Compliance Center: Implications of New Mexico Lawsuit Addressing Set-off Rights
March 7, 2017
By Kelley C. Washburn
Farleigh Wada Witt
Many credit unions have seen recent stories of a several-year lawsuit involving the exercise of a right of setoff against a joint account by a New Mexico Credit Union, Zia Credit Union. We understand there have been some concerns as to what the outcome of that lawsuit means for our Northwest credit union clients, so we provide the information below to help mitigate those concerns.
The lawsuit against Zia Credit Union purportedly involved a joint account held by a mother and her daughter. After the daughter defaulted on some loans at the credit union, the credit union exercised its right of setoff against approximately $100,000 in the joint account. The lawsuit claims that the daughter had never contributed funds to the joint account and her name was only on the account in case her mother died. The attorneys for the mother reportedly argued that the credit union could only take what the daughter contributed to the account and that the credit union did not inform the mother of the risks she assumed when she opened her accounts, or that events had occurred that jeopardized the mother’s account. The jury found in favor of the mother and awarded her a judgment of $580,000 in punitive and compensatory damages, which the mother’s attorney is requesting be increased.
Applicability to Northwest Credit Union Practice
As reportedly stated by the credit union’s attorney, the credit union was not taking a novel position on the law or a novel interpretation of its account agreements. Most credit unions engage in a similar practice of offsetting against a joint account for debts of one of the account owners, regardless of which owner contributed to the account. Such a practice is authorized by applicable law and most credit unions’ account agreements. We do not believe that the New Mexico case carries any precedential value or creates any risk to our credit union clients engaging in such a practice.
This can easily be classified as one of those cases where the law would appear to dictate one result but a jury reached a different result because of the way the credit union acted and the jury’s sympathy toward the mother. It is possible that the verdict could be overturned on appeal, and there is nothing to indicate that any other Court would reach the same verdict.
There appear to be many bad facts in the case that likely played a role in the jury’s decisions. There is one unique fact that appears to have made a significant impact in the case: the daughter who was the joint owner with her mother had been an employee of the credit union. That immediately casts an extra layer of suspicion on the credit union.
Legal Authority for Right of Offset
From a legal analysis perspective, most credit unions’ account agreements make it crystal clear (in more than one place) that if any joint owner is obligated to the credit union, the credit union can take the funds from the joint account, no matter who contributed the funds. The statutes governing multiple party accounts are similar in many states, and the wording in the New Mexico statute is very common. However, nothing in New Mexico law requires that statutory language to be in the agreement; that is simply language that creates a statutory presumption that will apply if nothing else indicates a contrary result. That’s the point of the language in the agreement—we agree with the member and ensure that the member is informed that any funds in the account are subject to our statutory lien, security interest, and right of offset, no matter who contributed the funds. That overcomes the statutory presumption related to ownership because it provides “clear and convincing evidence of a different intent” at least as between the credit union and the members. The New Mexico statute on set-off (also part of the multiple party account code) states: “Without qualifying any other statutory right to set-off or lien and subject to any contractual provision, if a party is indebted to a financial institution, the financial institution has a right to set-off against the account. The amount of the account subject to set-off is the proportion to which the party is, or immediately before death was, beneficially entitled under Section 45-6-211 NMSA 1978 or, in the absence of proof of that proportion, an equal share with all parties.” (Emphasis added.)
While the Zia account agreement contained a common set-off provision permitting set-off of any amount owed by any of the joint owners, we do not know what conversations may have occurred between Zia employees and the mother when the daughter was added to the account. If the employees advised the mother about adding the daughter as a joint owner and gave any assurance about safety of the funds or her access to the funds or anything else, that would certainly be facts that would go against Zia, along with the fact that the daughter was a Zia employee.
Nothing in Oregon or Washington law requires anything different or extra in the credit union agreements in order to exercise the right of setoff in a joint account. In general, the account agreement gives the credit union that right and it can be freely exercised. However, every case is different, and in some cases, the particular circumstances may dictate a different result. That would particularly be true if, for example, credit union employees advised the member on how to structure the account and gave information or advice that might contradict what is in the account agreement. Particularly when there is a significant amount of money at stake, the credit union should examine the circumstances and consider both the reputation risk and the legal risk of proceeding. In a case where the daughter was a credit union employee, contributed nothing to the account, one of the loans in question was a mortgage loan (so theoretically there was other collateral available, though we do not know the specifics), and the mother is a highly sympathetic figure, it is possible to get a verdict against the credit union even if the account agreement supported the action.
Absent such special cases, we do not believe the New Mexico trial court verdict will impact our Northwest credit union clients. It appears that the verdict can be attributed to some bad facts as well as the failure of the trial court to correctly interpret New Mexico statutes.
Kelley Washburn, attorney with Farleigh Wada Witt, represents credit unions primarily in Oregon, Washington, Idaho, and California, and advises on regulatory compliance and operational matters.
Compliance Question of the Week
What is the protected amount in a garnishment of an account that contains a Federal Benefits Payment?
The Protected Amount means the sum of all electronically posted benefits payments during the lookback period, or the available balance of the account. Whichever is lesser.
The following examples illustrate the definition of protected amount.
Account balance less than sum of benefit payments.
