Posts tagged ‘Plaintiffs’

Court Clarifies Proper Application of New York’s Levy and Restraint Law

In 2008, New York cast the Exempt Income Protection Act (EIPA). The Act establishes thresholds below which restraining notices and levies on bank and credit union accounts are not effective. The exemption increases when accounts contain “reasonably identifiable federally exempt funds.” Although I’ve not done an official calculation, I would bet you that our compliance team has received questions about levy and restraints at double the rate of any other compliance area over the last ten years. The good news is that plaintiffs’ lawyers have also taken interest in this statute, but their efforts have so far resulted in interpretations that are largely helpful to banks and credit unions that have to comply with this vaguely worded statute.

Which brings us to the highlight of today’s blog. Yesterday, US District Court for the Southern District of New York (referred to by normal people as Manhattan) put an end to litigation which has stretched on for almost a decade, in which consumers have unsuccessfully attempted to bring a class action lawsuit against Citibank for allegedly violating the EIPA. Here are some of the key takeaways that make the case, CELINDA ACEVADO & JACQUELINE LOPEZ, individually & on behalf of all others similarly situated, Plaintiffs, v. CITIBANK, N.A., Defendant., No. 10 CIV. 8030 (PGG), 2019 WL 1437575, at *10 (S.D.N.Y. Mar. 31, 2019) worth filing.

First, New York’s Court of Appeals ruled as part of the litigation that judgment debtors do not have a private right of action for money damages and injunctive relief against financial institutions that violate the EIPA. Why is this important? Because as more and more credit unions are finding out, there is no shortage of attorneys looking to sue credit unions for violating consumer protection laws. By limiting the damages they can seek for violations of the EIPA, the courts are kicking away much of the incentive potential plaintiffs had for examining your restraint and levy practices.

Does this mean you can’t be sued for violating the EIPA? No. You could still find yourself facing claims that you restrained or levied more funds than you should have. But the primary remedy for these alleged violations is for the account holder to obtain a release of the money unlawfully being restrained. As reinforced by yesterday’s decision, in the event that the unlawfully restrained money has already been transferred to a third-party, the account holder’s only remedy is to get the money back from the party to whom it was transferred and not to sue the credit union or bank.

Since the legislation took effect, there had always been an open question as to how a member’s funds are calculated for purposes of determining whether a member’s funds exceed the exemption threshold. For instance, let’s say a member has five different accounts at your credit union, each with $1,000 in it. If you get a notice to restrain the member’s funds, do you aggregate all these accounts, putting the member over the exemption threshold? Or do you examine the amount in each account as if no other accounts existed? The only case that squarely examined this issue was a 2017 case from New York’s 2nd Department called Jackson v. Bank of America, 349 A.D. 3d 815 2017 in which the court held that each account should be treated as if no other accounts exist. In yesterday’s ruling, the court noted that this is the only case in New York to directly address this issue and as such should be treated as controlling law.

I know you compliance people have very strong opinions, but remember if there is a conflict between your opinion as to how a statute should be interpreted and to how a court has actually interpreted it, ignoring the court’s ruling is never a good strategy.

Is Flood Insurance A Top Priority for Congress?

As I was watching news coverage of the awful flooding taking place in the Midwest, I went back and looked up this recent report from the Government Accountability Office. According to the GAO, fixing the nations flood insurance program remains a high-risk area that Congress needs to act on quickly. Even before the most recent flooding, the GAO expressed concern that the program is falling deeper into debt and that Congress has not taken adequate steps to address obvious flaws in the program. Sooner or later, maybe Congress will get the message.

April 2, 2019 at 9:14 am 1 comment

Are You Responsible When Your Member Dupes A Third-Party?

Let’s say you open up a business account for a new member. The account is used to hold funds invested in the account holder’s business. You start seeing some suspicious activity such as frequent transferring of funds to other accounts, but you don’t believe it rises to the level of filing a SAR. Eventually, the business goes under because your account holder was running a Ponzi scheme. The irate investors end up suing the credit union for its mismanagement of the account. Do they have a case?

This is the basic factual framework of a case recently decided by a Federal court in New York called HONGYING ZHAO, et al., Plaintiffs, v. JPMORGAN CHASE & CO. & JPMORGAN CHASE BANK, N.A., Defendants. The bank was holding funds for investors who thought they were putting money into an enterprise which involved owning and renting co-working stations across the United States. The irate investors basically argued that the bank knew or should have known that illegal activity was taking place and that by failing to act, it was aiding in the criminal deception. Interesting argument, but the court rejected it. It explained that “neither the Plaintiffs nor the Court have been able to locate a case which even suggests that New York law imposes upon banks a duty to protect non-customers from a fraud involving depository accounts.” see also Renner v. Chase Manhattan Bank, No. 98 Civ. 926 (CSH), 1999 WL 47239, at *14 (S.D.N.Y. Feb. 3, 1999).

Now just to be clear, this doesn’t mean the bank acted properly in discharging its Bank Secrecy Act obligations. Nevertheless, it’s important for credit unions to understand that simply because they are holding someone’s money, they do not automatically become a fiduciary of that account.

NCUA Clarifies Lending Maturity Limits

If that warm glass of milk isn’t doing the trick then I would suggest reading NCUA’s newest regulation reorganizing credit union lending rules to make them easier to find and understand. Don’t get me wrong, these are very practical and important provisions, they are just not that exciting to read. For my purposes, the clarification that I find most interesting is one that states when a loan qualifies as a “new loan under GAAP, the maturity limit is calculated from the new date of origination.”

Another issue deals with one of my pet peeves. Currently commercial loans to one borrower are limited to 15% of a federally insured credit union’s net worth. A waiver of this cap is available for loan participations but not for commercial loans. Instead, a credit union seeking to exceed the 15% commercial loan limit may be granted a waiver of up to 25% of the credit union’s net worth, provided that the additional 10% is collateralized with “readily marketable collateral.” (See 12 CFR 723.2). This is a standard appropriate for banks, not credit unions. There are some credit unions with a proven track record of making commercial loans in excess of the 15% cap which now find themselves unable to because of the stringent “readily marketable collateral requirement.” These credit unions should be given more flexibility and guidance from NCUA. I’m glad I got that off my chest. Enjoy your Monday.


March 18, 2019 at 8:11 am Leave a comment

Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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