Updated: New York’s Levy And Restraint Laws: The Gift That Keeps On Giving

April 12, 2013 at 11:57 am 1 comment

I’m updating this morning’s blog to clarify that the inflation adjusted amount of funds that the state now changes every three years only applies to exempt funds  that have been deposited electronically or by direct deposit within the last 45 days.  The threshold for this exemption was originally set at $2,500.  I don’t want to make a confusing statute even worse.

 New York’s levy and restraint laws involve, in the words of Nassau County District Court Judge Fred J. Hirsh, “complex and convoluted practices and procedures to determine if funds on deposit in a judgment debtors bank account are exempt from execution pursuant to CPLR 5222-a.”  Because of pending changes to New York’s minimum wage law and a case to be decided by New York’s Court of Appeals, this statutory framework, which judging by the number of calls to the Association’s compliance hotline is among the most vexing state-level requirements, is about to get another turn in the spotlight.

Although I suspect that most of the New York readers of this blog already know this, remember that under New York law a statutorily prescribed minimum amount of funds is automatically exempt from levy and restraint.  This amount is adjusted for inflation every three years and now stands at a hefty $2,625 for statutorily exempt payments that were deposited electronically or by direct deposit within the last forty-five days, 
In addition, when a judgment creditor seeks to restrain or levy an account it must give the credit union exemption claim forms that are passed on to the member.  The failure to provide such forms makes the levy or restraint void, meaning it is not to be honored.

What happens when a financial institution mistakenly honors a restraining notice that should actually have been ignored because the member did not have money in the account above the statutory threshold or didn’t receive the exemption claim form?  Can the bank or credit union be sued?  If so, can the suit be part of a class action lawsuit seeking damages for the illegal practices or is the member constrained by a special proceeding?  Recently, the Court of Appeals for the Second Circuit certified these questions to New York’s highest court, its Court of Appeals.

You see, federal courts are only supposed to interpret and impose well settled state law.  In Cruz v. TD Bank, NA, account holders are trying to start class action lawsuits alleging that banks can be sued when they wrongly impose restraints on accounts that don’t contain money in excess of the statutory threshold.  Another case involving Capital One alleges that the bank restrained funds on an account below the statutory threshold.

I know credit unions continue to make a good faith effort to comply with the statute, but in my ever so humble opinion, the statute clearly protects financial institutions that make honest mistakes in implementing this Rube Goldberg contraption intended to protect debtors who have legally binding judgments against them.  Let’s hope the Court of Appeals doesn’t expand the potential scope of liability in an area of the law that already imposes too much cost on credit unions on a daily basis.

New York’s new state budget will also have an impact on levy and restraints.  The Legislature and the Governor agreed to raise the state’s minimum wage from $7.25 to $9 an hour over the next three years, beginning with an increase to $8 by the end of 2013.  The minimum amount of money exempted from levy and restraint is equal to the higher of 240 times the federal or state minimum wage “in effect at the time the earnings are payable.”  This means that not only will the exemption be going up, but because it will be going up in stages, whoever handles your levy and restraints is going to have to be cognizant of when the wage increases kick in.  Hopefully this is something that New York’s Department of Financial Services will provide notice of on its website.

Entry filed under: Compliance, Legal Watch, New York State, Regulatory.

New York’s Levy And Restraint Laws: The Gift That Keeps On Giving What Happened To The American Dream?

1 Comment Add your own

  • 1. wwf  |  May 11, 2013 at 6:43 pm

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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