Zero Balance Accounts and Garnishments
by Sam Ott, BOL Guru
If a financial institution receives a garnishment, its procedures most likely call for a quick check of its customer base to determine if the entity whose funds are being sought is a customer. If a match is not found, the garnishment answer is prepared indicating "no account found" and returned to the proper Court or party. If a match is made, the customer is notified and the answer is prepared indicating that funds may or may not be available depending on the garnishment laws in the state where the institution is located.
The process seems simple enough, providing that the proper procedures are in place and are followed by the employee who is responsible for such matters.
If an active account in which the garnished entity has an ownership interest is found to have a positive balance, state law may direct the financial institution to either hold the funds subject to receiving a court order or transmit the funds to the appropriate party along with its answer.
In the event the account has a negative balance, that information would be included in the answer and no funds would be held or transmitted. But what about an account with a zero balance? What difference does it make? There would still be no funds available to satisfy the garnishment because there are no funds in the account. Right?
Under a recent decision by the Eighth Circuit Court of Appeals, if a line of credit is associated with the account and it may be accessed by check, the proceeds of the line of credit may be subject to the garnishment!
In the case of Southwestern Glass Company, Inc. v. The Bank of Arkansas, N. A., the Eighth Circuit U. S. Court of Appeals held that funds flowing through a zero balance account from a line of credit were subject to garnishment, and the bank was ordered to pay $583,628.52 plus interest.
What happened? The bank received a writ of garnishment in the amount of $517,000. It searched its records and timely filed a garnishment answer reporting the existence of a checking account containing $5,000 and a second account with a zero balance. The account with the zero balance had been established in conjunction with the granting of a one million dollar line of credit to the customer of the bank whose funds were the subject of the garnishment. The customer could access the line of credit by writing a check on the account. When a check was presented for payment, the bank would honor the check if sufficient credit existed under the line. The plaintiff issued three garnishments to the bank and each time the bank's answer mentioned the account and indicated the account balance was zero at the time the garnishment was received.
After the customer filed for bankruptcy, the plaintiff (garnishment creditor) contested the bank's answers in state court. The bank removed the case to U.S. District Court, which then transferred the matter to the bankruptcy court.
The bankruptcy court held that the proceeds from the line of credit flowed through the zero balance account to pay checks and therefore the proceeds were subject to garnishment. The bank was held liable for the full amount of the defendant's judgment plus ten percent interest and attorney fees. The bank appealed.
The bank argued that the funds disbursed from the line of credit were not subject to garnishment and the zero balance account was a special deposit account immune from garnishment. In addition, the bank argued that funds used to honor checks drawn on the account could not be subject to the garnishment because garnishment or attachment can not be made against a line of credit.
The Court held that the account was not a special account immune from garnishment. The garnishment was against the proceeds of the line of credit available to be transferred to the zero balance account and not the line of credit itself. Since the proceeds that were transferred into the account became the credits or funds belonging to the customer for a brief period of time, the garnishment captured the proceeds. The judgment was affirmed.
Lesson to Be Learned.
Institutions located in or otherwise subject to garnishments arising from states in the Eighth Circuit should ask their attorneys to review the applicable state statutes to determine if they contain language similar to the Arkansas garnishment statutes.
In addition, ask for an opinion as to how to respond to a garnishment if a zero balance account is maintained for the benefit of a customer whose funds are subject to a garnishment.
For those not located in the Eighth Circuit, be aware that even though this opinion may not be the law in your Circuit, other courts may find the reasoning persuasive if faced with a similar issue. Contact your attorney immediately if you identify an account subject to garnishment that is tied to a line of credit designed to be drawn upon by writing checks.
BankersOnline is a free service made possible by the generous support of our advertisers and sponsors. Advertisers and sponsors are not responsible for site content. Please help us keep BankersOnline FREE to all banking professionals. Support our advertisers and sponsors by clicking through to learn more about their products and services.
Print Friendly!
Email This Article!
Discuss NOW!
