There are some important arguments that a depositor can make when a bank has assessed a garnishment fee from his bank account when the account contains only exempt funds. They include:
- contract claims;
- the Supremacy Clause;
- due process; and
- lack of timely notice to the judgment debtor of the garnishment proceedings.
This vignette presents those arguments along with a recommended affirmative step the depositor should take to notify the bank that his or her account only receives exempt funds.
In Virginia, garnishment is governed by Va. Code Ann §§ 8.01-511-525 (Michie 2007). In particular, § 8.01-512.4 provides for the service of both a garnishment summons and notice of exemptions and claim for exemption form. The summons and notice make clear that certain kinds of funds are exempt from garnishment under federal law including “Social Security, SSI, Veterans’, Black Lung, and Railroad Retirement benefits.”
However, despite the form’s statement that certain funds are exempt, the Virginia code does not first require either a creditor or a garnishee to ensure there are nonexempt funds in a debtor’s bank account before serving the summons or freezing the account. The result is that the account will be frozen regardless of the type of funds within it, which in turn causes the debtor to incur numerous, expensive administrative fees. For example, the bank as garnishee may automatically deduct a processing fee from the debtor’s bank account; that fee at Bank of America is $100. Next, the bank could impose a fee for bounced checks written while the account was frozen even though the debtor was unaware of the garnishment proceedings. Finally, late or penalty fees might accrue from third parties when the debtor is unable to pay his bills in a timely manner.
Congress enacted 42 U.S.C. § 407(a) to protect social security funds from credito
Congress enacted 42 U.S.C. § 407(a) to protect social security funds from creditors and to allow beneficiaries to afford the basic necessities of life. Finberg v. Sullivan, 634 F.2d 50, 63 (3d Cir. 1980); In re Greene, 27 B.R. 462, 464 (Bankr. E.D. Va. 1983). However, once a bank subtracts a $100 garnishment fee from a debtor’s account that only contained $500 worth of social security benefits in the first place, it is certain the debtor will not be able to afford those necessities.
There is little definitive Virginia federal or state case law addressing the imposition of administrative and processing fees in the garnishment context; however, this vignette suggests that to recover such fees when a debtor’s account contained only exempt funds- contract, Supremacy Clause, and due process claims must be made. In addition, the judgment debtor could attempt to prevent the imposition of such fees by giving notice to the bank of the exempt nature of the funds in the account before garnishment proceedings ever ensue.
The relationship between a bank and an accountholder is a contractual one. See Fleming v. Bank of Va., 343 S.E.2d 341, 344 (Va. 1986) (citing Colley v. Cox, 167 S.E.2d 317, 319 (Va. 1969)). In the Fleming and Colley cases, the Virginia Supreme Court determined that the signature card constituted the contract between the bank and the account holder and regulated their rights and duties. 343 S.E.2d at 344-45; 167 S.E.2d at 319; see also McClenny v. First Va. Bank-South Cent., 66 Va. Cir. 396, 398 (Va. Cir. Ct. 1994) (“[The plaintiff] is bound by the terms of the document that he signed with the bank.”).
In Fleming, the plaintiff asked her grandson-in-law to open several bank accounts for her. The accounts were in her name and consisted only of her money, but the grandson’s name was on them so that he could make deposits on her behalf. 343 S.E.2d at 342. The plaintiff executed a signature card for these accounts. Id. at 342-43. Later, after the plaintiff sold her house, she had her grandson deposit the proceeds in a new Certificate of Deposit (CD). Id. at 343. She did not sign a signature card for this, although her grandson signed the face of the certificate. Id. Then, the grandson defaulted on an unrelated loan he had taken out with the same bank, and to offset the default, the bank withdrew money from the plaintiff’s CD. Id.
The court held that the bank wrongfully appropriated the money from the grandmother’s account. Id. at 345. Although she had executed a signature card for two of her accounts with the bank, she had not executed one for her CD and did not assent to any offset for her grandson’s debt. Id. at 344-45. There was also no evidence that she had ever seen the bank’s rules and regulations regarding offset, especially when the bank conceded that the plaintiff had never been inside the bank. Id. at 345. The court ordered the bank to repay the funds with interest. Id. (citing Lutz v. Williams, 99 S.E. 440 (W.Va. 1919)).
