13 soc.sec.rep.ser. 390, unempl.ins.rep. Cch 16,828 Berdie Thomas v. Otis R. Bowen, Secretary of Health and Human Services, Defendants , 791 F.2d 730 ( 1986 )

KOZINSKI, Circuit Judge,

concurring.

While, for the reasons explained above, I believe this case is squarely controlled by Powderly v. Schweiker, 704 F.2d 1092 (9th Cir.1983), I write these additional thoughts to express concern about Powderly, at least as it applies to appellant Berdie Thomas.¹ The majority in Powderly gave short shrift to the widow’s due process claim and held that the government could unilaterally debit her bank account to recoup funds she had received by cashing her deceased husband’s check.² I see a serious tension between this ruling and established principles of private property. My concern is the apparent absence of any lawful authority for the government to reach into Mrs. Thomas’ bank account and extract the funds it claims.

Bank accounts are contracts between private parties. These contracts, and the laws governing them, establish a property interest in the funds held by the bank on behalf of the depositor. See Anderson National Bank v. Luckett, 321 U.S. 233, 240, 64 S.Ct. 599, 603, 88 L.Ed. 692 (1944). Once funds are placed in the account, they may be removed only under the following circumstances: (a) by the depositor or someone authorized by him, see Cal.Fin.Code § 953 (Deering 1978); (b) by the bank pursuant to its contractual arrangement or in accordance with state law governing the banker/depositor relationship, see Cal.Fin. Code § 864 (Deering 1978); or (c) by someone acting pursuant to lawful authority, such as a writ of execution and a notice of levy, Cal.Civ.Proc.Code § 701.010 (Deering 1983). As best I can tell, none of these apply here.

The money was not removed by Mrs. Thomas, nor does the government claim to have had Mrs. Thomas’ consent to unilaterally debit her account in case of an erroneous payment or under any other circumstances. Nor did the government appear to have acted pursuant to statute or regulation. Neither the Social Security Act, nor its regulations, nor the Treasury regulations dealing with the handling of direct deposits, gives the government the authority to tamper with private bank accounts. Banks do have a lien under state law for debts owed to them by their customers. Cal.Civ.Code § 3054; see Bromberg v. Bank of America, 58 Cal.App.2d 1, 6-7, 135 P.2d 689, 692 (1946). Nothing, however, appears to authorize banks to reach into customers’ accounts to satisfy debts owed to third parties. See Cory v. Golden State Bank, 95 Cal.App.3d 360, 369, 157 Cal.Rptr. 538, 543 (1979) (no right of setoff unless there is first some indebtedness running from the customer to the bank).

The fact that the government claims entitlement to the money in Mrs. Thomas’ account is not, of itself, a basis for going in and taking it. Our legal system does not afford creditors a general self-help remedy. See Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972). Absent some contractual arrangement or legal authority, a creditor may not satisfy a debt simply by seizing the debtor’s assets. See Melara v. Kennedy, 541 F.2d 802, 805 (9th Cir.1976). Where property is not subject to a lien or security interest, a creditor may not help himself to a debtor’s car or equipment or household furniture to satisfy an obligation. Id. at 807; see Restatement (Second) of Torts §§ 100-110 (1985). He certainly may not forge a check on the debtor’s bank account. Absent proper legal authorization, the government must go into court, like everyone else, to have its claim adjudicated and converted into a judgment.³

Nor do I share the view, advanced by Judge Fletcher in Powderly, 704 F.2d at 1099, that the problem would be resolved if the government had offered Thomas notice and an administrative hearing before debiting her account. Procedural due process only comes into play after the government has shown that its actions are substantively authorized. Indeed, it is impossible to consider what procedures are appropriate without knowing the source of the government’s authority. For example, if the government debits the account pursuant to an agreement signed by the recipient, it may do so unilaterally and without prior notice. Cf. Cal.Fin.Code § 953 (Deering 1981) (banks may permit withdrawals from depositor’s account by authorized third parties). On the other hand, if the debiting is done pursuant to statute or regulation, the procedures provided therein would have to be measured against constitutional standards. See, e.g., Anderson National Bank v. Luckett, 321 U.S. 233, 64 S.Ct. 599, 88 L.Ed. 692 (1944) (state statute governing abandoned bank deposits found not to violate constitutional due process requirements). No measure of procedural fairness, however, can validate an action that is substantively beyond the government’s authority. Rutherford v. City of Berkeley, 780 F.2d 1444, 1447 (9th Cir.1986).

