California Supreme Court Draws Setoff Boundary
The California Supreme Court has refused to extend an earlier holding prohibiting a bank from setting off customer debts using funds in a deposit account from public benefits. In Miller v. Bank of America, NT and SA, the Court held that Bank of America could setoff overdraft fees and fees for insufficient funds "(NSF") charged to a checking account with funds in the account, regardless of whether those funds came from public benefits.
In Miller, plaintiff received Social Security Supplemental Security Income ("SSI") payments by direct deposit into a Bank of America checking account. In 1998, the Bank inadvertently credited his checking account, then reversed the credit to correct its error. The reversal of the credit caused plaintiff's account to have a negative balance, which depleted his SSI benefits payments for that month. Separately, plaintiff occasionally overdrew his account, and the Bank paid the overdraft and NSF charges, at least in part, with his SSI funds on deposit. Plaintiff filed a putative class action complaint against the Bank, alleging the Bank could not set off these charges with funds in his account from public benefits.
Plaintiff alleged fraud, negligent misrepresentation, intentional infliction of emotional distress, violation of Code of Civil Procedure section 704.080, violation of the Consumer Legal Remedies Act, violation of California's unfair competition law, Business and Professions Code section 17200, and violation of California's false advertising law, section 17500. The trial court granted the Bank's motion for summary adjudication of plaintiff's Section 704.080 claim and plaintiff's claim for intentional infliction of emotional distress, but denied the motion with respect to plaintiff's other claims. The trial court also certified a class of depositors who had accounts into which Social Security payments had been direct deposited. Plaintiff obtained a judgment after trial.
On appeal, the Court of Appeal reversed, holding the Bank's setoff of internal account charges was permissible, even against public benefit funds. The California Supreme Court agreed and affirmed the Court of Appeals. The Court held that its prior holding prohibiting a Bank from paying a customer's credit card debt with deposited public benefit funds did not extend to a Bank's payment of overdraft or NSF charges on the deposit account. The Court noted that California Financial Code Section 864, which governs a Bank's right to setoff from deposit accounts, expressly excludes overdrafts and bank charges from prohibited setoff items. The Court held that the text of the statute and its legislative history supported a distinction between setting off deposited public benefits funds for the payment of other debts and using deposited public benefits funds for internal account balancing, for example by paying overdraft and NSF fees.
Because of this interpretation of the statute, the Court did not reach the issue of federal preemption.
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