CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2005 No.2 June 3, 2005

Vol 2005 No.2 June 3, 2005

Update on Miller v. Bank of America Litigation

Status of Miller v. Bank of America

Following a jury verdict against the bank for violation of the Consumer Legal Remedies Act (Civil Code Section 1750, et seq. "CLRA") arising from overdraft fees charged against a purported class of depositors that received automated deposits of social security payments, the trial court judge in Miller also found that the bank was liable under Business and Professions Code Section 17200 et seq. for the same actions. In addition to paying damages, the bank is enjoined from charging overdraft (and perhaps other) fees on such accounts, and also from representing to customers or providing in any agreement that it has the authority to charge the fees.

The trial court agreed to stay portions of the decision pending filing of an appeal, but not for the duration of the appeal itself. The bank then filed an appeal and petitioned the appellate court to grant a stay pending the entire appeal process. The CBA, national trade associations, and the U.S. Justice Department on behalf of the United States of America have all filed amicus briefs supporting the bank, and all have been accepted by the appellate court.

The case directly affects only the defendant bank, and a trial court outcome does not carry the weight of judicial precedent. Nevertheless, the impact of the case is potentially far reaching because it involves standard industry practices not just in California but in the rest of the nation. That is, the bank paid NSF checks and replenished negative account balances in the amount of overdrafts and fees from incoming deposits, without regard to the source of the new deposits.

If a decision against the bank is rendered by the appellate court resulting in a written decision, then it would become a precedent and expose other banks directly to legal liability. In some instances, media coverage of Miller has already directly led to inquiries and letters of complaint by customers at other banks. Also, the same plaintiffs firm that represents Mr. Miller has made good on a warning reported in a legal journal last year by suing a second bank in this state based on the same theories.

The legal theory

As indicated above, the bank was found liable under the CLRA and Section 17200. But the basis for the court's findings is its misconstruction of Kruger v. Wells Fargo Bank 11 Cal. 3d 352, a 1974 California Supreme Court case. The Kruger court limited the defendant bank's right of set-off against a customer's deposit account to satisfy the customer's separate credit card debt, where the deposit account contained public benefit funds. Though Miller addresses overdraft fees, which are account charges, the Miller court relied on Kruger for the proposition that recovering overdraft fees from incoming social security deposits is legally indistinguishable from setting off the account to satisfy an external debt.

The Miller court's error is essentially the same one committed by the initial Ninth Circuit Court of Appeals panel that issued the first Lopez v. Washington Mutual decision (more on Lopez below). Lopez considered a bank's recovery of overdrafts to be the same as a creditor reaching account funds through a levy or other legal process, while Miller considers internal account fees to be the equivalent of collecting (i.e., setting-off) a debt.

Bank of America argued to no avail that Kruger, by its facts, does not apply to this matter. It also noted that Financial Code Section 864, enacted the year after the Kruger decision was issued by the Supreme Court, codified the Kruger decision and, by its terms, also does not apply to charges for bank services. 1 Not unlike what might happen today, Kruger had caused quite a stir among consumer groups when it was decided, one of which promptly introduced a bill in the legislature that culminated in what is now codified Section 864. Importantly, Section 864 does recognize the distinction that Miller misses: the statute specifically excludes from coverage charges for bank services, including recovery of overdrafts.

1) Under Section 864, a setoff of a bank debt against a depositor may not result in an aggregate balance of less than $1,000 for all demand deposit accounts maintained by the depositor. The law also requires the bank to provide a detailed notice to the depositor, which includes a response form to notify the bank that the customer's account contains certain kinds of funds, including public benefits, and that certain "exemption statutes" might apply. A "debt" is defined as "an interest-bearing obligation or an obligation which by its terms is payable in installments, which has not been reduced to judgment, arising from an extension of credit to a natural person primarily for personal, family, or household purposes, and does not mean a charge for bank services or a debit for uncollected funds or for an overdraft of an account imposed by a bank on a deposit account. [Emphasis added]. Financial Code Section 864(a)(2).

