I. INTRODUCTION
The relationship between a bank and its customer is that of a debtor-creditor. A third party who obtains a judgment against a bank customer may attempt to enforce that judgment though a garnishment proceeding. As part of that proceeding, the judgment creditor may name the bank as a garnishee defendant and attempt to garnish the accounts which the bank customer has on deposit with the bank.
When a judgment creditor attempts to garnish a bank customer’s deposits, Nebraska law requires that the judgment creditor provide the bank with information regarding the amount due on the judgment, interest and costs.
Once the judgment creditor has provided the bank with the above information, the bank is required to restrict or “freeze” those accounts in which the bank’s customer has an interest. If a court determines that the frozen deposits are properly due and owing to the judgment creditor, it will issue its “Order to Deliver Nonexempt Earnings Into Court” to the bank. Upon receipt of the Order, the bank will be required to pay the amount specified by the Order directly to the Clerk of the Court rendering the Order.
II. GARNISHMENTS AND BANKS AS GARNISHEES
Garnishment is a method of attachment used by creditors to obtain satisfaction of a judgment (either obtained or to be obtained) from personal property owned by the debtor and in possession of a third party, or from an indebtedness of a third party that is due to the debtor. The following items are general observations that bankers should keep in mind when dealing with garnishments:
A. Jurisdiction of the Court
1. Nebraska district courts and county courts have countywide jurisdiction
2. Proper place to file garnishment is county where individual, corporation or partnership holding debtor’s property may be served with a summons
B. Property Subject to Garnishment – General
1. Garnishing creditor has no greater right to a fund than the debtor.
a. Right to garnish a fund dependent upon debtor’s right to receive it from garnishee.
2. Generally, property not specifically exempted by statute and in the possession of a third party is subject to garnishment.
Therefore, it is recommended that the garnishee hold all property of every description and the credits of the debtor in the bank’s possession to the extent necessary to satisfy the garnished amount and further state, with regard to the exemptions listed below if known by the bank, that the bank is without information nor authority to determine if the exemption provided by Nebraska law is applicable. Below is a list of different categories of sources of funds which may be exempt in Nebraska.
a. Neb.Rev.Stat. § 8-1,131(2)(b). Medical/Health Savings Account below $25,000;
b. Neb.Rev.Stat. § 25-1559. Pension money received by a soldier, sailor or marine disabled in the service of the United States not exceeding $2,000;
c. Neb.Rev.Stat. § 44-371. Proceeds from annuity contract, life insurance policy, accident or health insurance policy;
d. Neb.Rev.Stat. § 48-149. Proceeds or interest from payments under the Nebraska Workers’ Compensation Act;
e. Neb.Rev.Stat. § 48-647(1). Unemployment benefits, “so long as they are not mingled with other funds of the recipient,”;
f. Federal benefit payments such as social security or veterans benefits (See, materials beginning at page 86b in this section).
4. Pledged property is not subject to garnishment
a. But surplus after payment of a debt secured by a pledge is subject to garnishment;
5. Funds of an estate of decedent prior to distribution to heirs are not available to garnishing creditor of an heir.
6. Attempt by creditor who has obtained judgment against heir to proceed in garnishment against the personal representative would also appear to be ineffective.
7. Bank accounts of a judgment debtor are the proper subject of garnishment.
III. COMPLIANCE WITH GARNISHMENT PROCEDURES AND ANSWERING INTERROGATORIES
A. Procedure
1. Judgment creditor files praecipe directing that summons in garnishment be served upon the person holding property of the judgment debtor.
2. Praecipe states garnishee’s address and address where judgment debtor can be served (with notice that garnishment has been filed).
3. Attached to praecipe is affidavit (usually signed by the creditor’s attorney) showing:
a. Date judgment was entered against debtor;
b. Amount of judgment with interest and costs due;
c. Name of garnishee;
d. Representation that affiant believes and has good reason to believe that garnishee has property or funds of debtor.
