Kruger v. Wells Fargo Bank

Decision Date26 April 1974
Docket NumberS.F. 23014
Citation113 Cal.Rptr. 449,11 Cal.3d 352,521 P.2d 441
CourtCalifornia Supreme Court
Parties, 521 P.2d 441, 65 A.L.R.3d 1266 Jean KRUGER, Plaintiff and Appellant, v. WELLS FARGO BANK, Defendant and Respondent.

Wong, Siedman & Lee and Jack Siedman, San Francisco, for plaintiff and appellant.

Cecily Nyomarkay, San Pedro, Richard A. Weisz, Long Beach, Michael B. Weisz, San Diego, and Thomas W. Pulliam, Jr., San Francisco, as amici curiae on behalf of plaintiff and appellant.

Brobeck, Phleger & Harrison, Moses Lasky and Kirtley M. Thiesmeyer, San Francisco, for defendant and respondent.

TOBRINER, Justice.

,2] In this case we hold that a bank's setoff of charge account debts against a depositor's checking account constitutes private action, not state action, and thus does not succumb to the requirements of procedural due process under the federal Constitution. We also hold that the reach of the due process clause of the state Constitution is insufficient to afford a remedy to depositiors. We conclude, however, that a bank may not exercise its right of setoff against deposits which, derived from unemployment and disability benefits, are protected from the claims of creditors.

1. Statement of facts.

Plaintiff Jean Kruger maintained a checking account and a Master Charge contract with defendant Wells Fargo Bank. Payments for unemployment compensation and state disability benefits, which she deposited in her checking account, comprised her only source of income. On October 21, 1970, the bank deducted the $87.68 balance of her account and applied it to her Master Charge delinquency. She received no advance notice of its intention to debit her account, but subsequently the bank served her with a statement that it had exercised a banker's lien against her account. The bank thereafter refused to honor checks which she had written prior to the debiting of her ac count, but which the payee had not presented until after that event; aggravating the alleged injury, the bank then billed her $44 for service charges on the dishonored checks.

Plaintiff filed suit, asserting both an individual claim on her own behalf and a class claim on behalf of all depositors with defendant bank whose deposits, derived from governmental benefit payments, enjoyed exemption from attachment and execution under Code of Civil Procedure section 690.18, subdivision (a). 1 The bank demurred. The superior Court sustained the demurrer, without leave to amend, on the ground that plaintiff's complaint did not state facts sufficient to constitute a cause of action. 2

2. A bank's exercise of its right of setoff against a depositor's account does not constitute state action, and consequently need not conform to the standards of procedural due process required by the federal Constitution.

3] As a preliminary matter, we note that, contrary to the contention of plaintiff, this case raises no issue of the constitutionality of Civil Code section 3045, the banker's lien act. That section provides that 'A banker has a general lien, dependent on possession, upon all property in his hands belonging to a customer, for the balance due to him from such customer in the course of the business.'

4] As the court in Gonsalves v. Bank of America (1940) 16 Cal.2d 169, 173, 105 P.2d 118, 121, explains: 'The banker's lien described in this statute is, properly speaking, a lien on the Securities such as commercial paper deposited with the bank by the customer in the course of business. The so-called 'lien' of the bank on the depositor's Account or funds on deposit is not technically a lien, for the bank is the owner of the funds and the debtor of the depositor, and the bank cannot have a lien on its own property. The right of the bank to charge the depositor's fund with his matured indebtedness is more correctly termed a right of set-off, based upon general principles of equity.' 3 Thus despite the bank's misleading notice to Kruger that it was asserting a lien upon her account, which led her to frame a complaint seeking a judicial declaration respecting the constitutionality of the banker's lien law, 4 the instant case does not in fact involve a banker's lien under section 3054, but arises from the bank's assertion of a right of setoff against a depositor's account. 5

We turn to plaintiff's contention that defendant bank, in asserting a setoff against her account, unconstitutionally deprived her of the use of property without due process of law. We recognize that in practice a bank's assertion of its right of setoff is often inequitable. Depositors have come to view their checking account balance not as an ordinary debt, but as the modern equivalent of cash on hand to meet the expenses of daily living. When the bank exercises a setoff against a checking account, the devastating effect on the depositor is exactly the same as garnishment of the account. Deprived of the use of the fund on which he relied to pay his daily bills, he may be forced to default on other obligations and may lack the ability to purchase the necessities of life. (See Randone v. Appellate Department (1971) 5 Cal.3d 536, 559--560, 96 Cal.Rptr. 709, 488 P.2d 13.) When the bank subsequently refuses to pay checks drawn before the date of setoff, it simultaneously destroys the depositor's credit standing, and works an unfair advantage vis-a-vis the other creditors who accepted those checks. If it should later develop that the bank's exercise of the setoff was improper, it is unlikely that all the damage can be redressed.

