Debt Defense: Tips & Hacks 3 (Exempt Income Protection Act)

Last week included a lot of exemption-claim work. We are testing the limits of New York's "bad faith" clause under CPLR § 5222-a(g)[1] to hold accountable a judgment creditor, its lawyer, and Capital One bank for what we contend is an unlawful ignorance of an Exemption Claim Form supported by bank statements that clearly demonstrated exempt sources of income such as "SSA TREAS." Our clients are residents of Texas but have been pulled into a New York turnover proceeding (an attempt to compel the bank "turn over" monies held in a joint bank account).

Below are some tips and rules of law to keep in mind when challenging a New York bank freeze:

  • Aside from New York exemption law (Exempt Income Protection Act or "EIPA"), federal law[2] also regulates banks to ensure that debtors have access to protected money such as social security benefits.
  • Generally, exemption laws should be construed liberally in favor of the debtor. Courts recognize the public policy in the preservation of your means to survive.
  • To hold a bank responsible for its legal violations of the EIPA, New York[3] requires a "special proceeding" against the bank.
  • Lawyers objecting to a debtor's exemption claim must demonstrate a reasonable belief supported by facts that the funds are not exempt.
  • Here is an explanation of the exemption claim process.
  • Upon receipt of a garnishment order, banks are required to review all accounts to determine if any electronic deposits of federal benefits were made during the last two months (the "look back period").
  • Judgment debtors do not waive their rights to assert their exemption rights.[4]
  • Banks that close your account upon receipt of a garnishment order may be violating a federal regulation[5] that requires "full and customary access" to exempt funds.
  • When a frozen account is held jointly with a non-debtor, the creditor must start a separate proceeding known as a turnover proceeding.
  • At least one New York court[6] held that separate non-military affidavits must be filed as to each joint account holder (to guard against seizure of a joint account holder's funds who are in the active military service).
Contact us if you need help with a frozen bank account.

[1] CPLR § 5222-a(g) Proceedings; bad faith claims. Where the judgment creditor objects to a claim of exemption pursuant to subdivision (d) of this section and the court finds that the judgment creditor disputed the claim of exemption in bad faith, as provided in paragraph four of subdivision (c) of this section, the judgment debtor shall be awarded costs, reasonable attorney fees, actual damages and an amount not to exceed one thousand dollars.

[2] 31 CFR 212, 212.4, 212.5, 212.5(f), 212.6, 212.7, 212.9, and the Social Security Act § 407.

[3] Cruz v. T D Bank v. Capital One Bank, N.A., 22 NY3d 61 (Ct App. 2013).

[4] When a frozen account is held jointly with a non-debtor, the creditor must start a separate proceeding known as a turnover proceeding.

[5] 31 C.F.R. § 212.6(a).

[6] Palisades Acquisition, LLC v. Ibrahim, 812 NYS 2d 866.

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