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."