PROCESSING RESTRAINING NOTICES AND LEVIES: COMPLIANCE CHALLENGES UNDER NEW YORK S EXEMPT INCOME PROTECTION ACT. March 27, 2014

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1 LONG ISLAND BROOKLYN MANHATTAN WASHINGTON, D.C. ALBANY PROCESSING RESTRAINING NOTICES AND LEVIES: COMPLIANCE CHALLENGES UNDER NEW YORK S EXEMPT INCOME PROTECTION ACT March 27, 2014 I. SUMMARY The Exempt Income Protection Act ( EIPA ), a New York State law that took effect on January 1, 2009, imposes certain obligations on banks when processing restraining notices and levies with respect to deposit accounts of customers. This telephone briefing will: Discuss why the EIPA was enacted Review the requirements of the EIPA, including the increased exemption amounts Discuss the amendments made to the EIPA exempting state and local governmental entities from the law Review the federal garnishment rules adopted in 2011 Discuss the interplay between the EIPA and the federal garnishment rules, using specific examples Discuss certain issues and common compliance mistakes that banks have faced in connection with the EIPA Discuss case law interpreting the EIPA, including last year s New York Court of Appeals case stating that aggrieved customers do not have a private right of action to seek damages from banks under the EIPA II. WHY THE EIPA WAS ENACTED A. Restraining notices and levies are forms of legal process. A creditor will commence a lawsuit for money owed, and when that creditor receives a judgment from a court, that creditor (now considered a judgment creditor ) will seek to satisfy that judgment from funds the judgment debtor may have on deposit at one or more banks.

2 B. The EIPA was enacted because creditors were restraining and levying on certain customer funds that were legally exempt from the reach of creditors, most notably social security funds. C. The EIPA requires banks to exempt certain funds held in deposit accounts and to notify deposit customers of their right to claim further exemptions under New York law. III. REVIEW OF THE EIPA The EIPA took effect on January 1, 2009 and imposes specific requirements on banks that are served with restraining notices and levies. There are requirements protecting (a) direct deposits and electronic payments of certain exempt funds, and (b) an amount determined to be wages. There are also requirements to provide notices and forms to customers about exemptions. A. DIRECT DEPOSITS/ELECTRONIC PAYMENTS 1. If the deposit account received a direct deposit or electronic payment of amounts reasonably identifiable as statutorily exempt funds within the 45-day period preceding the service of the restraining notice or levy, then the bank is prohibited from restraining (or paying out on a levy) $2,625 from that account. 2. The most common type of statutorily exempt funds are social security benefits, but other exempt payments include VA benefits, public assistance, workers compensation payments, unemployment insurance, pensions, and certain other types of benefits. 3. If the account has more than $2,625, the amount over $2,625 is subject to the restraint and levy; if the account has $2,625 or less, the restraining notice or levy is deemed void. 4. If the restraining notice or levy is deemed void, the bank cannot charge a fee to the customer in connection with the restraining notice/levy. B. PROTECTION OF WAGES 1. A bank cannot restrain or pay out on a levy certain funds in a deposit account deemed to be protected wages. The law sets a formula for calculating the exempt wage amount that is based on the minimum wage under federal and state law, whichever is higher. 2. The exempt wage amount under the EIPA is currently $1, If the account has more than $1,920, the amount over $1,920 is subject to the restraint and levy; if the account has $1,920 or less, the restraining notice or levy is deemed void. 4. If the restraining notice or levy is deemed void, the bank cannot charge a fee to the customer in connection with the restraining notice/levy. 2

3 C. EXEMPTION CLAIM FORMS 1. The EIPA requires banks to provide exemption notices and claim forms to their deposit account customers who are the subject of a restraint or levy, and then to follow specific procedures and time frames that vary based on whether a customer claims an exemption above the EIPA s direct deposit and wage exemption amounts (currently $2,625 and $1,920 respectively). This only applies to deposit customers who are natural persons. 2. Judgment creditors serving a restraining notice or levy on a bank with respect to a natural person are required to serve the bank with two copies of the restraining notice or levy (as applicable), an exemption notice, and two exemption claim forms. Within two business days of receipt of the restraining notice or levy, the bank must then serve the judgment debtor with a copy of the restraining notice or levy, the exemption notice and the two exemption claim forms. The required papers must be sent by first class mail to the judgment debtor s last known address. 3. If the judgment creditor does not provide the bank with the exemption notice and exemption claim forms along with the restraining notice or levy, the restraining notice or levy is void and the bank cannot restrain the account or pay out on the levy. 4. Banks are required to follow certain procedures and time frames depending on whether the customer claims an exemption. IV. AMENDMENTS TO EIPA EXEMPTING NYS AND LOCAL GOVERNMENT ENTITIES AND ACTIONS FOR CHILD SUPPORT, SPOUSAL SUPPORT, MAINTENANCE AND ALIMONY A. When the EIPA took effect on January 1, 2009, it applied to virtually all restraining notices and levies issued under New York s Civil Practice Law and Rules for the enforcement of money judgments against individuals. This included restraining notices and levies issued by the New York State Department of Taxation and Finance and other state agencies seeking to collect delinquent funds, and to actions for child support, spousal support, alimony and maintenance. B. The law was amended effective May 7, 2009 so that it does not apply if New York State or any of its agencies or municipal corporations is the judgment creditor, or if the debt enforced is for child support, spousal support, maintenance or alimony, provided the restraining notice or levy contains a required notice. The required notice must be above the caption on the restraining notice or levy, must be in 16 point bold type, and must state the following: THE JUDGMENT CREDITOR IS THE STATE OF NEW YORK, OR ANY OF ITS AGENCIES OR MUNICIPAL CORPORATIONS, AND/OR THE DEBT ENFORCED IS FOR CHILD SUPPORT, SPOUSAL SUPPORT, MAINTENANCE OR ALIMONY. V. FEDERAL GARNISHMENT RULES A. On May 1, 2011 federal rules took effect protecting federal benefit payments in deposit accounts from the reach of creditors. These federal rules do not preempt the EIPA, so banks must comply with both sets of requirements. 3