Was CBA involved in crafting the bill? Certainly. CBA appears in the supplemental records as having worked out the industry's concerns. While the specific nature of CBA's involvement is not evident from the records, it can hardly be doubted that the exclusion of charges for account services from the definition of a covered "debt" was a key concern. It is also likely that CBA helped craft the process whereby a customer is required to notify the bank of the existence of protected funds, which solves the problem that Miller now creates, namely, that a bank does not "know" in any given moment that an account contains protected funds.

Section 864 never went as far as to declare that Kruger is superseded by Section 864, but this is neither surprising nor necessary. For our purposes in Miller, Kruger and Section 864 are entirely consistent. Kruger stated the principle and Section 864 filled in the details. Both address debts external to the account and not charges or obligations arising from the account itself. In other words, neither limits a bank's ability to charge overdrafts or overdraft fees.

What about Lopez?

The industry had litigated and won this issue before in the Ninth Circuit Court of Appeals in Lopez v. Washington Mutual II, 311 F.3d 928 (as distinguished from Lopez I which was reversed by Lopez II) over two years ago, but the Miller court chose not to follow that federal case. At issue in Lopez was the interpretation of "legal process" under a Social Security administration statute (42 U.S.C. 407[a]) limiting the ability of a creditor from levying or otherwise gaining access to a debtor's social security benefits. The statute is similar to many state laws, including California's (e.g., Code of Civil Procedure Section 704.080), that require banks to exempt specified amounts of benefits funds when complying with orders of attachment, levies, and other forms of legal process against an account.

Until Miller, the industry relied on Lopez II for the proposition that a consent in an account agreement is sufficient to overcome a claim that collecting overdraft fees might violate exemption statutes as to benefit funds. Miller ruled that Lopez II was not binding because it is a federal court decision (and, moreover, it is a disputed decision), because the defendant was a federal savings institution and not a national bank, and Lopez II addressed the applicability of a federal statute, not state law (deemed preempted under the Home Owners' Loan Act). Thus, regardless of how Miller is decided, Lopez II can still be relied upon by federal savings institutions in Miller-type actions, but perhaps not by state or national banks.3

3) Bank of America unsuccessfully raised National Bank Act preemption arguments at the trial court, and is likely to pursue preemption arguments on appeal.

CBA's arguments as amicus

The defendant bank will raise on its own the pertinent legal arguments, while CBA focuses on the impact of Miller on the broader industry and bank customers. While recovery of an overdraft payment or fee may be characterized colloquially as the collection of a debt, it is not treated as such legally for good reasons. The first is that the system of accounting for debits and credits to an account, to include applying new deposits to replenish a negative balance, is largely an automated process. To comply with the trial court order not to charge accounts receiving automated social security funds, a bank would first have to identify such accounts efficiently and with certainty. As already suggested, this is no easy task. Then the bank would have to apply different data processing rules to block impermissible charges.

Second, such an interpretation effectively prevents bank customers from seeking and paying for bank services. Under Miller, it would even be considered unconscionable for a bank to put into the account agreement a provision specifically allowing the bank to use incoming benefit funds to pay an overdraft. The result is that affected bank customers would be barred from overdraft services. Indeed, the court's barring of overdraft fees and other "monetary claims" even throws into question a bank's ability to collect a returned item fee if doing so would itself create a negative balance.

Third, the strong policy reasons for placing limits against a creditor gaining access to the debtor's unrelated bank account assets through means of legal compulsion simply do not apply in the case of overdrafts. To the extent that an overdraft is a debt owed to the bank, it arises within the account itself, whether through an overdrawing check, a returned check that had already been credited, or the charging of a regular account fee when the account was deficient to pay it. The bank should not be limited from charging the account because, for the most part, the accountholder instigated the transaction creating the overdraft (in the case of an NSF check) and, in all instances, agreed to repay an internal account obligation. The Miller court advances the fiction that when an accountholder writes a check against insufficient funds, which a bank subsequently pays, she should not expect that the bank would recover the payment.

If you have any questions, you may direct them to Leland Chan at lchan@calbankers.com.