Filter Results

14.5.4.9 The Role of State Protections; Preemption and the Safe Harbor

CategoriesCart
Highlight Updates
  1. Collection Actions
  2. Chapters
  3. Chapter 14 Protecting Debtors’ Wages, Benefits, Other Income, and Bank Accounts
  4. 14.5 Protection of Bank Accounts
  5. 14.5.4 Treasury Rule Protects Electronically Deposited Exempt Federal Benefits from Garnishment
  6. 14.5.4.9 The Role of State Protections; Preemption and the Safe Harbor

14.5.4.9 The Role of State Protections; Preemption and the Safe Harbor

The Treasury rule fills a significant gap. Federal law has long provided an absolute exemption for Social Security and other benefits but did not specify any effective mechanism for implementing this protection. State laws have also generally recognized the exemptions, but their procedures placed burdens on the beneficiary that often resulted in freezing or even loss of the protected funds.

While the rule fills this gap, there is still room for additional state protections. The Treasury rule protects only two months of benefits, and it applies only to certain federal benefits. States could enhance the Treasury rule’s protections by adopting procedures similar to those required by the Treasury rule but applying them to a larger amount or additional types of benefits.525 One approach, which would also simplify compliance for banks, would be to create a flat, automatic exemption for a certain dollar amount in any bank account. Then, banks would only have to analyze accounts that exceeded that amount.526

Even before the Treasury rule was adopted, some state exemption statutes and rules provided automatic protections along these lines. Pennsylvania court rules protect the first $10,000 of any account into which recurring exempt benefit payments are electronically deposited.527 A California statute provides an automatic exemption for up to $2425 of directly deposited Social Security benefits,528 which for some recipients may be more than the two months of benefits protected under the federal rule. Connecticut has a similar provision and specifically confers immunity on a bank that attempts in good faith to comply with the statute.529 It also allows the serving officer to serve an execution on only one bank at a time and wait until the bank responds before serving the execution on another bank. New York protects a flat $2500 (adjusted periodically for inflation) if any reasonably identifiable exempt funds have been electronically deposited within forty-five days preceding service of a garnishment order.530 However, the state’s highest court has held that there is no private right of action for a bank’s violation of this statute, and the debtor’s only remedy is a special proceeding against the judgment creditor.531 The Seventh Circuit interpreted Illinois garnishment statutes and forms as prohibiting even a temporary freeze of exempt funds.532

The federal rule preempts state laws only to the extent that the state law prevents banks from complying with the rule.533 A state law that protects a higher amount than the federal rule is not preempted if the bank can comply with both requirements.534 Likewise, a state law prohibiting a bank from freezing exempt funds deposited by check is not preempted.535

State laws are preempted if they would stand in the way of the automatic, self-executing protection of federal benefits that the Treasury rule requires.536 For example, state laws that require banks to freeze the “protected amount” or that require the benefit recipient to take affirmative steps to assert the exemption are preempted.

The rule includes a safe harbor for banks that comply with it in good faith.537 This safe harbor is intended primarily to prevent creditors from using state law remedies to force garnishee banks to freeze and turn over exempt funds.538 The safe harbor also protects the bank from any claim by an account holder for freezing exempt funds in the limited circumstance under which a garnishment order from the federal government or a state child support enforcement agency results in the freezing of funds.

Any argument that that the safe harbor provides cover for a bank’s violation of a more protective state law is rebutted by the explicit language in the preemption provision: “(b) Consistent law not preempted. This regulation does not annul, alter, affect, or exempt any financial institution from complying with the laws of any State with respect to garnishment practices, except to the extent of an inconsistency.”539 There is no inconsistency between the Treasury rule and a state’s higher standard providing protection for exempt funds deposited by check, for example.

Footnotes

  • 525 See, e.g., Or. Rev. Stat. § 18.784 (similar to Treasury Rule but also applies to accounts in which unemployment compensation, payments from public or private retirement plans, public assistance, Black Lung benefits, or workers’ compensation was electronically deposited).

  • 526 See § 14.5.2, supra (describing New York statute that exempts flat amount regardless of its source).

  • 527 Pa. R. Civ. P. 3111.1.