4 B. The federal rules apply to garnishment orders, which is a more general term than restraining notice and levy. It includes within it restraining notices and levies, but also includes other forms of legal process used to effect collection of a debt. C. The federal rules do not apply if the garnishment order is accompanied by a Notice of Right to Garnish Federal Benefits issued by the United States or a state child support enforcement agency. D. The federal rules protect exempt federal benefit payments that were directly deposited to the account during the prior two month lookback period. E. The bank must allow the account holder to have access to an amount equal to the lesser of the sum of exempt federal payments directly deposited to the account during the lookback period or the balance of the account on the date of the account review (the "protected amount"). In addition, the bank must notify the account holder that the bank has received a garnishment order. The federal rules have a model form of notice. F. For an account containing a protected amount, the bank may not collect a garnishment fee from the protected amount. The bank may only charge a garnishment fee against funds in the account in excess of the protected amount. G. The federal rules apply to federal benefit payments. These benefit payments include Social Security benefits, SSI benefits, VA benefits, Federal Railroad retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits, and Federal Employee Retirement System benefits. H. The federal rules only apply to federal benefit payments. There is no wage protection as there is under the EIPA. I. Banks must now deal with the interplay between the federal rules and the EIPA. The compliance analysis should start with the federal rules the bank should determine whether the federal rules apply and satisfy those rules, and then determine what, if any, additional obligations exist under the EIPA. VI. Examples on How to Apply both the Federal Rules and the EIPA A. Bank receives a restraining notice for $2,600 for a bank account containing $2,400. The bank s account review for the two-month lookback period reveals that the account contains a federally protected amount of $1,200. If the federal benefit payments deposited into the account also qualify as statutorily exempt payments under the EIPA and were deposited within the preceding 45 days, the account holder is entitled to the full state cushion of $2,625. In addition, because the account contains an amount less than $2,625, the restraining notice is void under the EIPA. B. Bank receives a restraining notice for $2,600 for a bank account containing $3,000. The bank s account review for the two-month lookback period reveals that the account contains a federally protected amount of $1,200. If the federal benefit payments also qualify as statutorily exempt payments under the EIPA and were deposited within the preceding 45 days, the bank can only restrain funds in excess of the state cushion of $2,625, or in this case, $375. 4

5 The bank must also provide the account holder with the separate notices required under the federal rules and under the EIPA. C. Bank receives a restraining notice for $2,600 for a bank account containing $2,400. Of this amount, none comes from federal benefits covered by the federal rule, while $1,600 can be identified as workers compensation benefits directly deposited within the preceding 45 days. As a result, the bank s account review does not identify any federally protected amount under the federal rule. The bank must next determine whether the account contains any statutorily exempt payments under the EIPA. Since the account contains protected workers compensation benefits that were directly deposited in the preceding 45 days and since the amount in the account is less than $2,625 cushion provided by state law, the restraining notice is void under the EIPA. D. Same scenario as Example C directly above but the bank account contains $3,000. The same analysis applies except that since the account contains more than $2,625, the restraining notice is not void. The bank must make $2,625 available to the account holder and would restrain $ the amount above $2,625. The bank must also provide the account holder with the notice required under the EIPA. E. Bank receives a restraining notice for $2,600 for a bank account containing $2,400. If the bank s account review does not uncover any exempt federal benefits payments deposited to the account within the two month lookback period, there is no federally protected amount under the federal rule. The bank must next determine whether the account contains any statutorily exempt payments under New York law. If the bank determines that the account does not contain any such statutorily exempt payments, the bank is required to leave the account holder with a cushion of 240 times the minimum wage (currently $1,920). This amount is exempt from restraint and must be made available to the consumer. The bank restrains the remaining $480 and must send the account holder the notice required under the EIPA. VII. COMMON COMPLIANCE ISSUES UNDER THE EIPA A. Apply the federal rules first, then the EIPA. B. Apply the current exemption amounts under the EIPA ($2,650 and $1,920). C. Both the federal rules and the EIPA apply to both restraining notices and levies. D. On levies, wait 30 days before paying out the funds. E. Neither the federal rules nor the EIPA apply to IRS levies. VIII. CASE LAW UNDER THE EIPA A. Cruz vs. T.D. Bank: Bank customers do not have a private right of action against banks for violations of the EIPA. In November 2013, the New York State Court of Appeals held that an aggrieved customer does not have the right to sue a bank for damages suffered as a result of the bank s violation of the EIPA. The remedy a customer has is to bring a special proceeding under New York law to compel a bank to comply with the EIPA. 5

6 B. Bank customers have brought lawsuits against banks for improperly restraining exempt funds based on a number of other theories aside from violations of the EIPA tort and contract theories such as conversion, breach of fiduciary duty, unjust enrichment, and negligence. So far, these common law actions have been unsuccessful. 6