4. Sheriff serves garnishment summons and interrogatories upon:
a. Garnishee personally or by leaving process with some person of suitable age and discretion residing with garnishee;
5. Garnishment directs garnishee to answer interrogatories served within ten days after the garnishment interrogatories are served.
a. Answers shall be given in writing, but need not be verified or given under oath;
b. Answers given shall be deemed to be true and subject to all penalties of perjury in the event of willful falsification.
6. Garnishee must hold all property of every description and the credits of the debtor in his possession or under his control from the time served with the order of garnishment.
B. Answering Interrogatories
1. Garnishee must act in good faith and answer fully and truthfully all proper interrogatories presented and truthfully all proper interrogatories presented or in some appropriate manner make proper disclosure of all relevant facts within garnishee’s knowledge at the time of making answers concerning the present indebtedness to the debtor or concerning money or property of the debtor then in his possession. Neb.Rev.Stat. § 25-1026 provides the garnishee with an opportunity to request the court to pay the garnishee a fee for filing answers to the interrogatories. The statute allows a fee for filing answers to interrogatories to be taxed and collected as costs. If a fee is requested by the answering garnishee, the court may enter an order allowing the fee paid as a part of the costs from the proceeds delivered to the court by the garnishee. Although the garnishee has ten days from the date of receipt to answer the garnishment interrogatories, the operative date and time as to his holding of property of the judgment debtor are the date and time when service of the interrogatories was had upon the garnishee.
2. If answers to interrogatories are accepted by judgment creditor as true, creditor obtains an order from the court directing garnishee to pay the appropriate percentage of the money into court.
a. Order signed by a judge of the court issuing garnishment;
b. Copy of order is to be mailed to garnishee.
3. Upon receiving the order, garnishee pays monies so ordered to the Clerk of the Court which issued the garnishment.
4. Garnishee who answers fully and in good faith and obeys the order of the court is fully protected, but if answers are evasive and in the interest of one or more creditors or if garnishee fails to obey the order of the court in relation to the property or money held, garnishee acts at own risk.
5. If garnishee fails to answer, garnishee is presumed to be indebted to judgment creditor for the full amount of the underlying claim
a. By defaulting, garnishee admits having property in possession which belongs to debtor in the main action;
b. Admission has same effect as a disclosure by which garnishee admits holding property belonging to the judgment debtor.
6. To hold garnishee liable upon a failure to answer, creditor has seven days to file application and serve notice upon both garnishee and debtor of intention to have judgment entered against garnishee.
a. Seven day period begins when interrogatory answers were due;
b. Notice to garnishee of hearing to determine liability given as directed by court.
7. If garnishee files answers to the interrogatories, but answers are not satisfactory to the creditor, application shall be filed within seven days of receipt of faulty answers to determine the liability of garnishee and failure to file such application within seven days releases and discharges garnishee.
8. Application may controvert answers of garnishee or allege facts showing existence of indebtedness of garnishee to debtor.
a. Creditor gives garnishee and debtor notice of time and place of trial;
b. Notice given within time and in manner as court directs;
c. If garnishee answers, the answer and application of creditor are the pleadings upon which the issues will be tried.
9. If it appears on the trial of the liability of garnishee that garnishee was either indebted to the judgment debtor or had any property or credits of debtor in possession or under control at the time of being served with the garnishment, garnishee is liable to judgment creditor for full amount or to the amount of such indebtedness or property held by garnishee.
10. In an action against garnishee by judgment creditor for unsatisfactory or incomplete answers to interrogatories, burden of proof rests upon creditor rather than upon garnishee.
11. Intervenor who claims garnished funds has burden of proving claim by a preponderance of the evidence.
IV. DESIGNATION OF CENTRAL LOCATION FOR GARNISHMENT SUMMONS SERVICE
In order to implement the provisions of LB 195 (2015), regarding the designation of a central location for the service of a garnishment summons on a financial institution in which deposits are received within this state, the Nebraska Department of Banking and Finance has adopted the form “Service of Garnishment Summons Designation Form.” The Form became available on the Department’s website www.ndbf.ne.gov on November 16, 2015.
