California Supreme Court Rules Bank Seize SSI Deposit to Pay for Overdrafts and Fees

The California Supreme Court has ruled that a state statute exempting Social Security and Supplemental Security Income (SSI) funds directly deposited into a bank account from attachment does not prohibit a bank from seizing an incoming SSI deposit to repay itself for overdrafts and associated fees. Miller v. Bank of America, ___ Cal. Rptr. 3rd ___, 2009 WL 1507681 (June 1, 2009).

The decision creates a major exception to an earlier California Supreme Court decision which had ruled that a predecessor of the current statute prohibited a bank from taking exempt funds in a checking account to settle a credit card debt owed to the bank.  Kruger v. Wells Fargo Bank (1974) 11 Cal. 3d 352.   The Miller court distinguished Kruger on the ground that a separate California statute was enacted a year after Kruger to protect consumers from bank setoff of debt and specifically excluded overdrafts and bank charges from its definition of “debt.”  The court also found it significant that  Kruger involved the setoff of an independent debt generated outside of the checking account whereas Miller just involved internal account balancing within the checking account.  See also, Lopez v. Washington Mutual Bank FA, 302 F.3d 900, 906 (9th Cir. 2002).

In earlier litigation challenging bank setoff of overdrafts and related fees against Social Security and SSI benefits on both federal and state law grounds, the Ninth Circuit upheld the practice.  Lopez, supra.  The court in Lopez ruled that under the terms of the account agreement, when someone overdraws her account she was thereby consenting to the setoff against incoming benefits, and there was thus no violation of the Social Security Act anti-assignment provision.  The Lopez court also ruled that the California statute at issue in Miller was preempted in that case by regulations of the federal Office of Thrift Supervision.

This article originally appeared in the NSCLC Washington Weekly, June 19, 2009. Click here for subscription information or to request a free sample.

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