2nd Circuit Holds that Violation of State Statute on Garnishment of Bank Accounts Also Violates the Fair Debt Collection Practices Act

The Second Circuit recently ruled that a law firm conducting debt collection violated the Fair Debt Collection Practices Act (FDCPA) when it violated a New York state law governing garnishment of bank accounts.

In Arias v. Gutman, Mintz, Baker & Sonnenfeldt LLP, a law firm—working as a debt collector on behalf of a creditor—obtained a default judgment against the plaintiff.  The firm sought to garnish the plaintiff’s bank account to collect the amount due.  A New York statute limits the types of funds which can be subject to garnishment and exempts, among other things, funds derived from Social Security retirement insurance.  After the law firm commenced the garnishment process, the plaintiff provided the firm with several months of bank statements showing that all of the funds in the account were derived from Social Security.  The firm nevertheless informed the plaintiff—contrary to the statute—that it would only cease the garnishment process if he made a payment on the debt, and told him that his only other recourse would be to go to court to fight the garnishment.

To support its garnishment efforts, the firm filed an affidavit in court asserting that the funds in the account included comingled exempt and non-exempt funds, and claimed that the bank records the plaintiff provided were insufficient to show all the funds were exempt since the statements did not start from a zero balance.

The law firm ultimately dropped its efforts to garnish the account, and the plaintiff sued the firm for violations of, among other things, the FDCPA, claiming that the firm’s conduct violated one provision of the statute which prohibited false, deceptive, or misleading representations, and another provision which prohibited collecting debts through unfair or unconscionable means.

The U.S. District Court for the Southern District of New York dismissed the suit, but the Second Circuit reversed, finding that the plaintiff had pleaded a cognizable claim.  The Second Circuit noted that a debt collector’s conduct is evaluated under the standard of the “least sophisticated consumer” which “ensures the protection of all consumers, even the naive and the trusting, against deceptive debt collection practices.”  The court also noted that the FDCPA is a strict liability statute, in that the debt collector’s violations do not need to be intentional.

The court then found that the plaintiff had pleaded two different false representations related to the debt collection.  In the court proceeding regarding the garnishment, the law firm had stated in its affidavit that the plaintiff had not provided the firm with documents sufficient to show that all of the funds in the account were derived from Social Security, and that the plaintiff failed to provide information showing that he never commingled exempt and non-exempt funds.  Both statements were allegedly false or misleading since the New York garnishment statute did not require the plaintiff to provide bank documents starting from a zero balance, and because the statute did not require the plaintiff to disprove commingling—instead, the statute placed the burden on the debt collector to show that the funds were not exempt.  Further, the Court found that the documents provided by the plaintiff to the firm were sufficient to show that all funds in the account were exempt.

The court also found that the plaintiff had properly pleaded that the law firm had used unfair or unconscionable debt collection means, since the firm: 1) had documentary proof that all of the funds in the bank account were exempt from garnishment; 2) refused to end the garnishment proceeding and engaged in court proceedings without a good faith basis in order to abuse and intimidate the plaintiff into paying the debt; 3) engaged in a pattern or practice of proceeding with garnishment even when it had no good faith basis for doing so in order to abuse and intimidate debtors; and 4) ended the garnishment proceeding at a hearing only after one of its lawyers reviewed documents that had previously been provided to them by the plaintiff.  The actions were allegedly shockingly unjust or unfair since they required the plaintiff to prepare needlessly for a court proceeding that the law firm allegedly knew was frivolous and which was meant to harass and frustrate the plaintiff, and erect procedural and substantive challenges to the plaintiff’s exercise of his rights regarding garnishment.