By Kathy Chu and Taylor McGraw, USA TODAY
In a verdict that could have far-reaching implications for elderly and disabled bank customers, the California Supreme Court ruled this week that banks can tap Social Security benefits in bank accounts to cover bounced-check fees.
The decision, in the Miller v. Bank of America case, effectively reverses a 2004 San Francisco trial court ruling ordering the bank to pay at least $284.4 million in damages to more than 1.1 million customers.
Spokeswoman Shirley Norton says the verdict confirms that BofA "has always acted lawfully in maintaining and balancing its customer accounts." James Sturdevant, the lawyer who brought the case against BofA (BAC), says the opinion "condemns the most vulnerable bank consumers to predatory practices."
The Center for Responsible Lending, an advocacy group, has found that consumers heavily dependent on Social Security income pay $1 billion in overdrafts a year. Most overdrafts are triggered by small-dollar debit card transactions, says Eric Halperin, director of the center's Washington office.
The California ruling — along with a 2002 federal verdict in Lopez v. Washington Mutual Bank favoring the thrift — could make it more daunting to challenge banks' ability to deduct overdraft fees from government benefits. "It will make plaintiffs pause at least in bringing other cases," says Greg Taylor, associate general counsel at the American Bankers Association, a trade group.
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But Margot Saunders, counsel for the National Consumer Law Center, says the Supreme Court ruling merely "interprets a California statute" and doesn't prevent similar cases from moving forward elsewhere. It also won't stymie general lawsuits dealing with overdrafts, she says.
BofA, in an unrelated overdraft case, recently agreed to a $35 million settlement. The lawsuit alleged the bank processed transactions and provided account information in a way that increased overdraft fees. In settling, the bank denied the claims and said it fully complied with the law.
Federal law generally prohibits creditors from seizing Social Security or other government benefits to pay a debt. But California law says overdraft charges are not debt. The highest state court viewed the bank account as "a running tally of debits and credits," entitling banks to deduct overdraft charges, says Daniel Bussel, law professor at UCLA.
The U.S. government sided with BofA. The government said if banks are not able to tap Social Security benefits for overdraft charges, they may restrict electronic deposits, which could force the government to issue costly paper checks.