I. INTRODUCTION
Provisions of federal law give broad protection to Social Security recipients and Supplemental Security Income (SSI) beneficiaries. The United States Supreme Court in Bowen v. City of New York, 476 U.S. 467, 480 (1986) noted that the Social Security Act is “unusually protective of claimants” and later noted that there are no implied exceptions to the protections against assignments of benefits or attempts to attach Social Security benefits. See, Bennett v. Arkansas, 485 U.S. 395, 3297 (1988).
Although most bankers experienced with the Social Security Act are aware that federal law provides that Social Security and SSI benefits are not subject to execution, levy, attachment, garnishment or other legal process or to the operation of any bankruptcy or insolvency law, many of the same bankers do not realize that the phrase “or other legal process” may apply to the right of set-off or other self-help remedies.
II. RELEVANT PROVISIONS OF LAW
42 U.S.C. § 407(a), a section of the Social Security Act addressing the assignment of Social Security benefits, provides that:
The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.
42 U.S.C. § 1383(d)(1) extends these same protections contained in 42 U.S.C. § 407(a) to SSI benefits.
III. THE TOM AND LOPEZ CASES
Tom v. First American Credit Union, 151 F.3d 1289 (1998) is a 10th Circuit U.S. Court of Appeals case that held that a financial institution could not use its right of setoff by applying Social Security benefits held in a checking account to satisfy a loan agreement with the bank. The court held that setoff was within the meaning of the term “other legal process” found in 42 U.S.C. § 407(a). Relying on a California case that made no distinction between bank setoff and the legal actions of attachment and execution, the court noted that:
Although the banker’s setoff differs from attachment and execution in that it does not require the aid of a state official, there is no relevant difference between the two procedures as to the state objective of protection of unemployment compensation and disability benefits from claims of creditors. The assertion of a banker’s setoff has exactly the same effect as a third party’s levy of execution on the account – it deprives the depositor of income which the state provided him to meet subsistence expenses.
Id.at 1292 (quoting Kruger v. Wells Fargo Bank, 521 P.2d 441, 452-53 (1974)).
The 9th Circuit United States Court of Appeals decision of Lopez v. Washington Mutual Bank, 284 F.3d 990 (2002) originally held that, absent an unequivocal consent, the statutory protections afforded to Social Security recipients and SSI beneficiaries are offended by a financial institution’s policy or practice of using directly deposited Social Security and SSI benefits to cover deposit account overdrafts and overdraft fees. A Petition for Rehearing was filed by Washington Mutual Bank and supported by an amicus curia brief filed by several financial trade groups, including the American Bankers Association and the California Bankers Association. In a remarkable turn of events, the 9th Circuit Court of Appeals granted the Petition for Rehearing, withdrew its previous opinion and issued a new opinion.
In this case, recipients of Social Security and/or SSI benefits were deposit account customers of the bank and the benefits were directly deposited into their accounts. Upon opening these accounts, the customers entered into account agreements that included provisions regarding overdrafts. The agreements explained that if the account holder had insufficient funds to pay a check, the bank could elect to reject the check or to pay the check, thus creating an overdraft on the account and subject to an overdraft fee. The account agreements also contained a promise to immediately pay the overdraft amount to the bank.
The customers had overdrawn their accounts, creating overdrafts and overdraft fees. The bank’s practice of satisfying the overdrafts and overdraft fees was to offset the next directly deposited Social Security and Supplemental Security Income (SSI) funds.
In the new opinion of Lopez v. Washington Mutual Bank, issued August 6, 2002, the 9th Circuit Court of Appeals noted that:
In this case, the plaintiffs voluntarily opened an account with the bank and executed an account holder agreement which outlined the terms and conditions of the bank’s overdraft policies. They also established a direct deposit for their benefits (an agreement to which Washington Mutual was not a party). The plaintiffs remained free at all times to close their account or change their direct deposit instructions. Because they did not do so, Washington Mutual argues, each deposit to the account after an overdraft should be treated as a voluntary payment of a debt incurred. We agree. (Emphasis added)
The new opinion used the above-quoted language to distinguish the facts of the case at hand from previous cases relied upon in the withdrawn opinion, including the Crawford v. Gould decision (“plaintiffs were involuntarily committed” to a state hospital, “not free to terminate their dealings with the state, incompetent to handle their personal affairs” and obligated by law “to reimburse the state for the cost their care” and “to deposit all of their funds into the hospital trust accounts”) and the Nelson v. Heiss(accounts of prison inmates involuntarily opened with a prison).
