California Supreme Court to Hear Miller v. Bank of America

The California Supreme Court has agreed to hear the appeal in Miller v Bank of America and decide the question: Does California law, which provides that a bank account into which public benefit funds or Social Security payments have been electronically deposited is exempt from attachment and execution, prohibit a bank from exercising its right to setoff as to charges - such as overdraft fees and insufficient fund fees - arising out of use of that same account?

The trial court applied Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352 (Kruger), a California Supreme Court decision which prohibited a bank from utilizing the banker’s setoff against public benefits to recover on an account holder’s delinquent but separate credit card account. The First Appellate District reversed, holding that the setoff to collect a debt owed the bank related to the account against which setoff is exercised is significantly different from Kruger in which the debt's origin was an unrelated account.

While the legal question at issue may at first glance appear to be somewhat technical and trivial, in reality, large sums of money and significant issues of public policy are at stake in this case. The First Appellate District explained:

When it ruled on summary judgment, the court also certified a plaintiff class consisting of “All California residents who have, have had or will have, at any time after August 13, 1994, a checking or savings deposit account with Bank of America into which payments of Social Security benefits or other public benefits are or have been directly deposited by the government or its agent.” In 2003, the Bank had 1,079,414 such accounts. Each month more than $800 million in government benefits is electronically deposited into class members’ accounts. Between January 1994 and May 2003, the Bank debited at least $284,211,273 in NSF and other overdraft fees from accounts containing Social Security direct deposits.

The trial court ordered Bank of America to pay compensatory damages and restitution of $296,650,220, an astonishingly large amount even for an entity like Bank of America. The appeals court reversed, however, finding a distinction between using setoff to satisfy a debt not tied to the operation of the account being debited (prohibited by Kruger) and the facts in Miller.

Collecting a debt unrelated to the bank account, such as a credit card debt, does not implicate the internal balancing of a single bank account. Neither Miller nor his various supporting amici curiae have cited, and we have not found, a single case that interprets Kruger to prohibit a bank from applying a deposit against a negative balance in a single bank account, or towards fees assessed because of that negative balance; indeed, the distinction between that practice and the banker’s setoff against an independent account that was of concern in Kruger was observed in a closely related context. In Lopez v. Washington Mut. Bank, FA (9th Cir. 2002) 302 F.3d 900, the Ninth Circuit concluded that federal law exempting Social Security benefits from seizure6 did not prohibit a bank from debiting a customer’s account for overdrafts and NSF fees. (Id. at pp. 902-906.)

The appellate court was also concerned that prohibiting banks from practicing standard setoff procedures on accounts receiving public benefits, would drive banks away from providing banking services to benefit recipients.

There was also considerable testimony that extending Kruger to internal account balancing practices would have adverse consequences not implicated in the context of a traditional banker’s setoff. Bank witnesses testified that prohibiting a bank from debiting an account for overdrafts, chargebacks and NSF fees when a customer account contains directly deposited public benefits will cause banks to substantially curtail the services available to such account holders. Consequences might include dishonoring any checks that would overdraw those accounts instead of offering overdraft protection; dishonoring other payment requests, such as automatic bill payments, that could overdraw the account; placing maximum holds on deposited funds; forbidding online or telephone banking; and canceling or restricting account holders’ use of ATM and debit cards.

The United States also weighed in on the issue. The Treasury Department expressed similar concerns on behalf of the federal government. According to the Treasury, the injunctive relief would likely cause banks to reduce the range of services available to recipients of government benefits in order to minimize the risk of overdrafts, or cause higher prices for such services, working a significant detriment on both the plaintiff class and the general public interest. Other approaches banks potentially could take to address the increased risk of loss from overdrafts would include requiring account holders to maintain a segregated balance of nonbenefit funds in their accounts or attempting to return direct deposits of benefits that are directed to overdrawn accounts and instead requiring deposit by check. These changes, the Treasury says, would undermine the federal government’s goals of affording recipients of public benefits the same consumer protections offered other account holders and encouraging financial institutions to offer electronic banking services, including direct deposit, to individuals who traditionally do not use banks. There is no indication that any such consequences were implicated in Kruger.

Miller's counsel, as one would expect, was described as "ebullient" and quoted as saying " I have confidence that in granting the petition [for review] it intends to reinforce the public policy rule it set forth in 1974."