Docket Nº:0115303o
Case Date:February 13, 2002
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit





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.

No. 01-15303; D.C. No. CV-99-20890- RMW(PVT)


Appeal from the United States District Court for the Northern District of California

Ronald M. Whyte, District Judge, Presiding

Argued and Submitted

February 13, 2002—San Francisco, California

Amended Opinion filed May 9, 2002 Opinion Withdrawn August 6, 2002

Filed August 6, 2002

Before: Dorothy W. Nelson, John T. Noonan and Michael Daly Hawkins, Circuit Judges.

Opinion by Judge Hawkins; Concurrence by Judge Noonan


Robert D. Newman (argued), Western Center on Law & Poverty, Los Angeles, California. Appearances only by Helen H. Kang, Golden Gate University, San Francisco, California; Kyra Kazantzis, Mental Health Advocacy Project, Law Foundation of Silicon Valley, San Jose, California; Gerald A. McIntyre, National Senior Citizens Law Center, Los Angeles, California; and Dean Paik, Cohen & Paik, San Francisco, Cal-ifornia, for the plaintiffs-appellants.

Matthew L. Larrabee (argued), Heller Ehrman White & McAuliffe, San Francisco, California. Appearance only by Scott E. Morgan, Heller Ehrman White & McAuliffe, San Francisco, California, for the defendant-appellee.


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 The Amended Opinion filed on May 9, 2002, and appearing at 284 F.3d 990 (9th Cir. 2002), is withdrawn.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 Order.


HAWKINS, Circuit Judge:

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, or whether there are alternate grounds for affirming the district court’s dismissal of the state law claims.


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 it 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,

1Plaintiffs seek relief on behalf of a class of similarly situated persons. However, the district court deferred ruling on class certification until after ruling on the cross motions for summary judgment.

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 Decem-ber 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, or, alternatively, failed for other reasons. 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 (2000).

2Although the reasons for the overdrafts are not material to the outcome in this case, some of the overdrafts at issue were apparently caused by third persons (one plaintiff’s daughter used her ATM/debit card in unauthorized ways) or serious mental conditions such as bi-polar affective disorder and paranoid schizophrenia.


I. Federal Exemption for Social Security and SSI Benefits

[1] 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 subchap-ter 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.

[2] Our caselaw has broadly construed the phrase "other legal process" within Section 407(a). 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 veterans’ benefits to satisfy overdrafts on an inmate’s prison trust account. Although Nelson was actually construing 38 U.S.C. § 5301(a), which protects veterans’ 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

[3] In light of these precedents, plaintiffs contend that Washington Mutual’s overdraft practices constitute a seizure of protected benefits by "other legal process." By paying the plaintiffs’ checks when there were insufficient funds in the accounts, they argue, the bank essentially extended a loan to the plaintiffs and became a creditor. Washington Mutual then used a self-help equitable remedy to recoup the plaintiffs’ debt to the bank. However, even if Washington Mutual’s actions in applying the deposit to the account deficit can be construed as some type of legal or equitable action, we agree with the district court that no violation of Section 407(a) occurred in this case because there is simply no indication that the plaintiffs did not voluntarily agree to apply their SSI benefits in such a fashion. See Crawford, 56 F.3d at 1167 (distinguishing Fetterusso, 898 F.2d at 328, because in Fetterusso there was no basis for concluding the patients did not voluntarily agree to use SSI benefits to pay care and treatment costs).

[4] In this case, the plaintiffs voluntarily opened an account with the bank and executed an account holder agreement

3Similar to the language of Section 407(a), Section 5301(a) provides that veterans’ benefits "shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary."

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...

To continue reading