishonor checks can harm the customer’s credit rating, result in the customer’s incurring fees, and affect the customer’s relationship with merchants. In this case, policy concerns about the setoff of independent debt — at issue in Kruger — are not present here, where the credits and debits occur in a single account.” Accordingly, the California Supreme Court affirmed the appellate court opinion that reversed the trial court judgment. Id., at 17.