Definitions (Page 3)

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1 Dealing With Subpoenas, Summonses, Garnishments & Tax Levies by Terri D. Thomas, JD January 8, 2014 Definitions (Page 3) Subpoena - A command to appear in court or other hearing at a certain time and place in order to give testimony (typically as a witness): Subpoena ad testificandum (appear and give testimony) Subpoena duces tecum (appear and bring documents with you). 2

2 Summons An instrument used to commence a civil action or special proceeding against a person/entity. Note, the IRS refers to a subpoena for financial institution records as an IRS summons. 3 Garnishment A statutory proceeding whereby a person s property, money or credits in possession or under control of another are applied to the payment of the former s debt to a third party. 4

3 Forfeiture A proceeding in which a government agency can seize property as a result of a commission of a crime or some other fault or penalty. 5 Tax Levy A proceeding in which money is obtained for the payment of taxes that are past due. 6

4 The Right to Privacy- Does it really exist??? (Page 4) There is no specific right to privacy in the Bill of Rights, however, the right to privacy is considered to be in the penumbra of the Bill of Rights. 7 Is the Right to Privacy Absolute? No. In United States v. Miller (1976), the U.S. Supreme Court stated that customers had no legal right of privacy regarding their financial records held by financial institutions. 8

5 Right to Financial Privacy Act (Page 5) In response to the United States v. Miller decision of the U.S. Supreme Court, Congress passed the Right to Financial Privacy Act (RFPA). 9 RFPA sets forth that no Government authority may have access to or obtain copies of, or the information contained in the financial records of any customer from a financial institution unless the financial records are reasonably described and: The customer authorizes access; There is an appropriate subpoena or summons; There is a qualified search warrant; There is an appropriate judicial subpoena; OR There is an appropriate written request from an authorized government authority. 10

6 Advance Notice Required RFPA requires that the requesting federal government agency give the customer advance notice of the requested disclosure, giving the customer opportunity to challenge the government s access. The agency must serve the customer with a copy of its request or order, or mail a copy to the customer on or before the date which it serves the order or delivers or mails the request to the financial institution maintaining the records. The customer has 10 days from the date of service, or 14 days from the date of mailing, to challenge the disclosure. 11 Application The act only governs disclosures to the federal government. It does not govern inquiries from private businesses or state/local government agencies. RFPA-covered customers are individuals or partnerships of 5 or fewer individuals. Corporations, trusts, estates, unincorporated associations - such as unions and large partnerships - are not covered by the RFPA. 12

7 Exceptions to RFPA (Page 6) Disclosures that do not identify a particular customer. Disclosures in the financial institution s interest. Disclosures in connection with supervisory investigations and proceedings. Disclosures under the US Tax Code (separate summons requirements). Disclosures pursuant to other federal statutes or rules, administrative or judicial proceedings, and legitimate functions of supervisory agencies. Emergency disclosures and disclosure to federal agencies charged with foreign intelligence or counter intelligence or other national security protection 13 functions. RFPA and State Law (Page 7) RFPA does not apply to request for orders for information by state and local government entities. Some states have their own versions of the RFPA. 14

8 The Financial Institution s Duty (Page 8) Financial institutions should follow the instructions of the formal document served upon it. It should not deliver records to the federal agency until such time that the federal agency certifies its compliance with RFPA. If the agency refuses, it should indicate which exception of the RFPA it is relying upon in order to obtain the information. 15 Privacy of Consumer Financial Information (Regulation P)- (Page 9) The Act does not specifically deal with financial information provided to government agencies. It deals with the disclosure of non-public information to third parties. A financial institution must disclose to a consumer customer its policy with regards to disclosing non-public information to third parties and provide the customer with the right to opt-out. There are certain disclosures of non-public information for which a customer does not have the right to opt-out. 16

9 Exceptions to the Opt-Out - (Page 9) To comply with federal, state or local laws, rules or other applicable legal requirements; To comply with a properly authorized civil, criminal, or regulatory subpoena, investigation or summons by federal, state or local authorities. 17 Processing Subpoena Requests- (Page 9 & 10) Ask yourself the following questions: Does the court issuing the subpoena have jurisdiction? Normally, a subpoena issued in one state court is not valid in another state. 18