  • 528 Cal. Civ. Proc. Code § 704.080 (West). See In re Hernandez, 483 B.R. 713 (B.A.P. 9th Cir. 2012) (the automatic exemption protects Social Security benefits, and creditor that garnished benefits before debtor filed bankruptcy must surrender them); Shop Ironworkers Local 790 Pension Plan v. Cofab Steel Corp., 2008 WL 4790592 (N.D. Cal. Oct. 30, 2008) (statutory amount automatically exempt; awarding balance to creditor because debtor failed to present evidence of exemption); Kilker v. Stillman, 182 Cal. Rptr. 3d 712 (Cal. Ct. App. 2015) (federal exemption of Social Security benefits applies even when California automatic exemption for direct-deposited benefits is inapplicable, as long as debtor proves that funds are Social Security payments).

  • 529 Conn. Gen. Stat. § 52-367b.

  • 530 N.Y. C.P.L.R. 5205(l) (McKinney). See Arias v. Gutman, Mintz, Baker & Sonnenfeldt, L.L.P., 875 F.3d 128 (2d Cir. 2017) (consumer stated FDCPA claim against law firm that, in violation of Exempt Income Protection Act, refused to release bank account garnishment after seeing bank statements showing exempt source of funds); LR Credit 22, L.L.C. v. Eggleston, 951 N.Y.S.2d 658 (N.Y. Sup. Ct. 2012) (detailed explanation of C.P.L.R. § 5222-1 procedures; here sanctioning creditor for noncompliance with rule requiring release of prejudgment freezes on accounts containing exempt funds); Midland Funding, L.L.C. v. Roberts, 950 N.Y.S.2d 867 (N.Y. Sup. Ct. 2012) (exemption claim form filed by debtor need not be supported by documentation; it is prima facie evidence that funds are exempt, and shifts burden to creditor to demonstrate that they are not); LR Credit 21, L.L.C. v. Burnett, 967 N.Y.S. 2d 916 (N.Y. Dist. Ct. 2013) (creditor must plead and prove strict compliance with Exempt Income Protection Act; here ordering account unfrozen and denying bank fees when debt buyer failed to follow procedures; account here was joint and contained Social Security funds). But see Stephens v. Capitol One Fin. Corp., 2012 WL 2458173 (E.D.N.Y. June 22, 2012) (Exempt Income Protection Act does not apply when the creditor is the state—here for a tax debt); Distressed Holdings, L.L.C. v. Ehrler, 976 N.Y.S.2d 517 (N.Y. App. Div. Dec. 4, 2013) (restraining account without providing required notice denies due process, but refusing to lift restraint when creditor filed all proper forms and could not prevent bank’s failure to forward them to debtor).

  • 531 Cruz v. TD Bank, 2 N.E.3d 221 (N.Y. 2013).

  • 532 London v. RBS Citizens, 600 F.3d 742 (7th Cir. 2010) (where garnishment form directed bank to freeze non-exempt funds, bank was not acting in accordance with state law when it froze them; since it was a private party misusing a state procedure, it is not subject to section 1983 liability).

  • 533 31 C.F.R. § 212.9. See also 31 C.F.R. § 212.5(d)(6) (bank must perform account review without consideration for any instructions to the contrary in the garnishment order).

  • 534 31 C.F.R. § 212.9(b).

  • 535 See 76 Fed. Reg. 9939, 9941 (Feb. 23, 2011) (“The fact that the rule does not address Treasury checks in no way affects an individual’s right to assert or receive an exemption from garnishment by following the procedures specified under the applicable law”).

  • 536 31 C.F.R. § 212.9(a). See Deal v. First & Farmers’ Nat’l Bank, Inc., 518 S.W.3d 159 (Ky. Ct. App. 2017) (state law is preempted insofar as it denies bank standing to assert exemptions on behalf of the debtor, as Treasury Rule requires it to do so, but not insofar as it requires bank to disclose balance in debtor’s account to judgment creditor, as federal law does not address this).

  • 537 31 C.F.R. § 212.10(b).

  • 538 76 Fed. Reg. 9939, 9952 (Feb. 23, 2011).

  • 539 31 C.F.R. § 212.9(b).