California Supreme Court Rules in Favor of Bank of America and Upholds Reversal of a Billion Dollar Judgment

October 2009

The California Supreme Court recently issued its much-anticipated ruling in Miller v. Bank of America, a case which has been closely followed by the nation’s financial institutions, and the consequence of which could greatly impact the fee income generated by California depository financial institutions. The Court in Miller held that debiting a customer’s bank account to cover overdrafts and service charges in the same account does not violate California law, even if the debited funds consist of Social Security and other public benefit payments.

Miller was a class action lawsuit in which plaintiffs argued that automatically debiting an account for overdrafts and associated fees against a public benefit payment (e.g., Social Security) and charging a fee when an account is overdrawn violated California law because such payments are protected from offset or garnishment by creditors under California case law. The plaintiffs relied on the California Supreme Court’s holding in Krueger v. Wells Fargo Bank in support of their position. In Krueger, plaintiff Jean Kruger deposited her disability benefits and unemployment compensation into a checking account at Wells Fargo. When Kruger’s credit card account became delinquent, Wells Fargo applied the entire balance in Kruger’s checking account towards the delinquency. The Krueger Court concluded that because unemployment compensation and disability benefits are exempt from attachment and execution, “a bank may not satisfy a credit card debt by deducting the amount owed from a separate checking account containing deposits that” derived from public benefit payments.

In 2005, the trial court agreed with the plaintiffs in Miller and awarded the class of 1.1 million account holders over a billion dollars in restitution and damages by extending the holding of Krueger to repayment of bank account delinquencies. The trial court held that governmental benefits “are exempt from collection by the bank for insufficient funds fees [], overdrafts and money claims it has against the account holders.” The Court of Appeal reversed the trial court’s holding, and the California Supreme Court granted review.

The Supreme Court held that the practice of charging fees and recouping overdrafts was not prohibited by Krueger or California Financial Code Section 864. The Court relied on the plain meaning and legislative intent of Section 864. According to the Court, Section 864 was enacted for the purpose of treating charges for overdrafts and associated fees different from the satisfaction of independent debt by limiting a bank’s ability to set off using other accounts and not its “internal balancing practices” within a single account. Further, Section 864 constrains a bank’s right to set off debts but the statute explicitly excludes overdrafts and bank charges from the statute’s definition of “debt”. Therefore, the Court reasoned that a plain reading of Section 864 reveals that a bank may recover overdrafts and related fees without regard to the restrictions imposed by Section 864, and that such a reading is consistent with legislative intent.

The Court also distinguished Krueger from Miller. Central to the Miller Court’s holding was that Krueger involved the bank using a depositor’s funds to set off an independent, past debt. In contrast, in Miller, Bank of America tried to recoup an overdraft from funds which were later deposited in the same account. The Miller Court ultimately held that Kruger does not prohibit Bank of America from engaging in the practice of recouping overdrafts and bank charges occurring within a single account against public benefit payments.

Banks can now breathe a little a easier knowing that the industry-wide practice of debiting an account to cover overdrafts and service charges in the same account does not violate California law, even if the debited funds consist of public benefit payments.

Please note that the information contained in this letter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.