LB 195, which amended Neb.Rev.Stat. §§ 25-1010 and 25-1056, requires a financial institution with its main chartered office in Nebraska to designate the main chartered office for the service of garnishment summons. For financial institutions with a main chartered office located in another state, the financial institution may designate any one of its offices, branches, or its agent for service of process in Nebraska for the service of garnishment summons. The Nebraska Department of Banking and Finance is required to post the list of all designated locations on its website for access by the public. Commencing November 16, 2015, any financial institution with its main chartered office located in Nebraska, whether chartered by the Nebraska Department of Banking and Finance or a federal chartering agency will have its main chartered office posted by the Nebraska Department of Banking and Finance in satisfaction of designating the statutorily required location, since no other location is an option for these institutions. As a result, use of the Department form is optional for such financial institutions.
The operative date for designation of a central location for receipt of garnishment summons is January 1, 2016; however, financial institutions chartered by an agency other than the Nebraska Department of Banking and Finance may begin submitting the designation form any time after November 16, 2015, by either email or U.S. Mail as indicated on the bottom of the form. Subsequent to January 1, 2016, any main office address change for a financial institution, whether its main chartered office is located in Nebraska or outside of the state, must be reported using the designation form. Any questions regarding the designation form or action required pursuant to this law may be submitted to Department Review Examiner Greg Freese at 402-471-2171.
V. COMMON QUESTIONS AND ANSWERS
A. Where the bank customer deposits more money into the account after the service of summons and the interrogatories, is the bank responsible for holding and reporting those additional deposits?
No. The bank is only responsible to account for those amounts held by the bank at the time of the service of summons and interrogatories. Any deposit made subsequent to the service of summons and interrogatories is not subject to the garnishment order. Neb.Rev.Stat. § 25-1056. Although the bank as garnishee has ten days to answer the garnishment interrogatories, the operative date and time for holding property of the judgment debtor are the date and time when service of the interrogatories was made upon the garnishee.
B. If the depositor has several accounts, which account is to be frozen?
Nebraska garnishment statutes apply to all property and credits of the debtor which are in the possession of the bank or under its control at the time the bank is served with the summons and interrogatories. Neb.Rev.Stat. § 25-1056.
C. If the amount of the bank account exceeds the underlying debt, does the bank have to garnish the whole account?
No. The bank is required to hold the property of every description and the credits of the defendant in its possession or under its control at the time of service of the interrogatories until further order of the court; however, if the only property in the possession or under the control of the bank are credits of the defendants and the amount of such credits are not in dispute by the bank, then the bank need only hold such credits to the extent of the judgment, interest and costs set forth in the summons. Neb.Rev.Stat. § 25-1056.
D. If a bank is required to garnish funds held under a Certificate of Deposit, must the bank apply the early withdrawal penalty?
According to the Federal Reserve Bank in Kansas City, the Board has issued an informal opinion stating that the early withdrawal penalty must be applied if the funds leave the bank. Since funds leave the bank in the case of a garnishment, the early withdrawal penalty must be applied [Source: John Rogers, Federal Reserve Bank in Kansas City, February 10, 1987].
E. Where an individual is garnished and the bank also holds an account in the name of a sole proprietorship what accounts should be garnished?
An order of garnishment attaches to property of every description and to credits of the judgment debtor in the bank’s possession or under its control. Thus, the bank should garnish all accounts owned by the garnished individual (both the individual account and the sole proprietorship account) regardless of the name on the account and regardless of whether the account is business-related. Note that both the individual account and the sole proprietorship account will carry the same taxpayer identification number, so identification of common ownership should not be hard to establish. Neb.Rev.Stat. § 25-1056.
F. What if an individual is garnished and the bank also holds an account in the name of a corporation in which the individual is the principal (or only) stockholder?
Legally, a corporation is distinctly separate from its stockholders. Thus, a garnishment on an individual will not reach to corporate funds because the corporation is a separate legal entity. Note that, in this case, the individual and the corporation will have different taxpayer identification numbers.