10 Is the subpoena overly broad or burdensome? You may be able to work with the subpoenaing party to limit the amount of information being provided. Sometimes, the subpoena is so burdensome that a motion to quash may be justified. 19 Is there time to comply? If not, you may be able to request an extension of time to comply. 20

11 Is the subpoena confidential? An order prohibiting the financial institution from notifying the customer may be issued in cases where the financial institution insists that it is going to inform the customer of the subpoena. If so, you will not be permitted to notify the customer about the subpoena. 21 Was it issued by a court? If not, confirm that the subpoena has been validly issued in accordance with state law by contacting local counsel. 22

12 Steps in Processing (Page 11) Don t ignore the subpoena. Comply with the request fully unless you specifically have the permission to do less than what is ordered. 23 Contact the subpoenaing party to clarify the request if there are questions, or to limit the search and production criteria if the request appears to be a fishing expedition. 24

13 Be advised, courts rarely grant motions to quash, so, normally it is not worth the financial institution s time and money to pursue limitations through the court system. 25 For federal subpoenas, Regulation S allows for reimbursement of costs with certain Right to Financial Privacy requests. For state subpoena requests, states will frequently have similar cost reimbursement statutes. Keep detailed records of expenses. Can request payment up front for photocopies. You can normally request that delivery of the documents be arranged for by the subpoenaing party, or delivered by the financial institution directly to the court. 26

14 Electronically Stored Information (ESI)- (Page 12) FRCP Rules allow a party to subpoena ESI. ESI includes s, voice mails, hard drives, word processing files, spreadsheets, data bases, Internet website data, and potentially even backup tapes. 27 Two reasons for objecting to ESI subpoena request: Subject to privilege (attorney-client privilege) or attorney work product; Too burdensome or costly to produce. 28

15 Safe Harbor Protection Not liable if ESI has been modified, overwritten or deleted as part of normal, routine and good faith document retention program. Need policies/ procedures to support. 29 General obligation Duty to preserve ESI arises when a party receives notice or should know that specific information or types of information are relevant to existing litigation or investigation, or to litigation or investigation that is reasonably anticipated in the foreseeable future. 30

16 Federal Grand Jury Subpoena (Page 12) Typically, grand jury subpoenas are confidential. A financial institution will be prohibited from notifying the customer if such a subpoena is received. Warnings of confidentiality are usually included with the subpoena instructions. If you do not fully comply with a grand jury request, and your failure to comply is not excused, multiple grand jury subpoenas can be served on the financial institution, and perhaps a search warrant will be used as an alternative. 31 Processing Summonses (Page 13) Note the time and date of service, as well as the initials of the party receiving service. The financial institution will be required to appear and answer the plaintiff s petition or will be permitted to file an answer in order to preserve its standing. 32

17 If no answer or appearance is made as directed, a default judgment will be rendered against the financial institution. In some instances, a court will set aside a default judgment if the defaulting party had a valid reason or excuse for failing to answer or appear. Ignoring or misplacing the summons will not be considered valid excuses. 33 Processing Garnishments (Page 13) The parties are: Plaintiff (garnishing creditor), Defendant (judgment debtor), Garnishee (financial institution). Federal-based action: If the garnishment is issued in a federal court judgment, state garnishment law will be followed when it s a private party action. Federal law will apply when the United States is a party. The garnishment must be issued through a court in the same state where the assets are located. Out-of-state judgments normally have to be registered in the state where the subject property is located. 34

18 The garnishment form will provide the financial institution with instructions regarding: Time period for which the financial institution is accountable; Time period for answering; Effect of not answering Fees that can be assessed by the financial institution/garnishee for processing; Amount to hold; What can be done if no order to pay in is received by the financial institution/garnishee. 35 Processing Issues (same rules generally apply to tax levies, except where noted)-page 14 Note the time and date of service, as well as the initials of person receiving the garnishment. Does the financial institution have an account owned by the debtor? The garnishment will only attach to accounts for which the debtor has legal ownership. The garnishment will not normally attach to accounts where the defendant is simply an authorized signer, trustee or beneficiary. 36

19 Does the account have any direct deposits of federal benefit payments? Federal regulations require the financial institution to calculate the amount of funds that should be preserved for customer use when a garnishment is served pertaining to a customer who receives direct deposits of federal benefit payments. 37 Any Questions? 38