Therefore, with regard to the subject matter of this vignette, to recover administrative fees accrued during garnishment proceedings, the debtor should first investigate the type of agreement he had with his financial institution. Did he ever sign or agree to anything making him aware of the bank’s garnishment fees? If not, the debtor could argue there was no assent between the bank and himself with regard to the imposition of a $100 garnishment fee and as a result, no contract. The bank’s extraction of such a fee from the debtor’s account containing exempt funds would be a wrongful appropriation of the debtor’s money under Fleming.
Unconscionability and Contracts of Adhesion
If the judgment debtor did sign or agree to a list of the bank’s fees and terms when he opened his account, the debtor could still attempt to invalidate the agreement by arguing the terms are unconscionable or that the form he signed was a contract of adhesion.
Unconscionability concerns the intrinsic fairness of an agreement’s terms in relation to the circumstances under which it was entered. Philyaw v. Platinum Enters., 54 Va. Cir. 364 (Va. Cir. Ct. 2001). An agreement is unconscionable “if no person in his senses would make it on the one hand and no fair and honest person would accept it on the other.” Bramow v. Toll Va, L.P., 67 Va. Cir. 56, 59 (Va. Cir. Ct. 2005) (citing Philyaw, 54 Va. Cir. at 364).
A contract of adhesion is a standard form prepared by one party and presented to a weaker party, who is usually a consumer with no bargaining power and little choice about the terms. Id.; see also Roanoke Iron & Bridge Works v. Gilbane Bldg. Co., 1 Va. Cir. 344, 348 (Va. Cir. Ct. 1983) (holding that any doubts or inconsistencies in a form contract should be resolved against the author of the document); Huggins v. Pataki, No. 01-CV-3016, 2002 U.S. Dist. LEXIS 13664 (E.D.N.Y. July 11, 2002) (finding that a bank’s processing fee is covered by ordinary contract principles, and an account holder can invalidate it by arguing it was a part of an unenforceable contract of adhesion).
In Bramow, the court found that the contract the plaintiff signed with the homebuilder defendant was neither unconscionable nor a contract of adhesion. 67 Va. Cir. at 60. The contract contained a one-sided arbitration provision in favor of the defendant. Id. at 58. The court remarked that the plaintiffs were not arguing they were unaware of or did not understand the provision. Id. at 59. In fact, they initialed right next to it. Id. The court held that purchasing real estate was not as common as buying a cellular phone or applying for a job in which situation the applicant would have little bargaining power or choice about the terms of the deal. Id. at 60.
In contrast, in Philyaw, the court found that the plaintiffs had signed a contract of adhesion when they bought a used car. 54 Va. Cir. at 364. The contract was on a preprinted form document with the defendant’s logo at the top, and the court found that even if the plaintiffs had understood the ramifications of what they signed, the circumstances were such that they could not bargain for better terms. Id.
The subject matter of this vignette is more like the situation in Philyaw than Bramow. Here, the judgment debtor most likely signed a prepared form contract with the bank, which had a long list of term and fees in small print, and even if an account holder had read all of the terms, he could not have bargained against them. As in Philyaw, a debtor has no opportunity to bargain for better terms regarding his bank account.
The judgment debtor could also attack the amount of the bank’s garnishment fee as being unconscionable because no sensible person would agree to the imposition of a $100 administrative charge in relation to an invalid garnishment attempt. Cf. Huggins, 2002 U.S. Dist. LEXIS 13664 (holding the judgment debtor was no coerced into agreeing to the bank’s $3.83 garnishment fee). But see Baxter Healthcare Corp. v. Universal Med. Labs, Inc., 760 So.2d 1126 (Fla. Dist. Ct. App. 2000) (stating banks and account holders are free to contract as they wish and upholding the bank’s $65 garnishment fee). The extraction of a $100 garnishment fee when a debtor’s account funds are exempt is intrinsically unfair. In fact, the Virginia code limits an employer’s garnishment processing fee to $10. Va. Code Ann. § 8.01-512.2. A bank should be held to a similar standard.
In sum, the judgment debtor can make three contractual arguments in attempting to invalidate any garnishment fee imposed upon his bank account containing exempt funds. First, it must be determined whether an agreement or assent existed between the debtor and the bank with regard to the fee in the first place. Second, if such an agreement exists, the judgment debtor could argue it is an invalid contract of adhesion. Third, the debtor can argue the amount of the garnishment fee is unconscionable.