There is however, an acknowledgment on the part of the Ninth Court that the new opinion “does seem to create tension with the Tenth Circuit’s decision in Tom v. First American Credit Union, 151 F.3d 1289 (10th Cir. 1998).” In order to distinguish the factual situation presented in that case from the case at hand, the Court reasoned that the credit union, in Tom, had
used Social Security deposits to satisfy a separate, pre-existing debt unrelated to the operation of the depositor’s checking account. The act of depositing the funds into the checking account was thus not an indication of an intent to pay the separate debt. Had the depositor consensually arranged an automatic payment of the loan from the account containing the Social Security funds, we suspect the result would have been different.
The new opinion also stated that it did not see “similarities between a bank customer voluntarily entering into a loan agreement and a welfare recipient being required to sign an agreement as a condition of receiving direly needed benefits.”
IV. MILLER V. BANK OF AMERICA
The California Supreme Court upheld a bank’s practice of using direct deposits of Social Security payments to cover negative checking account balances and related fees. In the case of Miller v. Bank of America, a consumer class-action lawsuit was filed by a recipient of supplemental security income (SSI), who maintained a checking account with Bank of America (BOA). Each month, the federal government deposited the plaintiff’s SSI payment directly into his checking account. On occasion, the SSI deposit arrived at the bank when the account was overdrawn. BOA used the SSI deposit to cover the overdraft balance and was eventually sued.
The lawsuit proceeded to trial on the contentions that the bank misrepresented the “safety, security and accessibility” of direct deposit accounts and thus violated the California Unfair Competition Law (UCL) and the California Consumer Legal Remedies Act (CLRA). The trial court certified a plaintiffs’ class of “[a]ll California residents who have, have had, or will have, at any time after August 13, 1994, a checking or saving’s deposit account with Bank of America into which payments of Social Security benefits or other public benefits are or have been directly deposited by the government or its agent.”
BOA contended, among other things, that (1) California law permitted it to apply money from any source, including government benefit payments, to satisfy overdraft balances; (2) federal regulations permitted the bank’s overdraft practices and preempted any conflicting California law; and (3) the plaintiff consented to the bank’s overdraft practices by accepting the terms of the bank’s deposit account agreement.
The trial court and the jury found in favor of the plaintiff and entered an award against BOA in excess of $1 billion, which was appealed. Following a reversal of the trial court decision by the California Court of Appeals, the California Supreme Court was called upon for the final decision. Siding with the Court of Appeals rationale, the Supreme Court noted the bank “is not setting off independent, past debt. . . . .[T]he transaction occurs within a single account and is triggered by a customer’s overdraft, causing the Bank to recoup those funds from a subsequent deposit, and charge an NSF fee.”
In affirming the Court of Appeals decision, the Supreme Court relied on the provisions of California Financial Code Section 864, stressing the Code’s distinctions between the treatment of a setoff of independent debt and the recoupment of overdrafts and bank charges. While Section 864 forbids any bank from “exercising any setoff for a debt claimed to be owed to the bank” if the setoff would cause the customer’s account balance to drop below $1,000, the Code also excludes from the definition of debt, “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.” According to the court, the deliberate exclusion of overdraft charges from the statue’s definition of debt allows a bank to recoup overdraft fees from funds deposited into an overdrawn account, regardless of the source of the funds.
