The California Supreme Court ruled Monday that Bank of America Corp. does not have to pay a verdict worth as much as $1.6 billion in a customer lawsuit claiming the company illegally took overdraft fees out of Social Security direct deposits.

The state high court upheld a 2006 appeals court ruling that reversed a 2004 verdict against the Charlotte company.

The suit claimed that California law prohibits bankers from taking exempt funds, such as Social Security benefits, from customers' accounts.

But Bank of America continued the practice anyway, attorneys for the customers argued, deducting as much as $160 a day out of one account.

In December 2004 a San Francisco trial judge ordered B of A to pay customers $296.6 million of compensatory damages and said that as many as 1.3 million customers should receive $1,000 each for emotional and economic harm.

In 2006 an appeals court reversed the verdict, saying that the law did not apply in this case, because deductions were being made to customer accounts to cover fees owed on that same account.

The California Supreme Court had previously ruled that banking companies cannot deduct fees from accounts holding government benefits to recover funds that are owed in a separate credit card account.

B of A argued that its practice is not debt collection, as the plaintiffs claim, but simply balancing the books.

It would be a significant change in the way banking companies do business if they had to treat accounts differently according to the source of the funds, the company argued.

Jim Sturdevant, an attorney for the customers, did not immediately return a voice-mail message.

Shirley Norton, a B of A spokeswoman, had no immediate comment on the high court's ruling.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.