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Miller v. Bank of America

June 1, 2009


Ct.App. 1/3 A110137 San Francisco City and County Super. Ct. No. 301917. Judge: Anne E. Bouliane

The opinion of the court was delivered by: Moreno, J.

Relying upon our decision in Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 356 (Kruger), account holders who deposited Social Security or other public benefit funds into checking or savings accounts and then overdrew those accounts contend that Bank of America may not recoup the overdrawn amounts and charge insufficient funds fees for each transaction that results in an overdraft. In Kruger, we 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." (Ibid.) One year later, the Legislature enacted Financial Code section 864, which comprehensively governs the manner in which banks may exercise the right to set off debts. Financial Code section 864, subdivision (a)(2) expressly excludes overdrafts and bank charges from the statute‟s definition of debt. We conclude that Bank of America‟s practice does not run afoul of our holding in Kruger because the setoff of independent debt at issue in Kruger is not implicated here. We further 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. Because we conclude that Bank of America‟s practices do not violate state law, we do not reach the issue of federal preemption. Accordingly, we affirm the judgment of the Court of Appeal.


Representative plaintiff Paul Miller (Miller) receives Supplemental Security Income*fn1 benefits via direct deposit into his checking account with defendant Bank of America (the Bank). Miller has maintained an account with the Bank since 1975, and he began receiving SSI in 1992. Miller testified that he began having his SSI payments directly deposited into his checking account in 1994 after bank employees assured him that his deposits would be safe from debits or charges absent his authorization.

In January 1998, the Bank erroneously credited $1,799.83 to Miller‟s account. In April 1998, the Bank realized its error and reversed the credit to Miller‟s account without obtaining Miller‟s authorization or providing him with notice. The reversal caused a negative balance in Miller‟s account that depleted his May 1998 SSI payment as soon as it was directly deposited. Miller complained to the Bank that the reversal of the erroneous credit caused a negative balance in his account, completely depleting his SSI deposit, and he would be unable to pay rent and other living expenses that month.*fn2 The Bank advised Miller that he would be responsible for repaying the portion of the erroneous credit that he had spent, but he could open a separate checking account for his SSI deposits that would not be used for repayment. The Bank opened a new checking account and deposited Miller‟s previously deducted May 1998 SSI benefit funds into it. In June and July 1998, the Bank again used the SSI funds directly deposited into Miller‟s new checking account to repay the negative credit in his original account. Miller complained each time, and each time the funds were later restored.

From time to time, Miller overdrew his account, and the Bank recouped those overdrafts and associated insufficient funds (NSF) fees from his directly deposited public benefit funds. Bank employees testified that the Bank automatically deducted overdrafts and NSF fees from directly deposited funds, regardless of the source of those funds. Social Security funds received no special treatment or protection.*fn3 As of 2004, the Bank‟s NSF fees ranged from $14 per transaction to $32 per transaction, and up to five NSF fees could be levied in a single day, for a total daily NSF fee of $160.

The Bank executive in charge of the Bank‟s checking products testified that, in order to prohibit certain account holders from overdrawing their accounts (which would eliminate the Bank‟s need to recoup overdrafts or charge NSF fees), the Bank would have to "bounce" more checks, withhold check deposits for the maximum allowable period of four days instead of one or two days before the Bank would make the funds available for withdrawal, eliminate point-of-sale purchases (but not personal identification number (PIN) or transactions), and restrict automated teller machine (ATM) withdrawals from non-Bank ATM‟s. The Bank posts checks, or processes transactions, each day in order of largest to smallest based on its belief that larger transactions are more important, and therefore should be cleared first. When an account contains insufficient funds to cover the checks or point-of-sale transactions, the Bank‟s practice of processing larger transactions before smaller ones results in the same total amount being overdrawn from a particular account, but increases the number and amount of NSF fees imposed.

Miller initiated the instant representative action, and in his first amended complaint filed on August 13, 1998, alleged fraud, negligent misrepresentation, and intentional infliction of emotional distress, as well as violations of Code of Civil Procedure section 704.080; the Consumers Legal Remedies Act (CLRA), Civil Code section 1750 et seq.; the unfair competition law (UCL), Business and Professions Code section 17200 et seq., and the false advertising act, Business and Professions Code section 17500 et seq.

On October 16, 2001, the trial court denied in part and granted in part the Bank‟s motion for summary judgment and summary adjudication. The trial court granted the Bank‟s motion for summary adjudication with respect to plaintiff‟s claims for violation of Code of Civil Procedure section 704.080, and for intentional infliction of emotional distress, and denied the Bank‟s motion for summary judgment with respect to all other claims. The trial court found that triable issues of fact remained regarding the fraud, negligent misrepresentation, CLRA, UCL, and false advertising claims as to whether the Bank made false or misleading statements concerning the availability of directly deposited funds, whether the Bank had a practice of debiting benefit funds to collect overdrafts and other charges, and whether the Bank‟s practices as applied to plaintiff violated the UCL.

On the same day, the trial court also certified a class consisting of "[a]ll 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." As the Court of Appeal noted, "[i]n 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." Although SSI benefits constituted Miller‟s primary source of income, 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.

On February 25, 2004, following a bifurcated trial in which the jury considered CLRA issues and the trial court also considered CLRA issues, as well as UCL and false advertising issues, the jury returned its verdict, finding that the Bank violated the CLRA by "falsely represent[ing] that it ha[d] the right to use Social Security funds from direct deposit accounts that receive government benefits including Social Security funds to pay overdrafts, insufficient fund[s] fees, . . . and money claims it has against class members." The jury awarded $75,077,836 in compensatory damages to the class, and awarded $1,000 in statutory damages to each class member who suffered substantial economic or emotional damage. The jury also found that Miller suffered emotional distress as a result of the Bank‟s conduct, and awarded him individual damages in the amount of $275,000.

On December 30, 2004, the trial court issued its statement of decision following a bench trial regarding plaintiffs‟ CLRA, UCL, and false advertising claims. Relying on Kruger, supra, 11 Cal.3d 352, the trial court found that the Bank violated the CLRA, the UCL, and the false advertising act, and awarded $284,385,741 in compensatory and restitutionary damages to class members, concluded that each class member suffered substantial economic or emotional damage meriting the $1,000 in statutory damages awarded by the jury to eligible class members, enjoined the Bank from continuing to violate the CLRA, and awarded attorney fees and costs to plaintiffs.

The Court of Appeal reversed the trial court‟s judgment, 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. We granted review to consider whether the Bank‟s practice violated our holding in Kruger, and, if so, whether federal ...

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