The California Supreme Court also cited an interpretive letter issued by the Office of the Comptroller (OCC) (No. 1082 June 2007), in which the OCC determined that a national bank may “honor items for which there are insufficient funds in depositors’ accounts and recover the resulting overdraft amounts as part of the [b]ank’s routine maintenance of these accounts; and . . . establish, charge and recover overdraft fees from depositors’ accounts for doing so” without “running afoul” of federal law. In its interpretive letter, the OCC further explained that “the processing of an overdraft and recovery of an overdraft fee by balancing debits and credits on a deposit account are activities directly connected with the maintenance of a deposit account. Fundamentally, the [b]ank is not creating a ‘debt’ that it then ‘collects’ by recovering the overdraft and the overdraft fee from the account.” The California Supreme Court concluded that its interpretation of Financial Code Section 864, was consistent with the OCC’s interpretive letter.
V. NEBRASKA PRECEDENT
The rationale of Tom v. First American Credit Unionhas been adopted in the decision by the U.S. Bankruptcy Court for the District of Nebraska. In re Capp, Case No. BK00-40151 (2000), was a case in which the debtors sought an order requiring their bank to return social security proceeds that were setoff prior to the commencement of the bankruptcy case.
One of the debtors had executed a promissory note and security agreement in favor of the bank. The bank was granted a security interest in and a right to setoff against the debtor’s bank accounts in the event of default. The bank subsequently exercised its right of setoff on the debtor’s accounts to apply against the outstanding balance on the note. The account at issue held social security proceeds that were not commingled with other funds.
Although the bank cited legal precedent that held that a bank’s right to setoff is not a “legal procedure” prohibited by the protections of the Social Security Act [See, Frazier v. Marine Midland Bank, N.A., 702 F.Supp. 1000 (W.D.N.Y. 1988) and In re Gillespie, 41 B.R. 810 (Bankr. D. Colo. 1984)], the court did not agree with those decisions by reasoning that:
The language of the statute is clear that “. . . none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, . . .” 42 U.S.C. § 407(a). In interpreting federal benefit statutory schemes, the Supreme Court has directed that . . .
legislation of this type should be liberally construed . . . to protect funds granted by the Congress for the maintenance and support of the beneficiaries thereof, . . . [D]eposits such as are involved here should remain inviolate. . .
The Court concluded that the exercise of the non-judicial remedy of a setoff is a “legal procedure” prohibited by § 407 of the Social Security Act and that it was not legal for the bank to effectuate a setoff in this case.
VI. CONCLUSION
With the withdrawal of the previous Lopez opinion and the issuance of a new opinion, there is no outstanding United State Circuit Court of Appeals precedent that precludes a financial institution with account customers who receive direct deposit Social Security and SSI benefits from using the right of offset to cover overdrafts incurred on such accounts, as long as there is sufficient consent to such a practice. Financial institutions operating in the Ninth Circuit may continue to offer overdraft protection privileges to those customers with accounts that receive direct deposit of social security benefits and SSI payments without the fear of the potential violation of federal law. Nebraska and other financial institutions with operations outside of the Ninth Circuit (Nebraska is in the 8th Circuit U.S. Court of Appeals jurisdiction) may be relieved that the probable risk of challenges to their own overdraft protection programs have also been diminished.
The new Ninth Circuit opinion does not mean however, that the Social Security Act and other previously issued, outstanding opinions interpreting the Act’s provisions (regarding the broad protections given to Social Security recipients and SSI beneficiaries) are reversed or altered. Federal law continues to provide that Social Security and SSI benefits are not subject to execution, levy, attachment, garnishment or other legal process or to the operation of any bankruptcy or insolvency law.
In Nelson v. Heiss, 271 F.3d 891 (9th Cir. 2001), the 9th Circuit Court of Appeals seems to suggest that obtaining a consent to take future “statutorily protected” funds from an account may not be a solution (such consent could be construed as an “assignment”), but that the express consent to take existing funds in the account at the time the customer so directs would be acceptable.
The level of “voluntary consent” appears to remain the key element when applying the law to the facts in these cases.
The Miller decision also provides added credence to a bank’s practice of using direct deposits of social security payments to cover negative checking account balances and related fees as outlined under IV, above.