Keeping Current: Best Practices for Garnishment of Bank Accounts to Collect Debts
Pundits sometimes jokingly refer to a garnishment subpoena mailed to a bank as a “valentine.” A bank with a judgment of its own to collect can send such “valentines” to other banks. This article provides tips for use by a bank of deposit account garnishments to collect its own judgment debts. Although written for the judgment creditor bank, the article also will interest banks with setoff rights who receive garnishments of deposit accounts.
For convenience, this article uses definitions: The bank sending the garnishment – which has the judgment against its obligor— is called “Sending Bank.” The bank receiving the garnishment is called “Garnished Bank.” The judgment obligor is simply “Obligor.” The article discusses bank accounts, but similar concepts apply to other financial institution accounts. This article omits discussion of determinations of whether an account contains federally-exempt deposits such as sometimes come from Social Security payments.
Bank account garnishment typically involves Sending Bank filing a pleading that generates a summons and standard garnishment interrogatories provided by the county court. Sending Bank often achieves better results if at the time it files its pleading it includes a request for special interrogatories to supplement the standard ones. Sending Bank attaches the special interrogatories to its pleading and then follows up with the county court or sheriff to ensure the special interrogatories become part of the summons packet issued by the county court. Special interrogatories provide much more thorough and useful information than standard interrogatories, such as:
- Date of closure of bank accounts, if applicable.
- Amount and payee or transferee of last checks or wire transfers or intrabank account transfers of closed accounts, if applicable.
- Description of allowed signers on a signature card for each pertinent bank account.
- Date and amount of last deposit(s) to each pertinent bank account.
Nebraska, Iowa, and many other states allow special interrogatories if related sufficiently to Obligor’s rights (e.g., demand deposit accounts owned by Obligor) or other money or tangible property of Obligor possessed by Garnished Bank. E.g., Tiefenthaler v. Citywide Ins., Inc., 2012 Neb. App. LEXIS 30 (Neb. Ct. App.). A counter tactic for Garnished Bank is to write into the special interrogatory responses a burdensomeness objection if providing the information would be costly or unduly time-consuming. Sending Bank is wise to anticipate such objections and to phone or write Garnished Bank shortly after Garnished Bank receives the garnishment packet. Sending Bank can offer to pay Garnished Bank’s reasonable compliance costs or obtain an estimate of those costs if Garnished Bank insists on reimbursement as a resolution of burden concerns.
Another issue involves Garnished Bank asserting a setoff. If Garnished Bank is owed debts by Obligor, Garnished Bank sometimes asserts no funds exist in the account because they have all been setoff. Specialized legal advice can help either bank avoid somewhat common mishandling of setoffs.
For example, Sending Bank should probe for documentation of the setoff and carefully compare when it occurred versus when Garnished Bank received the garnishment packet. If the garnishment packet arrived before Sending Bank documented any setoff in its records, Sending Bank often prevails in a subsequent court dispute with Garnished Bank (assuming setoff is the only right Garnished Bank asserts). The Tiefenthaler case illustrates this principle, although that case involved a garnished insurance company rather than a garnished bank. The insurance company had told Obligor’s lawyer that “setoffs would be exercised.” But the company did not successfully produce any documents that they in fact were exercised and, if so, when. The judgment creditor prevailed over the purported setoffs.
Sophisticated Garnished Banks may raise, instead of or in addition to setoff, alleged security interests in the pertinent bank account. Is Sending Bank thwarted from any recovery from the account? Not necessarily. Sending Bank should request documentation of the security interests. Even if the documentation is proper, Sending Bank has a limited time in which it may use a tactic sometimes called “forcing the issue.” This involves contacting Garnished Bank to assert that Garnished Bank must either apply all funds in the bank account to pay down Garnished Bank’s debt or acknowledge that Garnished Bank is in effect waiving its security interest by continuing to allow Obligor to use the account. Sending Bank then argues that such implied waiver elevates Sending Bank’s garnishment lien to priority over the allegedly waived security interest.
Before deciding whether to “force the issue,” Sending Bank should carefully attend to at least two legal points. One is the limited time Sending Bank has to object to Garnished Bank’s answers to garnishment interrogatories. The limit is typically 20 days in Nebraska, for example. Second, some courts hold, in other involuntary debt collection contexts, that a creditor with a junior lien cannot lawfully sell collateral of a resisting creditor with a senior lien even though the junior lienholder agrees to sell it subject to any senior rights. Such courts might be sympathetic to Garnished Bank, although we are unaware of any court ruling against a Sending Bank recently for such a reason.
A last issue reminds Sending Bank to be sure to notify Obligor of the garnishment. A relatively recent federal decision in Iowa declared unconstitutional part of Iowa’s garnishment statutes if applied to a bank account garnishment without due process notice to Obligor. New v. Gemini Capital Group, 859 F.Supp.2d 990 (S.D. Iowa 2012) involved somewhat unusual facts. The judgment creditor garnished Obligor’s bank account but never asked the court to “condemn” the account and thus transfer the funds in it to the judgment creditor. As a result, Obligor claimed he never received timely notice of the garnishment and thus lacked due process. The New court agreed.
A Sending Bank presumably can avoid the New problem by always sending its own notice of garnishment to Obligor. However, as New recognizes, Sending Bank need not provide pre-garnishment notice to Obligor of intent to garnish: Pre-garnishment notice would allow too much opportunity for Obligor to deplete any bank accounts.
In conclusion, properly advised Garnished Banks can handle the garnishment packet “valentines” effectively to avoid a potentially bitter experience. Relatedly, Sending Banks can improve collection results if they follow effective legal tips in garnishing accounts at other banks.