G. If an individual is garnished and the bank also holds an account for a partnership in which the individual is a partner, must the bank withhold funds from the partnership account?
Generally, a partnership is not liable for a partner’s individual debt. Accordingly, where an individual is garnished, the bank should not withhold funds from the partnership account. On the other hand, where the individual’s debt is for partnership purposes, the partnership account may be garnished.
H. Where an individual is being garnished and the deposit account is owned in joint tenancy by the individual and another person, what should the bank do?
Under Nebraska law, a bank customer has an interest in his joint account in proportion to the net contributions he has made into that joint account. Neb.Rev.Stat. § 30-2703(a). The bank, however, is not required to inquire as to the source of funds received for deposit into a joint account. Neb.Rev.Stat. § 30-2708. (See also, Craig v. Hastings State Bank, 221 Nebraska 746, 380 N.W. 2nd 618 (1986)).
While the answer to the foregoing question is not crystal clear, court decisions in other states have held that all of the joint bank account is prima facie subject to garnishment and that the burden is on each joint depositor to show what proportion of the funds he actually owns. This rule would most likely be followed in Nebraska. Since the determination of a party’s contribution to the joint account will need to be resolved by the court, the bank should freeze the entire account and allow the court to determine the appropriate ownership of the joint account. (See also, Giove v. Stanko, 882 F.2nd 1316 (C. A. 8th Nebr. 1989.))
I. May a bank charge a customer a service charge for garnishing an account?
Nebraska law does not prohibit a garnishment charge. Such a charge could be utilized only if the underlying contract (signature card or certificate of deposit) provides for the imposition of such a charge. Normally, a bank will find it has not contracted for such a service charge. Keep in mind however, should a bank attempt to service charge the customer, the garnishment attaches to all funds in possession or under control of the bank at its operative date. This would mean that a garnishment fee could not be charged against the account unless funds remained in the account after the garnishment had been satisfied.
J. May a bank assess a garnishment fee against the garnishing creditor?
Neb.Rev.Stat. § 25-1026 provides the garnishee with an opportunity to request the court to pay the garnishee a fee for filing answers to the interrogatories. The statute allows a fee for filing answers to interrogatories to be taxed and collected as costs. If a fee is requested by the answering garnishee, the court may enter an order allowing the fee paid as a part of the costs from the proceeds delivered to the court by the garnishee.
K. May the bank exercise its right to set-off (assuming set-off is valid and legal at the time the service of summons and interrogatories were received) against a debtor’s account after it has received a garnishment order affecting that account?
In United Seeds, Inc. v. Eagle Green Crop., 223 Neb. 360 (1986), the Nebraska Supreme Court set forth, in detail, requirements that must be followed when a garnishee bank attempts to exercise a prior right of set-off against a judgment debtor’s accounts in the face of its receipt of a garnishee summons. Although a garnishee bank’s right to set-off probably is superior to the judgment creditor’s rights in garnishment, three steps must be taken by the garnishee bank to maintain the set-off rights it has against the debtor’s account. The court held that there:
1. must first be an intent and decision to exercise the right to set-off;
2. must be a subsequent action which completes the set-off;
3. must be a record which verifies the action taken. Furthermore, after a proper set-off, the garnishee bank must hold all other unapplied property and credits of the judgment debtor in its control at the time of service of the garnishee summons until further order of the court. See, Neb.Rev.Stat. § 25-1056.
A mere declaration of an intent by the garnishee bank retrospectively to exercise a set-off right will not establish a valid set-off. As in the United Seed case, a garnishee bank’s failure strictly to comply with the set-off rules will subject it to direct liability to the judgment creditor for the full amount of the underlying judgment, interest and costs.
L. Where a bank receives a garnishment order and also receives checks drawn on the garnished account, should the garnishment or the checks be first applied to the account?
