Banks
can cover overdraft with government funds
Wednesday, June 3, 2009
The state Supreme Court
has refused to reinstate a $1.3 billion jury verdict for more than a million elderly
and disabled Bank of America customers and ruled that banks can take money from
their patrons' Social Security deposits and other government benefits to pay
for bounced checks.
The unanimous decision
Monday upheld a policy that virtually all banks follow, covering overdrafts and
bad-check fees of up to $32 per transaction by tapping into a customer's newly
deposited funds from any source.
When the case went to
trial in 2004, Bank of America had nearly 1.1 million accounts in which
government agencies directly deposited $800 million a month in Social Security
and other benefits, mostly for age and disability. The ruling allows the bank
to dip into those deposits, like any other incoming funds, when the customer
writes a check for more than the previous account balance.
Lawyers for the
customers in a statewide class-action suit argued that California law prohibits
banks from deducting Social Security payments or other public benefits that are
typically the customer's chief source of income. The federal government sided
with the banks.
"This decision is
the latest example of sacrificing the poor who subsist on life support to the
altar of greed," said the plaintiffs' lawyer, James Sturdevant. It's now
up to Congress and state legislatures, he said, "to stop these predatory
practices."
Bank of America said the
ruling shows that it and other banks have been acting legally. Bank officials
had testified that prohibiting deductions of government benefits would force
them to cut back on overdraft protections and take other steps to prevent
bounced checks, such as increasing holds on deposits and restricting the use of
ATMs.
"Banks would have
had to categorically deny overdraft operations and privileges to anyone who
received government benefits," Leland Chan, general counsel of the
California Bankers Association, said Monday. "The aged and handicapped
would not have access to this service," referring to overdraft protection.
The court raised similar
concerns. A bank that could not deduct overdraft costs from new deposits might
have to bounce a customer's rent check or utility payment, said Justice Carlos
Moreno, a practice that could also hurt the customer's credit rating.
The suit was based on
the court's 1974 ruling that state law barred banks from taking money from
government benefits in a customer's account to cover funds that the customer
owed to an outside creditor, such as a credit card company.
San Francisco Superior
Court Judge Anne Bouliane ruled in 2004 that the same principle prohibited a
bank from using newly deposited government benefits to cover its own charges.
Bouliane and a jury then awarded $1,000 to each Bank of America customer with
such an account - more than $1 billion overall - and another $300 million for
reimbursement of improper charges and emotional distress.
A state appeals court
overturned the verdict in 2007 and was upheld Monday by the state's high court.
The court said its 1994 ruling applied only to outside creditors and not to
deductions from deposits in the same account that the customer has overdrawn.
That conclusion is
reinforced, the court said, by a 1975 state law that limited the amount a bank
could deduct from any customer's account to pay off a debt, but excluded bank
service fees from the definition of "debt."
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