Thursday, March 22, 2012

Garnishment of Reverse Mortgages

When garnishing the assets of a judgment debtor, it is not unusual for several parties to come forward and claim an interest in the assets that are the subject of the garnishment. When a bank account is the target of the garnishment, the bank itself will often claim a superior interest in the monies held by that bank. The law usually supports the conclusion reached by many Courts that the bank stands superior to the judgment creditor who initiated the garnishment action.

However, just last week in a garnishment proceeding directed at a bank, the Appellate Division of the New Jersey Superior Court ruled in favor of the judgment creditor and disagreed with the arguments made by the bank and its customer. In an unusual and clever garnishment proceeding, the judgment creditor sought to intercept payments from a bank to its customer pursuant to the terms of a reverse mortgage agreement. The New Jersey Superior Court held that the monthly reverse mortgage payments from the bank to the debtor are properly deemed debts due to the judgment debtor and could be garnished by the judgment creditor. Cameron v. Ewing, Docket No. A-3628-10T2 (N.J. Super, March 8, 2012). The court rejected arguments advanced by both the debtor and the bank that the payments were in the nature of a loan that had to be repaid and therefore constituted an obligation due to the bank, not a payment from the bank to the judgment debtor. As a result of this ruling, the bank will be compelled to pay the judgment creditor the monthly payment due the debtor under the reverse mortgage until the judgment debtor’s death. As a practical matter, the bank will be forced to recover its money from the collateral and judgment debtor’s estate instead of the judgment creditor.

In reaching its decision, the New Jersey Court rejected the bank’s argument that the reverse mortgage contained a non-assignment clause. The court stated: “[a]bsent a statutory exemption or other clear countervailing public policy, the non-assignability rule does not extend so far that it shields from execution and garnishment payments from a source the judgment debtor created.”

The language in the holding of the New Jersey Court decision provides fertile ground for extending the argument to reach other lines of credit such as home equity lines or any revolving credit instrument that permits a judgment debtor to accrue increased liability to a bank in exchange for cash. Applying the logic and reasoning of the New Jersey Court, the fundamental question to be decided in garnishment proceedings will be whether the bank is placed in a different economic position by paying the judgment creditor. In the case of a reverse mortgage, the answer determined by the Court was clearly “no”. Through the reverse mortgage the bank anticipated making monthly payments in exchange for a lien on the judgment debtor’s property (collateral). It was understood by the bank that the collateral would be used to satisfy the obligation owed to the bank upon the death of the judgment debtor. Payment to the judgment creditor through the garnishment is equivalent to the bank paying the same amount of money over time as it would have to pay to the debtor over time and in the end the bank still can enforce the lien on the judgment debtor’s property that was put up as collateral.

The analysis of the New Jersey Court could easily apply to a home equity line of credit depending upon the terms and conditions of the underlying credit agreement. Essentially, the New Jersey Court is suggesting, at Gross & Romanick, P.C. we think correctly, that a garnishment action against a bank cannot make the bank worse off than it would have been absent the garnishment, but similarly, cannot be utilized by the bank to improve its economic position.

The bank is an innocent third party in a dispute between a judgment creditor and a judgment debtor. And, the bank should be protected from harm in a garnishment action. However, a bank should not be able to receive a windfall and benefit just because the judgment creditor has filed a garnishment action against the judgment debtor. The New Jersey Court ruling is consistent with a ruling out of the District of Columbia which applied the same logic to garnishments and security interests. However, the discussion of security interests and garnishments is a topic reserved for our next posting.