20 Garnishing Federal Benefit Payments (Page 15)- Account Holder - A natural person who is the owner or beneficial owner of an account; Account - will be a deposit account to which a Federal benefit payment is routed and credited. In cases where a payment recipient is assigned a customer/member number or there is a master account for the customer, that doesn t represent an account per se, but that serves as a prefix for individual sub accounts, it is the sub account (and not the master account ) that is subject to the account review and lookback period. The term does not include securities, real estate, alternative investment or other asset accounts or address any protection that may exist for securities or other assets purchased with Federal benefit payments. 39 Definitions, cont. Benefit Payment - Direct deposit payments that include an XX in positions 54 and 55 of the Company Entry Description field and a 2 in position 79 in the Batch Header Record. The term does not include a check. Lookback Period - The two month period that begins on the date preceding the date of the account review and ends on the corresponding date of the month, two months earlier. 40

21 Definitions, cont. Garnishment/Garnishment Order- includes a writ, order, notice, summons, judgment, levy or similar written instruction issued by a court, a State or State agency, a municipality or municipal corporation, or a State child support enforcement agency, including a lien arising by operation of law for overdue child support or an order to freeze the assets in an account, to effect a garnishment against the debtor. Will not include an IRS Tax Levy. 41 Definitions, cont. Protected Amount - The lesser of the sum of all benefit payments posted to an account between the close of business on the beginning date of the lookback period and the open of business on the ending date of the lookback period, or the balance of the account at the time of the account review. 42

22 Processing Steps (Page 16) Step 1: Is creditor the US government or a state child support enforcement agency? If yes, then follow customary procedures (hold the federal benefit funds). For court- issued orders, the US government or child support agency will provide notice that the order is exempt from the rules. If no, proceed with analysis (IRS Tax Levy will not have a notice); 43 Process, cont. Step 2: The financial institution must review the account history to determine if one or more exempt federal benefit payments were DIRECTLY DEPOSITED during the previous two months. This period of time is referred to as the lookback period. The account review must be done within two business days following the date the garnishment was received, however, the period may be expanded if the financial institution needs additional information to identify the account owner; 44

23 Account Review and the Lookback Period If the financial institution finds no benefit payments were deposited during the lookback period, the financial institution will follow its customary procedures for handling garnishments pursuant to state law. The lookback period is not 60 days, but instead is two months. The two month period begins on the date preceding the date of the account review and ends on the corresponding date of the month two months earlier or on the last date of the month two months earlier if the corresponding date does not exist. 45 Extension of Account Review Time Frame The two-business-day time frame for performing the account review may be extended, with permission of the plaintiff-creditor, if a large number of garnishment orders are submitted by that plaintiff-creditor. However, this exception doesn t apply if financial institution receives a large number of single garnishments from different plaintiff-creditors. The financial institution is required to keep records on such batch garnishments and creditor permissions. 46

24 Insufficient information: If the garnishment order does not provide enough information to identify the account owner, the financial institution does not begin counting the two-day period until the information is received. 47 Account Review- Other Issues Financial institution can not take any action on an account until the account review is completed; Financial institution must do a separate account review for each account owned, and do a separate calculation for each account; If the account review shows no federal benefit payments, then financial institution follows its customary procedure for garnishments pursuant to state law; and If account review shows that there were federal benefit payments, financial institution is required to calculate the amount that is protected. 48

25 Irrelevant Factors in Account Review The following were determined by the Agencies to be irrelevant: Commingling of exempt and nonexempt funds in the account; Existence of a co-owner on the account; Whether benefit payments to multiple beneficiaries are deposited to the same account; Any instructions in garnishment order are NOT relevant, including information on the nature of the debt or underlying obligation. 49 Process: Step 3: The financial institution must allow the customer to have access to the protected amount which is equal to the lesser of the sum of the exempt payments directly deposited during the lookback period, or to the balance of the account at the time of the account review (not necessarily the day of the garnishment). 50

26 Access to Protected Amount, cont. The financial institution s calculation of the protected amount which is exempt from garnishment is NOT subject to a legal action by a creditor that is challenging the determination. 51 No Actions After Account Review Garnishment fee can only be taken within five business days after the account review and only from unprotected funds. Financial institution may not later freeze funds deposited after account review, and may not later take a garnishment fee. Any actions taken must be based on the balance in the account from transactions occurring at or before the open of business on the date of account review. 52

