Bank of America must face class action over 2020 benefit card fraud

May 25 (Reuters) - Bank of America (BAC.N) must face cardholder allegations that it bungled its response to unauthorized transactions on unemployment and disability benefits cards in California during the pandemic, a San Diego judge ruled on Thursday.

U.S. District Judge Larry Alan Burns said benefits recipients can move forward with a proposed class action lawsuit claiming the bank violated state law by issuing cards to millions of Californians that lacked standard security measures.

The cardholders also claim Bank of America broke federal law by failing to investigate fraud claims or summarily freezing tens of thousands of accounts.

A Bank of America spokesperson did not immediately respond to a request for comment on Thursday.

The bank previously agreed to cease using automated fraud detection software to freeze accounts.

Michael Rubin, an attorney representing the cardholders, called the ruling a "huge victory."

The cardholders claim Bank of America failed to follow the Electronic Fund Transfer Act, which sets rules for banks to resolve account errors.

They also say the bank violated California's consumer privacy law by issuing cards with outdated magnetic stripes, rather than chip technology, leaving them subject to fraud.

Burns said they can move forward with those claims and others, including that the bank was a state actor that violated cardholders' constitutional right to due process by freezing accounts without notice.

The judge dismissed claims that the bank violated California's Unfair Competition Law and that it breached its contract with the state.

Last year, Bank of America paid $225 million to two U.S. regulators to settle claims that its fraud detection program improperly froze thousands of benefits accounts in 2020 and 2021.

California estimated in 2021 that it had paid more than $111 billion in unemployment insurance benefits during the pandemic, with more than $10.4 billion in claims suspected to be fraudulent.

The case is In re Bank of America California Unemployment Benefits Litigation, No. 21-02992, U.S. District Court, Southern District of California.