Can You Sue the Bank For Attaching Your Benefits Account?

[David A. Szwak]

In Huggins v. Pataki, 2002 WL 1732804 (E.D.N.Y.2002), Judge Gleeson of this court considered and rejected a virtually identical "technology" argument. In Huggins, the plaintiff, a disabled man who received electronically deposited Social Security Disability (SSD) payments, brought a Section 1983 action against HSBC bank, alleging that the bank's compliance with New York's garnishment statute when it should have known that the electronically deposited funds were exempt violated plaintiff's due process rights. Huggins, like the plaintiffs in this case, argued that his case was distinguishable from McCahey because the "funds were transferred electronically to the bank in a form that clearly identified them as social security payments ... [and therefore] the burden is now more properly on the bank receiving the funds to make a determination whether the funds are exempt or not." Id. at 3. The district court determined that:
*13 Although Huggins raises valid concerns about the advisability of New York's current garnishment process, the mere fact that banks are now better able to determine that payments are exempt does not sufficiently distinguish McCahey. Huggins suggests that since McCahey employed the balancing test established by Matthews v. Eldridge ... I should re-balance the competing interests in light of technological change ... I disagree. McCahey is binding authority, and I am obliged to apply that authority. Perhaps arguments directed to the state legislature will produce a change in law. If Huggins chooses to appeal this decision to the Second Circuit, it may be inclined to reconsider its previous decision. But I conclude that I am bound to follow it.
Id. at *4. With all due respect, I disagree with the determination in Huggins, and find that McCahey does not mandate dismissal of plaintiffs' due process claim.
"Due process, unlike some legal rules, is not a technical conception with a fixed content unrelated to time, place and circumstances." Connecticut v. Doehr, 501 U.S. 1, 10, 111 S.Ct. 2105, 115 L.Ed.2d 1 (1991) (finding that a state statute authorizing prejudgment attachment of real estate without notice or hearing violates due process) (citing Matthews v. Eldridge, 424 U.S. at 334). It is "flexible and calls for such procedural protections as the particular situation demands." Memphis Light, Gas and Water Division v. Craft, 436 U.S. 1, 15 n. 15, 98 S.Ct. 1554, 56 L.Ed.2d 30 (1978). Moreover, "a procedural rule that may satisfy due process for attachments in general ... does not necessarily satisfy due process in every case." Sniadach v. Family Finance Corp., 395 U.S. 337, 340, 89 S.Ct. 1820, 23 L.Ed.2d 349 (1969) (finding state's prejudgment wage garnishment procedure to violate due process).
In this case, plaintiffs have alleged facts that the McCahey court did not consider and which, if proved, necessitate a re-examination of the second and third prongs of the Matthews test. The second prong of Matthews requires a court to assess "the risk of erroneous deprivation ... and the probable value, if any, of additional or substitute procedural safeguards." Matthews, 424 U.S. at 334-35. Plaintiffs contend that technological changes have both increased the risk of erroneous deprivation and increased the probable value of additional procedural safeguards. In McCahey, the Second Circuit determined that the additional procedural protections sought by the plaintiff were not "required by due process because their cost [was] outweighed by any benefit they might produce." McCahey, 774 F.2d at 550. Here, plaintiffs allege that the additional procedural protection sought--i.e. that a garnishee bank determine whether a debtor's account contains only electronically deposited exempt money prior to restraining it--would impose only a "negligible" cost in relation to the benefit it would produce, because "each electronic Social Security payment sent to a bank has the word 'SOC SEC'... imbedded in its electronic message," making it easy to identify. (Second Amended Compl. ¶ 38). Although the bank defendants argue that plaintiffs have misrepresented the costs of such additional protection, on a motion to dismiss, the Court must take the facts alleged in the complaint as true, and draw all reasonable inferences in favor of the plaintiff. See Robinson, 269 F.3d at 140.
*14 Moreover, plaintiffs contend that these technological changes together with certain policy changes by the Social Security Administration have increased the risk of erroneous deprivation beyond that of a typical debtor envisioned by the McCahey court. Plaintiffs allege that "since 1998, the Social Security Administration has required Social Security recipients to receive payments electronically." (Second Amended Compl. ¶ 22). In order to receive paper checks by mail Social Security recipients must "opt out of electronic payment." Id. (citing 31 C.F.R. pt.208. 63 Fed.Reg. 186). The plaintiff in McCahey received paper checks, and consequently, if her account was restrained, she could at least be assured of receiving subsequent payments directly. Here, because plaintiffs must opt out of electronic payment in order to receive paper checks, they face an increased risk that subsequent exempt payments will be deposited into a frozen account, or as was the case with Plaintiff Mayers, returned by the bank to the SSA. (Second Amended Compl. ¶¶ 58, 114). Plaintiffs also allege that changes in technology which enable creditors to serve restraining notices electronically on banks, see N.Y. CPLR 5222(g), have also increased the risk of erroneous deprivation by making it easier for creditors to repeatedly restrain a debtor's exempt account. [FN10]


FN10. It should be noted, however, that § 5222(c) states that "leave of the court is required to serve more than one restraining notice upon the same person with respect to the same judgment or order." NYCPLR § 5222(c).


Moreover, plaintiffs contend that the facts alleged here, which were not before the McCahey court, implicate the third prong of the Matthews test--i.e. the "Government's interest." In McCahey, the Second Circuit described the government's interest in: (1) "providing inexpensive and rapid methods of collecting judgements ...;" (2) "the efficient use of judicial resources, so they are not wasted in proceedings of little value ....;" and (3) "seeing that laws exempting property from seizure are not evaded." McCahey, 774 F.2d at 549. Under the current statutory scheme, debtors whose accounts contain only electronically deposited exempt funds must initiate proceedings in state court in order to have restraints lifted. Accepting as true the facts alleged in the complaint, the additional procedural protections sought by plaintiffs would, at little cost, reduce the erroneous restraint of exempt accounts. This, in turn, would reduce the number of costly proceedings initiated in state court and promote a more efficient use of judicial resources.
I find that plaintiffs have alleged facts sufficient to give rise to the inference that Section 5222, as applied to accounts containing only electronically deposited exempt funds, fails to "strike a fair balance between the competing interests" and thus, does not "meet[ ] due process standards." McCahey, 774 F.2d at 549-550. At this stage in the proceedings, it cannot be said that plaintiffs can prove no set of facts which would entitle them to relief. Accordingly, defendants' motions to dismiss plaintiffs' due process claims pursuant to Rule 12(b)(6) are denied. Because "the New York State Constitution's guarantee of ... due process is virtually coextensive with those of the U.S. Constitution," Coakley v. Jaffe, 49 F.Supp.2d 615, 628 (S.D.N.Y.1999), plaintiffs' claims under the due process clause of Article 1, § 6 of the New York State Constitution also withstand the defendants' motions to dismiss under Rule 12(b)(6).

Mayers v. New York Community Bancorp, Inc.
Not Reported in F.Supp.2d, 2005 WL 2105810
E.D.N.Y.,2005.
Aug 31, 2005