27 Process Step 4: The financial institution must notify the account owner that the financial institution has received a garnishment if there are unprotected funds to be sent to the creditor. The Notice must explain what a garnishment is and include other information regarding the accountholder s rights. The model notice can be found in Appendix A of the regulation or in can be found in the US Treasury Guide at Appendix How do you handle jointly-owned accounts? (Page 18) Joint Tenants with Rights of Survivorship States are divided on how much of the account to attach. Contact local counsel for guidance. Note: IRS Levy will attach whole account. 54

28 Tenancy in Common The judgment debtor s prorated share of the account is typically held, however, some states would mandate a full 100% of the account be held. Contact local counsel for guidance. Note: IRS Levy will attach whole account. 55 Tenancy by the Entirety If only one spouse is the subject of the garnishment, then 0% is held, since the husband and wife are viewed as a single legal unit. IRS Levy will attach to at least half of the account, and possibly to the whole account. Consult local counsel. 56

29 Special wording, such as If your account is a joint account, we may pay all amounts in the account in satisfaction of any levy, garnishment or court order, even if it attaches to the interests of fewer than all of the accountholders may help in your deposit agreement. 57 Federal Benefits not Directly Deposited and State-Based Exemptions (Page-19) Federal benefits (not directly deposited), and certain other deposits, are frequently exempt from garnishment. The financial institution is not obligated to raise the exemptions on behalf of the judgment debtor (although some states do require the financial institution to notify the parties if the exemptions may apply). If the only deposits to the account in question are social security deposits (or the only account is an exempt asset, such as an IRA), then the financial institution can normally raise the exemption on behalf of the judgment debtor. 58

30 Loans v. Accounts (Page 19) A th Circuit Court of Appeals decision best describes what can happen when a financial institution is caught in the garnishment-loan trap: In Waelder Oil & Gas, Inc. v. Southwestern Glass Co., the Debtor had a line of credit in which, as checks were presented for payment against Debtor s checking account, funds were advanced from the line of credit and put into the checking account to pay the checks. Garnishing creditor claimed that the bank should have reported the deposits on hand as a result of an advance from the line of credit as assets of the debtor on the garnishment answer. The court agreed. 59 The Creditor had a right to the advances that flowed through the checking account because, for a brief time between the transfer of proceeds from the line of credit into the checking account and the payment of the checks, the proceeds became money belonging to the debtor. The Court further found that the bank had failed to answer the garnishment interrogatories truthfully and entered judgment against the bank in the amount of $568,

31 Letter of Credit Obligation (Page 20) A garnishment will not normally attach to letter-of-credit proceeds, since most letters of credit have specific instructions of how draws must be submitted. Note, there has been litigation on this issue. 61 Safe Deposit Box (Page 20) A financial institution is normally not charged with knowing the contents of a safe deposit box, making it impossible to answer. To be safe, financial institutions may want to answer that it has a safe deposit box in the name of the judgment debtor and that it is NOT holding the property. Seek the advice of local counsel. 62

32 Payment of Checks (Page 21) The garnishment should be processed before a check presented on the same date is paid, unless the check has been: Certified; Settled for cash; Finally paid due to the clearinghouse, midnight or other cutoff deadline has passed (making the item finally paid ). 63 Setoff States Differ (Page 21) When allowed by states, generally a financial institution will be permitted to exercise setoff as long as the debt owed by the judgment debtor has matured either under the debt agreement or under the state s law. Use caution when dealing with consumer debt. States allowing setoff to occur will normally require the financial institution to physically apply the proceeds of the account to the debt owed when answering the garnishment. Seek the advice of local counsel. 64

33 The IRS and Set Off Revenue Ruling states that a financial institution should raise a set off claim (or lien interest claim) that it has in a deposit account directly with the IRS prior to exercising its right. The claim can be raised informally by contacting the issuing office or an objection can be formally filed within 9 months of the levy issuance date. 65 Liens on Accounts (Page 21) When the financial institution has a valid lien on the account (has taken steps to perfect), the financial institution should be able to claim the funds in the account prior to answering the garnishment. Most states will require default to be declared and the funds to be applied to the loan secured by the deposit account. Seek the advice of local counsel. The IRS will require pre-notification. 66

34 Uncollected Deposits (Page 22) The prudent rule is to garnish funds that would have been available for withdrawal by the judgment debtor. The question is whether the financial institution previously held the funds under Regulation CC (Expedited Funds Availability Act). 67 Accounts in a d/b/a Name (Page 22) If an account is held in a d/b/a name, but the legal owner is the judgment debtor, then the account is fully subject to garnishment. 68

