We last examined the subject of what happens when a bank fails to honor a levy against a debtor’s bank account in my article Registered Agent’s Mistake Leads To Liability Of Zions For Failure To Honor A Levy In Bergstrom (May 8, 2022). A recent court opinion from the U.S. District Court returns us to that examination in the context of a bank’s delay in honoring the levy that allowed considerable funds to escape the grasp of the creditor.
The opinion to be considered is from the U.S. District Court for the Southern District of California in In re Outlaw Laboratory, 2024 WL 3708868 (S.D.Cal., Aug. 7 , 2024). The facts are pretty simple. The creditor held a judgment for about $900,000 against Tauler Smith LLP, which was apparently a trial lawyer firm in Los Angeles. On April 9, 2024, the creditor had a notice of levy and associated documents served upon Chase Bank for the money in the debtor’s bank account, which apparently was just short of $382,000.
Two days later, on the morning of April 11, the creditor called Chase Bank’s garnishment department to confirm that the department had received the notice of levy. An employee of that department said that it had not received the notice of levy and requested that the creditor transmit a copy of the notice of levy by fax, which the creditor did that same morning.
The next day, April 12, the creditor again called Chase Bank’s garnishment department to confirm that it had received the fax copy of the notice of levy, and another employee of that department confirm receipt of one of the creditor’s faxes but indicated that the documents had not been processed yet.
Three days after that, on April 15, the creditor again called the garnishment department to check up on things, but an employee of that department indicated that Chase Bank would need ten business days to respond to the notice of levy.
Finally, the next day, April 16, the creditor called Chase Bank yet again and was told that Chase Bank had finally captured the funds in the debtor’s bank account, but only for $49,000 and change (recalling that at the time Chase Bank received the notice of levy there had been $382,000 in the account). Or, in other words, due to Chase Bank not honoring the notice of levy promptly upon receipt, Chase Bank had allowed about $333,000 to slip away.
Predictably not happy with this outcome, the creditor sought to make Chase Bank liable for the missing $333,000. The relevant California statute provides that when a third-party such as Chase Bank is served with a notice of levy, that third party shall “at the time of the levy” or “promptly thereafter” turn the debtor’s property (including cash in accounts) over to the levying office (read: Sheriff). But further, at the instant in time when a notice of levy is served upon a bank, then a lien on the account funds arises in favor of the creditor and the bank cannot let the funds go to anybody but the levying officer. If the bank fails to do any of this, then the bank becomes responsible for the creditor’s loss.
Chase Bank attempted to defend on various grounds. The first ground was that the creditor should not have been able to collect against Tauler Smith LLP’s account because that law firm had entered into a settlement agreement with the creditor in another case whereby the creditor would cease attempting to collect against Tauler Smith LLP when the latter had paid the creditor $190,000. The problem with this argument was that Tauler Smith LLP had not yet paid the $190,000 and further was obliged to cooperate until the end of the litigation which had not yet come. For similar reasons, Chase Bank would not be allowed a $190,000 credit against the missing $333,000 either.
The second ground asserted by Chase Bank was that its seven-day delay in honoring the levy was reasonable and with good cause. Here, Chase Bank argued that honoring a levy the same day that is received was not reasonable and that it needed several days to process such levies. However, Chase Bank failed to establish with evidence exactly why it needed the several days. For its part, the Court agreed that honoring a levy on the same day was not required, but that in any event a bank should honor a levy on the business day after the levy had been received. Had Chase Bank done that, then the creditor would have received about $319,000 instead of the $49,000 and change that Chase finally caught — this $319,000 was ultimately the amount awarded by the Court to the creditor and against Chase Bank.
The creditor also argued for an award of attorney fees and costs relating to Chase Bank’s botched levy and in the creditor having to file the instant motion. The Court found that the creditor had not presented sufficient legal authority to justify such an award, and also noted that much of what authority the creditor had presented was in its reply brief and thus was improper. The attorney fees and costs were thus denied.
ANALYSIS
So there you have it: A firm rule in California that a bank need not honor a levy the same day that it receives a writ of levy, but must honor that levy the next business day.
Before I get into some further analysis, it must be understood since this is a ruling of a U.S. District Court interpreting a California statute, the California state courts may not necessarily agree and could make their own rule (which the federal courts would then be required to follow).
While a one-day delay in honoring a bank levy may not seem like a long time, particularly in the context of our courts which sometimes seek to take months to accomplish the most simple of tasks, a few hours in the electronic-transfer nature of the financial sector can seem like eons. This is particularly true where online banking is now available on a 24-hour basis and significant transfers can be made while bank employees soundly slumber.
Even assuming no online transfers are made, a one-day delay can give a debtor sufficient time to move money by wire transfer. Suppose that the bank receives a notice of levy at 10:00 a.m. on Monday but does not honor it until 4:00 p.m. on Tuesday. In the interim, a debtor could initiate a wire transfer on Tuesday afternoon before 4:00 p.m. and the money could be gone before the notice of levy is processed by the bank.
Further, I have been involved in cases where the debtor had “sweep accounts” that automatically cleaned out the accounts at the end of the day, often transferring them to another bank altogether such that if you couldn’t catch the money before the sweep it was lost.
All this militates against a next-day rule and in favor of a same day rule, but, again, we’ll have to see where the California state courts go with this.
Let’s take a moment to also consider that the notice of levy creates an immediate execution lien on the debtor’s account which is automatic and does not require the notice of levy to be honored by the bank. This execution lien essentially follows the money to wherever the money goes so that the creditor may assert a superior right to the funds over those of any transferee of those funds.
Suppose that a creditor serves a notice of lien on a bank for the debtor’s accounts, but before the bank honors the levy, the debtor transfers the money to yet another bank to repay a loan. In such circumstances, the creditor could go to the second bank and demand that it pay over the cash to the creditor because of the execution lien. Such a lien would presumably follow those funds through multiple transactions as well.
A thing about notices of levy upon bank accounts is that the debtor is not made aware of them unless somebody at the bank tells them — or until their checks start bouncing and their ATM cards give no joy. This can cause a great deal of frustration and expense to debtors, but these days it can be mitigated by setting up electronic “zero balances” notices for their accounts.
Many states have statutes that allow a debtor to keep a small amount of money in a bank account to pay expenses for basic necessities, say a $3,000 balance or something, and it is important for counsel to know these rules. In such an event, the levy will hit only the excess portion of the account.
Levying upon bank accounts is perhaps the most bread-and-butter aspect of judgment enforcement, not to mention very likely the most common. It is good to know the rules here.