The California Supreme Court unanimously overturned a billion-dollar class-action award against Bank of America Corp. on Monday, ruling that banks can collect overdraft fees from accounts in which government benefits intended for subsistence are directly deposited.
The ruling threw out a 2004 verdict by a San Francisco jury that found the bank violated state law by taking fees for insufficient funds from accounts set up to receive Social Security benefits.
The bank customers who had stood to benefit from the award included 1.1 million California residents receiving government assistance. James C. Sturdevant, who represented the Social Security recipients, said the award, with interest, would have cost Bank of America more than $2 billion.
He said banks earn about $40 million a year from overdraft charges and that some of the Social Security recipients in the suit lost 20% of their monthly income in a single day because of bank fees.
The suit relied on a 1974 state high court ruling that Monday’s decision said did not apply to the facts alleged against Bank of America. Although banks cannot take funds from a government recipient’s account to recover debt on a bank-issued credit card, the government money can be tapped to cover bank fees, the state high court said.
The court noted that an overdraft could stem from a bank’s honoring a rent or utility payment before the government benefits have been deposited.
“Requiring banks to dishonor checks can harm the customer’s credit rating, result in the customer’s incurring fees and affect the customer’s relationship with merchants,” Justice Carlos R. Moreno wrote for the court.
Sturdevant said the court’s ruling would punish the poor.
“They don’t have a credit rating,” he said. “These are the poorest of the poor. They live on $800 a month.”
Walter Dellinger, who represented Bank of America, said he was pleased that the court concluded that the bank’s practices were “entirely lawful.”
The court observed that banks post checks each day in the order of largest to smallest amount on the grounds that the larger transactions are more important and should be cleared first.
The policy also increases the number and amount of fees imposed on the customer for having insufficient funds, the court said.