The Supremacy Clause of the Constitution allows laws passed by Congress to pre-empt state law. U.S. Const. Art. XI, cl. 2; Saturn Distribution Corp. v. Williams, 905 F.2d 719, 722 (4th Cir. 1990) (quoting La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 368 (1986)). Usually, in a garnishment case, the Supremacy Clause is implicated when a state law allows for the taking of federally exempted funds, such as social security benefits. See, e.g., Bennett v. Arkansas, 485 U.S. 395 (1988) (holding that an Arkansas statute allowing attachment of a prisoner’s social security funds for the purpose of maintaining the prison system violated the Supremacy Clause); Harris v. Bailey, 574 F. Supp. 966 (W.D. Va. 1983) (finding Virginia’s post-judgment garnishment provisions to be a an obstacle to the objectives of 42 U.S.C. § 407(a)). However, for purposes of this vignette, there are no Virginia state law provisions that specifically allow banks to deduct garnishment fees from a debtor’s bank account. As stated earlier, the banks often assess the fee pursuant to a contractual agreement with the debtor.
The Supremacy Clause could be implicated here by the fact that any contract between the bank and debtor is governed by state common law principles.
The Supremacy Clause could be implicated here by the fact that any contract between the bank and debtor is governed by state common law principles. Thus, the court must ask whether the contractual right a bank asserts under state law conflicts with the express terms of the federal law. Holland v. Holland, 53 Va. Cir. 512, 516 (Va. Cir. Ct. 1999); see United States v. Bollin, 264 F.3d 391, 423 (4th Cir. 2001); Harris, 574 F. Supp. 966 (W.D. Va. 1983). In doing this, the court must examine whether the object of the federal program has been sufficiently injured. Rose v. Rose, 481 U.S. 619, 625 (1987); Holland, 53 Va. Cir. at 516.
42 U.S.C. § 407(a) exempts social security payments from “execution, levy, attachment, garnishment, or other legal process.” A garnishment processing fee could constitute “other legal process” depending on its definition. The Supreme Court has held that
other legal process should be understood to be a process much like the processes of execution, levy, attachment, and garnishment, and at a minimum, would seem to require utilization of some judicial or quasi-judicial mechanism, though not necessarily an elaborate one, by which control over property passes from one person to another in order to discharge or secure discharge of an allegedly existing or anticipated liability.
Wash. Dep’t of Soc. & Health Servs. v. Guardianship Estate of Keffeler, 537 U.S. 371, 385 (2003) (internal quotations omitted).
In Keffeler, the Court upheld a Washington state regulation that allowed its Department of Social and Health Services to use social security funds to pay for foster care. Id. at 377-78. The Department would make itself payee on behalf of a child under its care who was entitled to the payments. Id. at 378. The court found that even though the Department was using a legal process to become the payee of the funds, it was not engaged in creditor-type acts constituting other legal process. Id. at 382.
In contrast, in Marengo v. First Mass. Bank, 152 F. Supp. 2d 92 (D. Mass. 2001), the district court read “other legal process” to include both judicial and extra-judicial self-help remedies including setoffs. The plaintiffs had defaulted on an unsecured line of credit with the bank, and the bank withdrew money from their account containing only social security benefits to offset the debt. The court held the bank’s practice violated 42 U.S.C. § 407(a) since the plaintiffs had not signed an authorization for the setoff and were at the bank’s mercy to the extent it could withdraw funds from their account without notice. Id. at 95.
Here, the bank’s practice of assessing and withdrawing a garnishment fee when the debtor’s account contains exempt funds is like the practice of the bank in Marengo. The contractual agreement between the bank and the debtor is the judicial or quasi-judicial mechanism through which control over the debtor’s property passes. See Sterlingunston, L.P. v. Splash, Inc., 41 Va. Cir. 478, 479-80 (Va. Cir. Ct. 1997) (holding that deposits to a checking account were clearly the property of the judgment debtor who opened the account). The bank is also engaged in creditor-type acts when it withdraws funds. See In re Meyer, 211 B.R. 203, 209 (Bankr. E.D. Va. 1997) (“[T]he relation between a general depositor and the bank in which his deposit is made is simply that of debtor and creditor.” (quoting Bernardini v. Cent. Nat’l Bank of Richmond, 290 S.E.2d 863, 864 (Va. 1982)).
Thus, a judgment debtor could argue that the bank’s imposition of a garnishment fee on an account containing exempt social security funds violates the Supremacy Clause. A contractual term providing for the fee constitutes “other legal process” under 42 U.S.C. § 407(a) and interferes with the judgment debtor’s ability to pay for his basic necessities, the objective of exempting the funds.
