A recent Kentucky Court of Appeals decision in Deal v. First and Farmers National Bank, Inc., 2017 WL 1193175 (Ky. App. 2017), details how banks must handle garnishment orders when there are conflicting federal and state laws.
Cindy Deal (“Ms. Deal”) obtained a money judgment for $64,000.00 against her ex-husband, James Deal (“Mr. Deal”). As part of her collection efforts, Ms. Deal’s attorney took a post-judgment deposition of Mr. Deal, who testified that he maintained a deposit account at First and Farmers National Bank (the “Bank”).
As a result of Mr. Deal’s testimony, Ms. Deal’s attorney sent a garnishment order, along with an AOC-150.1 form, to the Bank. The Bank responded that it did not have any of Mr. Deal’s money or property.
Puzzled by the inconsistencies between Mr. Deal’s testimony and the Bank’s response, Ms. Deal’s attorney personally pushed for answers from senior management at the Bank. The Bank’s Vice President emailed Ms. Deal’s attorney that the Bank had no “garnishable funds”.
The seeming lack of funds prompted Ms. Deal to file a contempt motion against Mr. Deal in circuit court. Mr. Deal testified he had an account with the Bank but there was nothing there. The contempt hearing resulted in Mr. Deal’s attorney providing statements proving Mr. Deal maintained an account with a positive balance at the Bank, but that the money in the account was federally protected from garnishment because it was from either veteran’s or social security benefits.
Ms. Deal then filed a separate action against the Bank for returning a garnishment order with false and misleading statements. This lawsuit was based on Kentucky’s garnishment statutes. The Bank responded by claiming the federal statutes preempted Kentucky’s laws, and that no disclosure was required.
No one disputes that Mr. Deal maintained an account at the Bank, that the funds in the account were exempt from garnishment under federal law, or that the Bank failed to disclose that Mr. Deal maintained an account at the Bank. The legal issues addressed by the Court were: (1) whether federal law preempted a state law requiring any funds to be turned over to the proper authority, and (2) whether the Bank was required to identify that Mr. Deal maintained an account.
The first issue results from conflicting requirements between state and federal laws. Kentucky’s garnishment statutes require banks to identify any money belonging to the judgment debtor and turn it over to the clerk of the court, the sheriff, or the attorney for the judgment creditor. That money must be held for at least 15 days to allow the judgment debtor time to object to the release of the funds. If the judgment debtor objects, the court determines whether the objection is valid.
Federal law, on the other hand, prohibits financial institutions from releasing federally protected funds. This puts the onus on the financial institution to determine whether there are garnishable funds in an account.
The Deal decision makes clear that the federal law expressly preempts Kentucky’s statutes when handling accounts with federally protected funds. The Court held that financial institutions must decide whether the funds in an account are garnishable, and “that the Bank’s review is
to be performed without judicial oversight.” Perhaps more importantly, the Court stated, “the Bank’s review is deemed to be conclusive.” In this instance, the Bank properly concluded the funds were protected from garnishment and correctly refused to release them to the proper authorities.
The second issue, whether the Bank had to disclose that Mr. Deal maintained an account, did not raise a direct conflict between the state and federal statutes. Kentucky law requires financial institutions to identify whether they are in possession or control of property belonging to the judgment debtor. See KRS 425.511. Federal law does not require that financial institutions notify the judgment creditor of the presence of money or an account, however, as the Court noted, “[n]ot requiring notice to be provided is a far different matter than prohibiting it. The federal regulations neither explicitly nor implicitly suggest that it is a violation of federal law for the financial institution to respond to a garnishment order with information as to the amount of funds it holds, even if the funds are exempt, so long as the financial institution does not impair the account holder’s access to the funds.”
Recognizing that Kentucky’s statutory requirement of disclosure does not conflict with the corresponding federal laws, the Court ruled that the Bank should have disclosed Mr. Deal’s account to the judgment creditor. The Bank argued it could not comply with the Kentucky and federal statutes because the AOC-150.1 form did not have an appropriate space for notice of disclosure only.
The Court agreed with the Bank that the AOC form was deficient, but held “the form is provided for the convenience of garnishees . . . it should go without saying that a financial institution should not use the AOC’s form if doing so would cause it to submit incorrect or incomplete information in violation of Kentucky’s garnishment statutes.” The Bank’s failure to provide correct information “created confusion and resulted in a technical violation of KRS 425.511.”
Ms. Deal, therefore, could bring a separate action against the Bank for failing to disclose Mr. Deal’s account. The final question for the Court was to determine her damages.
Ms. Deal argued the Bank was strictly liable to her for the entire amount of the judgment, plus costs and attorney fees. The Court disagreed and held “[t]he statute cannot be used to punish a garnishee for a mere technical violation that did not result in actual money or other property being wrongfully withheld from the judgment creditor.”
The main takeaways for your institution are: (1) financial institutions must unilaterally determine if funds are exempt from garnishment, and (2) financial institutions must alert judgment creditors to the presence of an account, regardless of whether the AOC provides the proper form or there are garnishable funds in the account.
Please feel free to contact one of our attorneys if you have any questions about these developments with garnishments.
by Molly E. Rose
Molly Rose’s practice focuses on bankruptcy and retail foreclosure. She understands that being a good attorney is about more than thinking of the firm’s bottom line; it’s about building trust with clients by keeping them informed and working together to determine the best legal and most financially sound course of action.