Lopez v. Washington Mut. Bank, Fa
| Citation | 284 F.3d 990 |
| Decision Date | 14 March 2002 |
| Docket Number | No. 01-15303.,01-15303. |
| Parties | Luis LOPEZ, individually and on behalf of the General Public; Barbara Bowman; Gary D. Miller, Jr., individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. WASHINGTON MUTUAL BANK, FA, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Robert D. Newman (argued), Western Center on Law & Poverty, Los Angeles, CA. Appearances only by Helen H. Kang, Golden Gate University, San Francisco, CA; Kyra Kazantzis, Mental Health Advocacy Project, Law Foundation of Silicon Valley, San Jose, CA; Gerald A. McIntyre, National Senior Citizens Law Center, Los Angeles, CA; and Dean Paik, Cohen & Paik, San Francisco, CA, for the plaintiffs-appellants.
Matthew L. Larrabee (argued), Heller Ehrman White & McAuliffe, San Francisco, CA. Appearance only by Scott E. Morgan, Heller Ehrman White & McAuliffe, San Francisco, CA, for the defendant-appellee.
Appeal from the United States District Court for the Northern District of California; Ronald M. Whyte, District Judge, Presiding. D.C. No. CV-99-20890-RMW(PVT).
Before: D.W. NELSON, NOONAN and HAWKINS, Circuit Judges.
Opinion by Judge HAWKINS; Concurrence by Judge NOONAN.
We must decide whether the statutory protections afforded Social Security and Supplemental Security Income ("SSI") beneficiaries are offended by a bank's practice of using directly deposited Social Security and SSI benefits to cover overdrafts and overdraft fees. We must also decide whether plaintiffs' related state law claims are preempted by Office of Thrift Supervision ("OTS") regulations.
The facts of this case are not extremely complex. Each of the named plaintiffs1 receive Social Security and/or SSI benefits. Each had an account with Washington Mutual, and their benefits were directly deposited into these accounts. At the time the plaintiffs opened their accounts with Washington Mutual and/or its predecessors-in-interest, they executed account agreements which included provisions regarding overdrafts. Though differing in specific language, the agreements generally explained that if an account holder had insufficient account funds to pay a check, the bank had the option of rejecting the check or paying the check, creating an overdraft on the account accompanied by an overdraft fee. Each account agreement also contained a promise to immediately pay the overdraft amount to the bank. In addition, the bank would notify the account holder in writing in the event an overdraft occurred.
Each of the named plaintiffs then overdrew their accounts, creating overdrafts and incurring overdraft fees. In each case, the next deposit of Social Security and/or SSI benefits was used to satisfy the account deficiency.2
The plaintiffs filed their first amended complaint in December 1999, alleging that Washington Mutual's practice of using the directly deposited Social Security and SSI benefits to set off overdrafts and overdraft fees was prohibited by 42 U.S.C. §§ 407(a) and 1383(d)(1). The complaint also alleged several state law claims, including a violation of California Civil Procedure Code § 704.080, California Business and Professions Code § 17200, and the tort of conversion. The parties filed cross-motions for summary judgment. The district court granted Washington Mutual's motion, finding that the bank's practices did not violate federal law and that the state law claims were preempted. Plaintiffs appeal.
This court reviews a grant of summary judgment de novo. Robi v. Reed, 173 F.3d 736, 739 (9th Cir.1999). Questions of statutory interpretation are reviewed de novo, Alexander v. Glickman, 139 F.3d 733, 735 (9th Cir.1998), as are questions of preemption. Williamson v. General Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir.), cert. denied, 531 U.S. 929, 121 S.Ct. 309, 148 L.Ed.2d 247 (2000).
42 U.S.C. § 407(a), involving Social Security benefits, provides:
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 protections to SSI benefits as well.
These provisions offer Social Security and SSI recipients broad protection from creditors. The Supreme Court has recognized that the Social Security Act is "unusually protective" of claimants. Bowen v. City of New York, 476 U.S. 467, 480, 106 S.Ct. 2022, 90 L.Ed.2d 462 (1986). The Court has also noted that there are no implied exceptions to the protections of Section 407(a), and that "Section 407(a) unambiguously rules out any attempt to attach Social Security benefits." Bennett v. Arkansas, 485 U.S. 395, 397, 108 S.Ct. 1204, 99 L.Ed.2d 455 (1988). When Congress has created exceptions, it has done so expressly, as with enforcement of child support orders. 42 U.S.C. § 659(a).