Once a court declares a debtor’s funds exempt, the judgment debtor could try to claim that his procedural due process rights were violated because he received inadequate notice of the garnishment proceeding and was denied a prompt opportunity for a hearing. See generally, Mathews v. Eldridge, 424 U.S. 319 (1976). Consequently, the debtor could request the judgment creditor reimburse him not only for the exempt funds garnished from his account but also for any fees incurred from the garnishee bank.
In Harris v. Bailey, the district court for the Western District of Virginia found the plaintiff had been denied due process when her bank account containing exempt social security funds was garnished because:
- the judgment debtor was not given prompt notice of the action after the garnishee was served;
- when she received notice, the form did not discuss the federal exemptions; and
- she was not provided with a hearing to challenge the garnishment within a reasonable period of time.
574 F. Supp. 966, 970-71.
With respect to the district court’s findings, the Fourth Circuit later clarified that due process required the debtor be made aware in general that exemptions existed and a prompt procedure to challenge the garnishment be provided. Reigh, 784 F.2d at 1196-97. It did not address the issue of serving the debtor after the garnishee.
As a result, the Virginia statutory provisions now state that the summons and notice and claim for exemption form must be served promptly on the judgment debtor after service on the garnishee. Va. Code Ann. § 8.01-511 (emphasis added). The notice must contain certain language including a list of exemptions and a statement that the judgment debtor has a right to a hearing within seven business days from the date he files a claim for exemption with the court. § 8.01-512.4.
Although the Fourth Circuit has frowned upon a judge defining the word “prompt” with an actual number, Reigh, 784 F.2d at 1197-98, the Harris district court found that six days in between the service of the garnishee and judgment debtor was not adequate notice to the judgment debtor of the proceedings, 574 F. Supp. at 967, 969. It found that in order to meet the notice requirements of due process, notice must be provided simultaneously with or within a reasonable time after the garnishment occurs. Id. at 970. The Fourth Circuit did not refute this in Reigh.
Thus, the judgment debtor can make two arguments. First, because the code does not define promptly, he can bring a due process claim that he was not notified of the garnishment within a sufficient amount of time after the garnishee was served. Second, the judgment debtor can attempt to attack the language of the garnishment summons and notice of exemptions and claim for exemption form under § 8.01-512.4. Does it include all of the information § 8.01-512.4 requires? Did it state that a judgment debtor had a right to a hearing within seven business days of the filing date? Does it list the code’s exemptions?
Finally, before a garnishment action ever takes place, the judgment debtor may want to look for a bank that does not charge a garnishment processing fee. However, when this is not possible, the debtor could prevent garnishment of exempt funds by giving the bank notice of the exempt status of the money in his accounts.
The garnishment summons informs the garnishee that its responsibility is to withhold from the judgment debtor any sums of money to which the debtor may be entitled. It then states that sums of money that consist solely of certain kinds of funds like “Social Security, SSI, Veterans’, Black Lung, and Railroad Retirement benefits” are exempt and not to be withheld. Neither the form nor the Virginia code state whether the garnishee bank has a threshold duty to first inquire as to whether a debtor’s bank account contains exempt funds before freezing.
The Virginia Supreme Court in Bernardini v. Cent. Nat’l Bank of Richmond held that when a depositor puts funds in his bank account for a specific purpose of which the bank has been notified, those funds are protected from creditors. 290 S.E.2d at 864 (citing First Nat’l Bank v. Commercial Bank, 75 S.E. 775, 777 (Va. 1934)). The court stated that “[b]y depositing the funds in a special account with proper notice to the
[b]y depositing the funds in a special account with proper notice to the bank, and keeping these moneys separate from other nonexempt funds, a debtor can protect himself from creditors and still avail himself of the conveniences of modern banking.
bank, and keeping these moneys separate from other nonexempt funds, a debtor can protect himself from creditors and still avail himself of the conveniences of modern banking.” Id. at 865. In that case, the bank took funds from the plaintiffs’ joint checking account to offset a defaulted loan, but the reasoning of the case could be extended to a garnishment action where the depositor previously informed the bank that only exempt funds like social security payments are deposited into his account.
See Legal Services of Northern Virginia's Model Letter below for a Specially Designated Bank Account .
(name of bank)
(address of bank)
(type and number of bank account)
I am writing to advise you that the above bank account is exempt from garnishment because the only source of money in the account has been and will continue to be exempt income. The only deposits are automatic electronic deposits of:
My Social Security income. It remains exempt from garnishment even after I deposit it in the above checking account.
