By Justin Scheck
Recorder Staff Writer
The federal government says banks should be allowed to continue taking bounced-check fees from customers' Social Security deposits.
In briefs filed Tuesday in the First District Court of Appeal, a trio of federal agencies argued that Bank of America should be allowed to withdraw overdraft penalty fees from Social Security funds deposited directly into customers' bank accounts.
The briefs come in support of the bank's appeal of a huge 2004 trial verdict – likely worth about $1.6 billion – on behalf of a class of 1.3 million Californians.
"It's disappointing, but not surprising, that the Bush administration has joined the Bank of America," said Thomas Brandi of the Brandi Law Firm, who represented the class with James Sturdevant of the Sturdevant Law Firm.
Bank of America claims both that it did not violate state law and that the state law exempting such funds from penalty fees is pre-empted by federal banking regulations.
In briefs asking the court to stay enforcement of the trial judgment, the Social Security Administration, Office of the Comptroller of Currency and Department of the Treasury – along with several banking industry groups – agree.
Lawyers and spokespersons for the federal government would no comment, but Debra Belaga, a partner with O'Melveny & Myers who represents Bank of America, said the government involvement highlighted the importance of the case.
"It's the impact on the federal banking and regulatory structure," she said. "And it clearly supports the bank's view that what the trial court did impacts the very people the trial court said it was trying to protect."
Belaga and the federal agencies argue that enforcing the judgment would cause banks to treat Social Security recipients differently than other clients.
"The trial court's decision will likely cause [Bank of America] to begin to eliminate or severely restrict valuable banking services used by depositors who are recipients of Social Security benefits and whose benefits are directly deposited into their accounts," the government brief said.
Brandi disagrees. He says the bank routinely waives such fees for wealthier customers, and questions the government's position.
"282 million was stolen by the Bank of America from Social Security recipients in violation of state law," he said. "The Justice Department is intervening for the bank to uphold that theft."
Jan Chilton, an appellate specialist at Severson & Werson in San Francisco, said conflicts between state and federal banking laws are nothing new. But, he added, the federal government has grown increasing concerned about state regulation attempts in recent years, as well as threats to the use of electronic deposits.
The current debate over federal pre-emption of state banking laws, Chilton said, "is just the latest fight in a continued butting of heads between the state and federal governments over the regulation of bank."
The head butting has largely surrounded ongoing efforts by the Office of the Comptroller of Currency to bolster its power, he said.
"The conflict between the OCC and the states has ramped up in recent years," Chilton said. The matter came to a head last year with regulations aimed at strengthening its powers of pre-emption over state laws.
"It was met with a huge amount of opposition, as one would expect, from the state governments," he said.
Similarly important, Chilton added, is the federal government's desire to conduct as much business as possible through electronic means to save money, keep Social Security recipients from getting robbed when their checks come and streamline the tax refund process.
"Unless banks can charge their normal fees against customers who receive government payments, they may not make those services available," he said.
The Bank of America case originated when lead plaintiff Paul Miller – a former photojournalist permanently disabled on assignment in Asia when he was caught in a riot – had repeated problems with the bank docking his account for overdraft fees.
Miller's only income was government payments, and he alleged that the bank was illegally levying overdraft fees against those deposits.
Upon finding the practice to be widespread, Brandi and Sturdevant pursued the case as a class action. They argue that state law clearly exempts such funds from being subjected to penalty fees and accuse the bank of exploiting a particularly vulnerable group of people.
The San Francisco jury agreed, and – in combination with a follow-up ruling by San Francisco Superior Court Judge Anne Bouliane – ordered the bank to pay $1,000 per class member, along with an additional $400 million or so in restitution and prejudgment interest, along with other fees.
Bouliane also ordered the court to stop withdrawing bounced-check fees from Social Security funds, but that ruling was stayed until June 5. The main purpose of the recent government filings, Belaga said, is to continue that say until the appellate court proceedings are over.
The government agencies plan to further brief the court on the merits of the case, Belaga said.
The case is Miller v. Bank of America, A110137.