35 Specially Designated Accounts (Page 22) A special designation on a deposit account, such as payroll tax account, will not normally affect the ability to garnish such account, unless the financial institution has clear evidence that the funds belong to another party (for example, is the financial institution required by contract to hold the funds for a third party). 69 Can the financial institution assess a garnishment fee? Page 22 This is a state-law based issue. If a fee is permitted by statute, the financial institution will be able to assess the fee. The fee does not have to be disclosed in the financial institution s account disclosures under Truth in Savings (Regulation DD). However, it is always prudent to make it contractually agreed to by the customer. Remember, though, the fee can not be taken from the customer s protected funds under the garnishment rules for direct deposits of federal benefit payments. 70

36 IRS Levies- other issues (Page 23) Delivery is permitted in person or by mail. Notice of where levies should be mailed can be sent to the district director of the IRS office. 71 IRS Levy example: Financial institution instructions to remember 72

37 When the levy is received: Note the time and date of receipt, along with the initials of the party receiving the levy; Immediately identify accounts and hold funds on hand for 21 days, not counting the day of service. Automatically send to IRS at the end of 21 day period. The levy only applies to the funds in the account at the time the levy is received. If there is a penalty assessed for early withdrawal on a certificate of deposit, the fee can be assessed against the amount sent to the IRS, unless the levy is for less than the amount of the certificate of deposit. Interest accrued on the account should be remitted as well, up to the full amount of the tax levy; Copy mailed to taxpayer within two business days. 73 When serving the levy in person, the IRS can make immediate demand for information regarding account balances. No 21-day waiting period will apply. 74

38 Identify property based upon the taxpayer s name, address and identifying number(s) shown on the form. A perfect match is not required. Use common sense. 75 Any financial institution fees to be assessed for the processing of the tax levy should be taken from funds remaining on hand, not from the proceeds of the levy. 76

39 At the end of the 21-day period, the financial institution should automatically pay the funds on hand to the IRS, unless a release of levy or other instruction has been received from the IRS. Only the District Director of the IRS office that issued the levy has the authority to release it. 77 Personal Liability If there is an error on the amount reported, the IRS can issue a summons to determine the actual balance on hand when the levy was served. It can then demand payment on the amount that was actually in the account, rather than just the amount held by the financial institution. If no payment is received, the IRS can ask a court to issue a judgment of personal liability and impose a 50% penalty against the financial institution if there does not appear to be a valid reason for non-compliance. Financial institutions may want to add the language that appears in the Garnishment section under Joint Accounts to its account agreement. 78

40 A customer is permitted to waive the 21- day waiting period. 79 If the IRS issues the levy in error, it will be responsible for the error, and will provide the institution with explicit indemnification from liability. 80

41 Contact the number on the levy if clarification is needed about whether or not to hold funds. 81 Informal Request for Information (Page 25) Always use caution. If there is a question as to the legitimacy of the request, ask for a statute or regulation which provides for the release of the information, or a properly prepared authorization from the customer. The requesting agency/party should be able to show why such a request is permissible. 82

42 Common informal requests occur for the following: Determining if a deceased accountholder had funds on hand to reimburse state benefit programs or taxes; Reporting the exploitation of elderly customers; Answering Social Security Administration inquiries used to confirm names and addresses of applicants; Report accounts in name of persons owning past due child support. 83 Terri D. Thomas tthomas@ksbankers.com Upcoming Webinars January 8 th - Background Checks, References and Pre- Employment Testing January 9 th - 15 Reasons Name and TIN Numbers May Not Match January 14 th - How To Avoid Signature Card Mishaps Mark Bennett TTS mbennett@ttstrain.com January 16 th - IRA Update - What's New for the Filing Season? January 17 th - BSA Confidentiality Issues: Subpoenas, NSLs, Law Enforcement & Lawsuits January 21 st - Lending 101 January 22 nd - UDAAP: What Your Frontline Needs to Know & Do January 23 rd - Marketing & Advertising Compliance - The First UDAAP Hotspot January 23 rd - Compliance Perspectives: A Monthly Update January 28 th - Records Management and Retention: Can a Program be Comprehensive and Efficient at the Same Time? 84