Finally, a bank may be answerable for ignoring rules to protect New Yorkers' exempt money from seizure by judgment creditors.
After three federal cases denied a private right of action against banks for violations of the Exempt Income Protection Act ("EIPA"), Justice Richard Velasquez of Kings County New York stands up for consumers in a big way.
EIPA refers to the 2009 amendments of five basic judgment-enforcement statutes aimed to protect the income of "small" debtors. The amendments were enacted to prevent or deter banks from restraining exempt funds in the first place, but also to provide an efficient process to quickly restore access to exempt monies that are restrained.
In the case discussed in this blog, Jackson v Bank of Am., N.A., 40 Misc 3d 949 [Sup Ct, Kings County 2013], a class action against Bank of America survives a dimissal motion asserting a failure to state a claim. In essence, the bank argues that CPLR § 5222-a does subject it to civil liability.
Mother and daughter ("Plaintiffs") jointly held checking and savings accounts at Bank of America. Both accounts were frozen due to Creditor's enforcement of a default judgment against daughter only.
On the same day, Bank of America sent a letter to Plaintiffs advising them that all money in both accounts were being restrained (frozen) and would be "held pending further instructions from the court or attaching party." The funds, however, were not on "hold." Bank of America instead closed both accounts and sent to plaintiffs a check for the statutorily exempt sum of $1,740.00.
Bank of America's violations of the EIPA
In its hasty and ill-considered response to the restraining notices, Bank of America committed the following violations:
- Restraining Plaintiffs' bank accounts without first receiving the documents required under CPLR § 5222-a(b) [two copies of the restraining notice, exemption notice, two copies of exemption claim form with addressees written in them];
- Failing to send Plaintiffs required exemption notice documents;
- Failing to give Plaintiffs the requisite 20 days to assert pension exemptions before closing their account and remitting a $1,740 check;
- Upon information and belief, failing to have a system (or at least adhere to one) for identifying whether deposits are made directly from exempt sources.
The court stated that Bank of America's own documents in support of its motion to dismiss establish its violations of § 5222-a. Bank of America produced an affidavit signed by a Vice President of the entire Northeast Legal Order Processing Department that mentions nothing about New York's exemption process.
Bank of America essentially conceded the above failures, but argued that Plaintiffs have no legal recourse to remedy the harm caused. It argued that a right of action is not provided for in CPLR § 5222-a, and that three federal cases dismissed cases with similar fact patterns.
Although CPLR § 5222-a provides no explicit private right of action, Justice Velasquez however, applied the Sheehy test to arrive at the conclusion that recognizing an implied right of action would promote the legislative objective of protecting injured consumers from banks who ignore exemption protection laws.
The court cited part of the Senate Bill entitled "JUSTIFICATION." Below is a list of relevant excerpts discussing the problem of freezing exempt funds before § 5222-a was enacted:
- Without meaningful protection of exempt monies, hundreds of vulnerable New Yorkers face the perils of hunger, illness, loss of utilities, evictions and further lost income from bank fees. Currently, over three million or 80 percent all SS, SD, and SSI beneficiaries in New York receive their benefits through direct deposit, consistent with federal policy. Banks can easily ascertain the origin of these direct deposits. However, under current law, CPLR § 5222 makes no allowance for direct deposit of exempt funds and instead, requires the bank to freeze the account or to risk being held in contempt of court. Only after the account is frozen, does a debtor receive notice of the restraint. The burden is placed on the account holder to show the exempt nature of the frozen funds.
- The CPLR provides no specified procedure for a claim of exemption, and debtors are left guessing as to how to enforce their exemption rights.
- Debtors often have difficulty getting an account released even thought the creditor has no legal right to its contents. Banks can provide little help, as only the creditor or judge can release the account.
- All too often, however, creditors ignore calls from debtors, demand a debt payment as a condition of releasing the account, or insist on proof of the exemption that an elderly, disabled or poorly-educated person may be unable to produce, even when the bank possesses the necessary proof.
- Moreover, using the courts to claim an exemption is complicated and extremely difficult without the aid of a lawyer.
- The result is that creditors often take safety-net income from New Yorkers living on the margins. Those affected are unable to provide basic necessities for themselves and their families. Those who regain access to their accounts discover that the bank has debited their accounts for legal processing, overdraft and bounced check fees, often totaling hundreds of dollars. For low-income debtors, such a loss often means skipping meals or forgoing medical treatment in order to pay the rent. The experience is so costly that many give up their bank accounts and revert to using expensive nontraditional financial services, including check cashing services.
Using the above legislative history as guidance, Justice Velasquez found that granting aggrieved consumers a private right of action under CPLR § 5222-a would "promote legislative purpose," which is to ensure that life sustaining funds are available for the basic necessities of life for the elderly, disabled, poor families, veterans, and others who depend on exempt funds.
Justice Velazquez then addressed an inconsistent federal case arising out of the Southern District of New York in Cruz v. TD Bank, N.A., 855 F.Supp.2d 157 (SDNY 2012). The
Cruz court found that the EIPA's legislative history does not "fairly imply" a private right of action against banks when considering the statute's silence coupled with the multitude of special proceedings available to litigate over possession of restrained money. Here, Justice Velasquez found bases to set this case apart to fairly imply a private right of action.
Justice Velasquez disagreed with two other federal cases that adopted the reasoning of Cruz (See
Martinez v. Capital One, N.A., 863 F.Supp.2d 256 (SDNY 2012) and
Acevado v. Citibank, N.A., 2012 WL 996902 (SDNY 2012). These cases also held that aggrieved account holders have no private right of action against the banks for violations of the EIPA. But Justice Velasquez held that CPLR § 5022-a is a
remedial statute, "which, throughout its legislative history, emphasizes the point that the primary purpose of this statute is to ensure account-holders' access to exempt funds where a third party creditor seeks to restrain an account containing Federal or State Funds that are exempt from restraint."
Justice Velasquez construed New York's clear legislative intent of this remedial statute: to enact into law a procedure which, unlike the procedures set forth in § 5222, would protect account holders whose federal and/or state funds are exempt from third-party creditor restraint. These funds are needed for the necessities of life. New York seems to want a procedure where debtors keep access – uninterrupted – to exempt funds, not a procedure where consumers have to fight for possession of exempt money.
Why would New York mandate detailed compliance of important exemption-protection laws without any teeth against banks that so willfully and carelessly violate its provisions?
 Restraining notice is deemed void if not accompanied with an exemption notice and exemption claim forms. CPLR § 5222-a.
 Inferred due to absence of procedures discussed in B of A's supporting affidavit, and failure to follow law in this case.