A financial institution receives a garnishment order against an account holder for $2,000 on May 20. The date of account review is the same day, May 20, when the opening balance in the account is $1,000. The lookback period begins on May 19, the date preceding the date of account review, and ends on March 19, the corresponding date two months earlier. The account review shows that two Federal benefit payments were deposited to the account during the lookback period totaling $2,500, one for $1,250 on Friday, April 30 and one for $1,250 on Tuesday, April 1. Since the $1,000 balance in the account at the open of business on the date of account review is less than the $2,500 sum of benefit payments posted to the account during the lookback period, the financial institution establishes the protected amount at $1,000.
Three benefit payments during lookback period.
A financial institution receives a garnishment order against an account holder for $8,000 on December 2. The date of account review is the same day, December 2, when the opening balance in the account is $5,000. The lookback period begins on December 1, the date preceding the date of account review, and ends on October 1, the corresponding date two months earlier. The account review shows that three Federal benefit payments were deposited to the account during the lookback period totaling $4,500, one for $1,500 on December 1, another for $1,500 on November 1, and a third for $1,500 on October 1. Since the $4,500 sum of the three benefit payments posted to the account during the lookback period is less than the $5,000 balance in the account at the open of business on the date of account review, the financial institution establishes the protected amount at $4,500 and seizes the remaining $500 in the account consistent with State law.
A financial institution receives a garnishment order against an account holder for $4,000 on Friday, September 10. The date of account review is Monday, September 13, when the opening balance in the account is $6,000. A cash withdrawal for $1,000 is processed after the open of business on September 13, but before the financial institution has performed the account review, and the balance in the account is $5,000 when the financial institution initiates an automated program to conduct the account review. The lookback period begins on Sunday, September 12, the date preceding the date of account review, and ends on Monday, July 12, the corresponding date two months earlier. The account review shows that two Federal benefit payments were deposited to the account during the lookback period totaling $3,000, one for $1,500 on Wednesday, July 21, and the other for $1,500 on Wednesday, August 18. Since the $3,000 sum of the two benefit payments posted to the account during the lookback period is less than the $6,000 balance in the account at the open of business on the date of account review, the financial institution establishes the protected amount at $3,000 and, consistent with State law, freezes the $2,000 remaining in the account after the cash withdrawal.
The regulation provides more examples that may be helpful in determining the protected amounts.
- Guidelines for Garnishments
- Appendix C to Part 212: Examples of Lookback Period and Protected Amount
- 31 CFR 212
National Credit Union Administration (NCUA)
The NCUA announced that it will host a webinar, “Pathways to Offering E-Services,” aimed at helping credit unions understand electronic services, such as mobile and credit card services, debit cards, ATM service options, and income generation and expenses for ATM and POS transactions. The webinar will be held on Wednesday, March 22, 2017 at 11 a.m. Pacific. Credit unions interested in attending the webinar can register here.
The NCUA announced that the Temporary Corporate Credit Union Stabilization Fund received a clean audit opinion, making this the fund’s seventh consecutive clean audit opinion.
NCUA Acting Chairman McWatters informed credit unions that they can anticipate a thoughtful loosening of regulations, streamlined agency budget, and the possible closure of the Temporary Corporate Credit Union Stabilization Fund in 2017.
The NCUA released remarks made by former Chairman Metsger regarding his nine months as the Chairman. Metsger discussed some of the accomplishments made during his tenure, including completion of the modernized field of membership rule, implementation of the new MBL rule and the successful defense of the rule in court, implementation of a more flexible examination schedule, and issuance of an ANPR on a possible alternative capital rule.
Consumer Financial Protection Bureau (CFPB)
CFPB Director Richard Cordray delivered prepared remarks at the Consumer Advisory Board Meeting. Cordray’s remarks focused specifically on the consumer reporting marketplace, the influence that consumer reports have over consumer’s financial lives, and issues with the accuracy of consumer reports.
The CFPB issued a report detailing the issues that the CFPB has uncovered and corrected within the credit reporting industry.
The CFPB also released a special edition of its Supervisory Highlights, with the Winter 2017 edition focusing on consumer reporting.
The CFPB released its monthly consumer complaint snapshot. The February snapshot highlighted complaints about credit reporting—specifically with disputing information, inaccurate information, and confusion about credit scoring. The February issue also highlights complaints specific to Louisiana.
Federal Reserve Board (FRB)
The FRB released the March issue of its FedFocus publication.
The FRB released the March edition of the Beige Book.
The FRB announced that it released the minutes of its interest rate meetings from January 23rd and February 1, 2017.
Federal Housing Finance Agency (FHFA)
The FHFA announced that its index shows that mortgage rates increased in January 2017.
Federal Trade Commission (FTC)
The FTC is hosting a FinTech Forum on March 9 that will include discussions on blockchain technology and artificial intelligence. The forum begins at 9 a.m. and will be available via a live webinar for those that are not able to attend in person.
The FTC announced the release of its Annual Summary of Consumer Complaints. The top three consumer complaints in 2016 were debt collection, imposter scams, and identify theft, respectively.
Department of Labor (DOL)
The DOL issued a proposed rule to extend the applicability date of the fiduciary rule. Comments are due by March 17, 2017.
Office of the Comptroller of the Currency (OCC)
The OCC released its most recent CRA evaluations.
Federal Deposit Insurance Corporation (FDIC)
The FDIC released its most recent CRA evaluations.
U.S. Securities and Exchange Commission (SEC)
The SEC voted to publish a request for public comment on disclosures required by Industry Guide 3—Statistical Disclosure by Bank Holding Companies.
Office of Foreign Assets Control (OFAC)
OFAC has updated the SDN list as of February 23, 2017. The last update prior to this was February 16, 2017.