My Veterans Administration income. It remains exempt from garnishment even after I deposit it in the above checking account.
Other income. [describe]
I request that you reject any effort by a creditor to garnish those funds; and, that you take no action to freeze the account or charge the account with a garnishment fee.
(print name) (signature)
(phone number) (address)
A summons in garnishment may constitute a warning to the garnishee not to pay money to a judgment debtor upon personal penalty if he does, In re Lamm, 47 B.R. 364, 368 (Bankr. E.D. Va. 1984); however, if the garnishee is on notice and was earlier given proof that the account contains only exempt funds, it need not fear liability from the judgment creditor. In fact, it may become liable to the judgment debtor. See In re Adomah, 340 B.R. 453 (Bankr. S.D.N.Y. 2006) (holding the garnishee responsible for the judgment debtor’s costs and attorney’s fees when it did not unfreeze her account after the debtor presented it with a Notice of Automatic stay and demanded instead notification from the creditor).
Regardless of the above, if the fee is charged and the debtor’s bank account is garnished, the judgment debtor could request reimbursement of the fee and funds from the judgment creditor after the court declares the funds exempt. In Finberg v. Sullivan, the Third Circuit noted that the district court awarded the judgment debtor the $23.50 fee the bank charged for its services as garnishee on an account containing exempt funds, which the judgment creditor did not challenge. 634 F.2d at 53 n.3.
In closing, there is one final case directly on point that could be looked to for persuasive authority in this matter. In Resource Servs., LLC v. Gregory, 806 N.Y.S.2d 407 (N.Y. Civ. Ct. 2005), the defendant and her estranged husband defaulted on a loan with the plaintiff. Id. at 408. The defendant’s sole source of income was her social security disability payments. Id. In New York, as under Virginia law, a creditor is permitted to serve notice on a bank to freeze a debtor’s account. However, the judge remarked that when such funds are exempt, freezing the account accomplishes no useful purpose and only harms a vulnerable individual who depends upon regular access to her exempt Social Security funds. Id. at 410. Additionally, the court observed that the bank’s legal processing fee compounded the problem since paying a $20 to $125 bank fee could mean the difference between fulfilling a critical prescription or paying the rent on time. Id.
To mitigate the harm, the judge granted the defendant’s request to require the plaintiff to include the following language in its restraining notice:
"SPECIAL INSTRUCTIONS: When Social Security Disability [SSD] and/or Supplemental Security Income [SSI] is the sole basis for the property in your possession or custody, this Notice shall not be effective. If that condition applies, please check the box and complete the applicable statement at the bottom of this page, and return this Notice to [the plaintiff or the plaintiff's attorney at the address indicated].
YOUR REPLY TO THE SPECIAL INSTRUCTIONS (CHECK THE BOX IF APPLICABLE):
The sole basis for the property in our possession is Social Security Disability [SSD] and/or Supplemental Security Income [SSI]. Therefore, we have not restrained the property pursuant to your instructions.
(Signed): _____ Date: _____
"Compliance Officer or Designee."
Id. at 413. The language must appear in bold and in at least 12 point font. Id.
Such relief could be argued for in a Virginia court as well. A debtor could request that similar language be included in the garnishment summons and exemption notice. Since the bank would already be on notice that the account contained only exempt funds, it could fill out the form. If the creditor believed the funds were not exempt, it would have the burden of proving the exemptions improper under a preponderance of the evidence standard. See In re Hanes, 162 B.R. 733, 736 (Bankr. E.D. Va. 1994).
A judgment debtor can make several types of arguments when a bank has assessed a garnishment fee from his bank account even though the account contains only exempt funds. First, he can make several contract claims, arguing an agreement between the bank and himself never existed in the first place, and that if an agreement did exist, it was invalid as a contract of adhesion or that the amount of the fee is unconscionable. Next, he can attempt a Supremacy Clause argument that the signed fee agreement, although protected by state common law contract principles, conflicts with federal law, 42 U.S.C. § 407(a). The debtor can also attack the fee through a due process argument and request reimbursement of the fee by the judgment creditor if he was not given prompt notice of the garnishment proceedings. Finally, before proceedings are ever instituted, he can notify the bank of the exempt status of the funds in his account so that the bank understands it need not freeze the account.
This vignette was researched and written by Jaclyn Brickman, Esquire, EOIR, U.S. Department of Justice, Falls Church, VA 22041. Ms. Brickman is a Virginia attorney. She may be contacted at firstname.lastname@example.org. May 14, 2007.