Uniform Commercial Code § 4-303 addresses this question and treats it as a first-come first-serve proposition. The garnishment will lose the race (the check will have priority) where the bank (with no knowledge of the garnishment order) has already taken one of the following actions on the check:
1. Certified the check;
2. Paid the check in cash;
3. Finally settled for the check (not revoked the provisional settlement by the midnight deadline);
4. Completed the process of posting (both posted and made a decision to pay the check);
5. Become accountable for the amount of the check (missed the midnight deadline);
6. Otherwise taken an action that indicates its decision to make final payment.
Thus, if a check is finally paid or certified before the bank has any knowledge or receives any notice of the garnishment (or before it has a reasonable time to act), then the owner of the check is first in time and is therefore entitled to the proceeds of the account. But, if the bank learns of the garnishment prior to taking any of the above actions on the check, and if it has “reasonable” time to act to prevent those actions from being taken, the garnishment order must be handled first. If the entire account must be held as a result of the garnishment, the competing checks must be dishonored.
M. If a bank has a security interest in the deposit account being garnished, must the bank still turn that account over to the garnishing creditor?
Neb.Rev.Stat. § 25-1030.03 states as follows:
Garnishment; ownership of property; intervention; trial. Any person claiming ownership of any money or property sought to be reached in the possession or under the control of the garnishee as the property of the defendant in the original action may intervene in the garnishment proceedings by a suitable pleading and set up facts showing that the debt or the property with which it is sought to charge the garnishee is the property of such intervener. The defendant in the original action may by a suitable pleading filed in the garnishment proceedings set up facts showing that the debt or the property with which it is sought to charge the garnishee is (1) exempt from execution or (2) for any other reason is not liable for plaintiff’s claim. If issue on such intervention or on such pleading by the defendant in the original action is joined by the plaintiff, it shall be tried with the issues as to the garnishee’s liability. If such debt or property or any part thereof is found to be the property of the intervener or is found to be exempt or not liable, the garnishee shall be discharged as to that part which is exempt or not liable.
Outside of this intervention procedure, an untested (not ruled upon by the Nebraska Supreme Court) approach might be to report the amount of the secured account in the answer to the interrogatories, indicating that bank has a security interest in such funds. The bank might state that the funds are subject to the bank’s prior lien created by the bank’s loan, security agreement, and UCC filing covering accounts; regard the answer as notification that bank intends to enforce rights a prior lien holder to the funds; attach copies of the aforementioned documents as evidence of the lien; further request a court hearing before any type of court order ordering funds to be released to the garnishor. It is not settled how the various courts would respond to such answer.
N. What happens if a bank fails to answer the interrogatories or ignores an order of garnishment requiring it to freeze a customer’s account and allows the customer to withdraw funds from that account?
From the day that the bank is served with the summons and order of garnishment, the bank becomes accountable to the judgment creditor for all funds in the customer's account up to the amount of the unpaid judgment. If the bank permits the customer to withdraw funds from his or her account while the account is to be frozen, the judgment creditor may recover such funds directly from the bank. In addition, the bank’s failure to answer interrogatories will result in a presumption that the bank is indebted to the customer in the full amount of the claim of the judgment creditor. Neb.Rev.Stat. § 25-1028.
O. When money is paid to a recipient by the Social Security Administration and on deposit with a bank, may such money be garnished by a garnishing creditor?
The Nebraska Supreme Court answered this question in the case of Havelock Bank v. Hog Confinement Systems, 214 Neb. 783 (1983) wherein the Court ruled that an account consisting only of checks received from the Social Security Administration is wholly exempt from garnishment. In support of this conclusion, the Court cited 42 U.S.C. § 407 which states that “[T]he right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable for rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” (Emphasis supplied.)
P. If the bank is the trustee or custodian of stock bonus, pension, profit-sharing, or similar plan or contract funds or Individual Retirement Account (IRA) funds, must the bank turn over funds in such account to the garnishing creditor?