Because of a recent change in its collection procedure, the government is unlikely to repeat the conduct that gave rise to Thomas’ claim.⁴ Yet this case and Powderly remain as troubling precedents for the millions of Americans who receive government payments in the form of checks or electronic fund transfers. Errors are inevitable and the government must be able to recoup money it has erroneously paid out.⁵ Equally inevitable, however, are errors in identifying and correcting errors. Disputes will arise from time to time and experience teaches that the government will sometimes be in the wrong. What Powderly and this case suggest is that the government may seize money it claims, or its equivalent, based on its own determination of error and without the need to show legal authorization. This, in my view, im-permissibly blurs established principles of private property, rights fundamental to a free society. See Lynch v. Household Finance, 405 U.S. 538, 552, 92 S.Ct. 1113, 1122, 31 L.Ed.2d 424 (1972) (“rights in property are basic civil rights”); Fuentes, 407 U.S. at 81, 92 S.Ct. at 1994 (“[there is a] high value, embedded in our constitutional and political history, place[d] on a person’s right to enjoy what is his, free of governmental interference”).

1 . The bank removed funds from Mrs. Thomas’ account on the direction of the government. This was the basis of the district court's determination that removal of the funds constituted state action. At oral argument before us, government counsel conceded that the removal of funds from Thomas' account was state action. Removal of funds from the accounts of the other named plaintiffs was not done at the direction of the government and probably does not amount to state action. Compare Powderly, 704 F.2d at 1099 (Fletcher, J., concurring) (no state action), with Breault v. Heckler, 763 F.2d 62, 65 (2d Cir.1985) (state action).

2 . As Judge Fletcher noted in her concurring opinion, the court need not have reached the constitutional issue because the debiting was done by the bank on its own initiative and therefore was not state action. 704 F.2d at 1099. By bypassing the state action issue and resolving the merits of the constitutional claim, id. at 1097, the court necessarily assumed that the debiting had been done by, or on behalf of, the government.

3 . The government is in no better position because the erroneous deposit may have established a constructive trust. See United States v. Pegg, 782 F.2d 1498 (9th Cir.1986); Cal.Civ.Code §§ 2223, 2224 (Deering 1984). I am aware of no authority for the proposition that the beneficiary of a constructive trust is entitled to exercise self-help.

4 . The Treasury Department’s collection procedures are spelled out for financial institutions in a publication called The Green Book. The 1977 edition, which was in effect until 1984, directed banks to withdraw the amount claimed by the government from the customer’s account. A revised version, promulgated after the district court’s summary judgment in this case, notes that banks are not authorized to debit customer’s accounts by either 31 C.F.R. § 210 or Treasury procedures, and that any right to withdraw funds must be based on a contract with the customer or on state law. 31 C.F.R. § 210.-11(c).

5 . The government is free to deal with the problem of erroneous payments in a variety of ways, such as making consent for unilateral recoupment part of the EFT agreement or passing a statute or promulgating a regulation. Requiring government to pursue these avenues is not an exercise in unnecessary formalism. Procedural requirements frequently have substantive consequences. A provision in the EFT agreement allowing recoupment might deter some people from participating in the program; others may keep their balance low to avoid recoupment. Statutory or regulatory provisions implicate the political process, an important check on arbitrary government action. A statute might not pass; a proposed regulation may evoke sufficient protest to bar implementation.