As a preliminary matter, we must consider whether Washington Mutual's offset practice constitutes a type of "other legal process" within the meaning of Section 407(a). In light of our current caselaw, which has broadly construed this phrase, we conclude it does.
In Crawford v. Gould, 56 F.3d 1162 (9th Cir.1995), we addressed California's practice of taking Social Security benefits from institutionalized patients' hospital accounts to pay for the cost of their care and treatment, whether or not the patients had signed a form authorizing such deductions. California argued that its actions were not prohibited by Section 407(a) because they had not resorted to any type of "other legal process" similar to those expressly listed in the statute. Id. at 1166. We rejected this argument, noting that Section 407(a) was designed "to protect social security beneficiaries and their dependents from the claims of creditors" (quoting Fetterusso v. New York, 898 F.2d 322, 327 (2d Cir.1990)), and that the "cramped reading of § 407 California urges would enable the state to obtain Social Security benefits through procedures that afford less protection than judicial process affords." Id. We therefore determined that reading "other legal process" to include the practice of withdrawing benefits from the accounts without consent was consistent with the purposes underlying Section 407. Id. at 1167-68.
More recently, we decided Nelson v. Heiss, 271 F.3d 891 (9th Cir.2001), holding that prison officials could not use veteran's benefits to satisfy overdrafts on an inmate's prison trust account. Although Nelson was actually construing 38 U.S.C. § 5301(a), which protects veteran's benefits from creditors, we expressly noted the similarity to Section 407(a) and relied upon Social Security cases to reach the result. Id. at 895.3
The only other circuit to address the issue has also construed "other legal process" quite broadly. The Tenth Circuit held that a credit union could not use the self-help remedy of setoff and apply Social Security benefits contained in a checking account to satisfy the depositor's loan obligation to the bank. Tom v. First American Credit Union, 151 F.3d 1289, 1293 (10th Cir.1998). Relying in part on our decision in Crawford, the court decided that the setoff constituted "other legal process" within the meaning of Section 407:
We can see no reason why Congress would, on the one hand, choose to protect Social Security beneficiaries from creditors who utilized the judicial system, a system that is built upon principles of fairness and protection of the rights of litigants, yet, on the other hand, leave such beneficiaries exposed to creditors who devised their own extra-judicial methods of collecting debts. Such a construction of § 407 would run contrary to both logic and the spirit underlying the Social Security Act. Moreover, if the Supreme Court did not see fit to carve an exception to § 407 where an important public interest — a state's need to defray the costs of supporting indigent individuals — was at stake, we will not create an exception that would, for the most part, serve very private interests — banks' desires to cut their bad debt losses.
Id. at 1292 (internal citations omitted). The Tenth Circuit also relied on a California state law case which discredited making a distinction between bank setoffs and legal actions such as attachment and execution:
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. (quoting Kruger v. Wells Fargo Bank, 11 Cal.3d 352, 113 Cal.Rptr. 449, 521 P.2d 441, 452-53 (1974)).
In sum, we agree that Washington Mutual's overdraft setoff constitutes a seizure of protected benefits by "other legal process." By paying the plaintiffs' checks when there were insufficient funds in the accounts, the bank essentially extended a loan to the plaintiffs and became a creditor. Washington Mutual then used the self-help remedy of setoff to recoup the plaintiffs' debt to the bank and enforce the contractual account holder agreement, in which the plaintiffs agreed to promptly repay any overdraft. Our decision in Crawford suggests that "other legal process" should be given an expansive reading in order to fulfill the purposes of Section 407...
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Lopez v. Washington Mutual Bank
...by Judge NOONAN. ORDER Appellee's Petition for Rehearing is GRANTED. The Amended Opinion filed on May 9, 2002, and appearing at 284 F.3d 990 (9th Cir.2002), is withdrawn. An Opinion will be filed contemporaneously with this MICHAEL DALY HAWKINS, Circuit Judge. We must decide whether the sta......