When the bank is served with the garnishment summons and the interrogatories and the bank identifies funds held in stock bonus, pension, profit-sharing, or similar plans or contracts or an IRA, the bank, as trustee or custodian of the funds, is advised to seek legal counsel if there are claims against such funds because any distribution may, in some cases, result in a taxable event to the customer holding the funds and Nebraska State Law provides some protections to such funds from being garnished. Neb.Rev.Stat. § 25-1563.01 states that “[I]n bankruptcy and in the collection of a money judgment, the following benefits shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors: To the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service . . .” (Emphasis supplied.) In the case of Novak v. Novak, 245 Neb. 366 (1994), the Nebraska Supreme Court held that IRAs are generally protected from attachment and garnishment to the extent the funds contained therein are reasonably necessary for the support of the debtor or any dependent of the debtor. Since the protections afforded by Nebraska law are “fact dependent” on whether or not the funds held are “reasonably necessary for the support of the debtor and any dependent of the debtor,” the use of professional counsel may be well-advised.
Notwithstanding the foregoing, the United States Bankruptcy Court for the district of Nebraska In the Matter of Troy D. Euse, BK-10-43179-TLS, held that because Nebraska opted out of the federal bankruptcy exemptions, in 1980, that subsequent amendments to the Bankruptcy Code specifically exempting “any property exempted under the laws of the state and retirement funds to the extent those funds are exempt from taxation under specified provisions of the Internal Revenue Code are applicable and such retirement funds are exempt and remain the property of the debtor, notwithstanding the provisions of Neb.Rev.Stat. § 25-1563.01."
Q. May funds in a medical savings account or health savings account be garnished by a garnishing creditor?
Neb.Rev.Stat. § 8-1,131(2)(b) provides that “[E]xcept for judgments against the medical savings account holder or health savings account holder or his or her dependents for qualified medical expenses as defined under Section 223(d)(2) of the Internal Revenue Code, funds credited to a medical savings account or health savings account below twenty-five thousand dollars are not susceptible to levy, execution, judgment, or other operation of law, garnishment, or other judicial enforcement and are not an asset or property of the account holder for purposes of bankruptcy law.”
R. Are the rights of a bank with a perfected security interest in deposit accounts superior to those of a judgment creditor seeking to garnish funds in the accounts?
In Meyers v Christensen, 278 Neb. 989 (2009), the Supreme Court held that a bank with a perfected security interest in a deposit account which predated the trustee’s judgment and the service of garnishment interrogatories, when the debtor was in default on the loans secured by the account on the date that the garnishments summons was issued and the amount in default was in excess of the balance in the deposit account on that date entitled the bank to enforce its perfected security interest in the deposit account simply by applying the balance of the account to the debtors loan obligations.
The Supreme Court differentiated this case from cases involving a bank’s right of set off (see item K. above), citing the provisions of U.C.C. Section 9-322(a)(2) which provides that a “perfected security interest….has priority over conflicting unperfected security interests in the same collateral.”
NOTE: Based on the foregoing court decision, it is prudent for a financial institution to check its records for loans in the name of the garnishee defendant prior to responding to account garnishment interrogatories. A financial institution should review its records for both deposit accounts and loans when determining if the financial institution has a customer relationship matching the information in the interrogatories. If the customer who is the subject of the garnishment interrogatories also has a loan account with the bank that is secured directly by the deposit account or indirectly (e.g., collateral interest in accounts receivable that are being deposited into the deposit account) and the bank’s security interest in the deposit account is properly perfected, the bank’s lien should have priority over the judgment lien of the judgment creditor. The priority means that the funds in the deposit account, to the extent of the bank’s properly perfected security interest, should not be available to satisfy the garnishment.
S. Are tax levies subject to the garnishment of accounts containing federal benefit payments rule?
The requirements of the rule are triggered by the receipt of a “garnishment order,” which is defined as an order issued by a court or a state child support enforcement agency. Accordingly, federal or state tax levies issued directly by a taxing authority are not subject to the rule. Other levies issued by a state agency or division without a court order would likewise not be subject to the rule.