5] But private action, however hurtful, is not unconstitutional. (Civil Rights Cases (1883) 109 U.S. 3, 11, 3 S.Ct. 18, 27 L.Ed. 835.) 6 The Fourteenth Amendment provides that 'No state shall . . . deprive any person of life, liberty, or property, without due process of law.' (Emphasis added.) As stated in Shelley v. Kraemer (1948) 334 U.S. 1, 13, 68 S.Ct. 836, 842, 92 L.Ed. 1161, the only action inhibited by the due process clause is 'such action as may fairly be said to be that of the States. (The Fourteenth) Amendment erects no shield against merely private conduct, however discriminatory or wrongful.' Thus plaintiff, to prevail in her contention that the bankers' setoff violates constitutional strictures, must show a level of significant state involvement in the act of the bank sufficient to characterize the setoff as 'state action.' (Moose Lodge No. 107 v. Irvis (1972) 407 U.S. 163, 173, 92 S.Ct. 1965, 32 L.Ed.2d 627; Reitman v. Mulkey (1967) 387 U.S. 369, 380, 87 S.Ct. 1627, 18 L.Ed.2d 830.)

,7] In the only reported decisions to consider the constitutionality of the bankers' setoff, the courts have concluded that the act of a bank in setting off a depositor's debt against his account is private, not state, action and hence not subject to constitutional requirements of due process. (Bichel Optical Labs. v. Marquette National Bank (8th Cir. 1973) 487 F.2d 906; Jojola v. Wells Fargo Bank (N.D.Cal.1973); Fletcher v. Rhode Island Hospital Trust Nat. Bank (D.R.1973). 7 Agreeing with the reasoning of those decisions, we shall explain that the procedure of setoff, in contrast to other prejudgment remedies, requires no act of assistance from state officials. Although former Code of Civil Procedure section 440 authorized setoff, that statute merely codified the right of setoff as it existed in courts of equity; it did not compel or encourage the exercise of this right. Judicial and legislative recognition of this private right of setoff does not mould the exercise of that right into a form of state action. Finally, we shall explain that government regulation of the banking industry does not render every act of a bank the act of the state; in the instant case, the bank did not proceed pursuant to government command but merely exercised a right available to all private contracting parties.

The present case emanates from the emerging line of decisions extending procedural due process protections to debtors whose property is taken pursuant to statutes establishing summary creditor remedies. Within the past five years courts have struck down or limited a host of summary prejudgment remedies: wage garnishment (Sniadach v. Family Finance Corp. (1969) 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349); claim and delivery (Blair v. Pitchess (1971) 5 Cal.3d 258, 96 Cal.Rptr. 42, 486 P.2d 1242); garnishment of bank accounts (Randone v. Appellate Department (1971) 5 Cal.3d 536, 96 Cal.Rptr. 709, 488 P.2d 13); replevin (Fuentes v. Shevin (1972) 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556); unlawful detainer (Mihans v. Municipal Court (1970) 7 Cal.App.3d 479, 87 Cal.Rptr. 17); the innkeeper's lien (Klim v. Jones (N.D.Cal.1970) 315 F.Supp. 109); the landlord's lien (Hall v. Garson (5th Cir. 1970) 430 F.2d 430); and garnishment of accounts receivable (Jones Press, Inc. v. Motor Travel Services, Inc. (1970) 286 Minn. 205, 176 N.W.2d 87). Almost all of these remedies required some ministerial act of a court clerk, a sheriff, or some other state official. Such official acts, undertaken pursuant to authority conferred by statute, so obviously constitute state action that the courts in these cases have proceeded directly to adjudicate the due process issue without discussion of the requirement of state action.

The present case, in contrast, involves the act of a private party bereft of any action of state officials. Plaintiff seeks, therefore, to discover some other foundation on which to erect a structure of state action. The many arguments she advances can be organized into two contentions: (1) that since the right of setoff derives from state statutory or court-made law, it should be deemed state action; and (2) that even if setoff by an ordinary creditor is not state action, the banking industry is so highly regulated, and performs so important a function, that the act of a bank should be treated as the act of the state itself. We discuss each contention in turn; we initially...

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