SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
All American Auto Salvage v. Camp's Auto Wreckers
Citibank, South Dakota, N.A. v. Lisa A. Coffey (A-88-95)
Argued January 30, 1996 -- Decided August 1, 1996
POLLOCK, J., writing for a unanimous Court.
The primary issue on appeal is whether a bank may deduct a processing fee from a judgment
debtor's general deposit account before paying the balance to a levying creditor. A related issue is whether
the Superior Court may decide the issue in a summary proceeding under N.J.S.A. 2A:17-63.
All American Auto Salvage v. Camp's Auto Wreckers and Citibank, South Dakota, N.A. v. Lisa A.
Coffey were consolidated in the Appellate Division.
In All American Auto Salvage v. Camp's Auto Wreckers, a judgment creditor, All American Auto
Salvage (All American) levied on the account of Camp's Auto Wreckers (Camp's) at First Fidelity in the
amount of $1,068.10. Pursuant to the deposit agreement between Camp's and First Fidelity, Camp's agreed
to be bound by "all the rules, regulations, conditions, and limitations, requirements and agreements which are
heretofore and hereafter adopted by the Bank." First Fidelity, in an amended schedule in its small-business
account fee-schedule, notified depositors that it had a security interest in any service fees or charges to the
account. First Fidelity charges a service fee of $60 for responding to levies on its depositor's accounts.
First Fidelity investigated to ensure that All American's levy was on the correct account and
searched its Customer Information System for any setoffs or unpaid fees. First Fidelity deducted $60 from
the account balance of $940.65 for those processing services, leaving $880.65 to satisfy partially the levy. The
Special Civil Part of the Law Division permitted First Fidelity to deduct the processing fee before paying the
balance in Camp's account, thereby denying All American's motion to turn over the entire amount in Camp's
account.
In Citibank, South Dakota, N.A. v. Coffey, Lisa Coffey had a personal account with First Fidelity.
Coffey agreed to be bound by "all rules and regulations and any amendments thereto promulgated by Federal
and state authorities, the Federal Deposit Insurance Corporation, and Bank." Pursuant to the personal
account agreement, Coffey agreed to pay any service fees that applied to her account and any special fees for
services. First Fidelity notified the depositor that it had a security interest in the account for any fees the
debtor had not paid.
Coffey failed to pay charges on her Citibank Visa Card. Citibank obtained a $1,707.28 default
judgment against Coffey and levied on the $477.58 balance in her First Fidelity account. First Fidelity
investigated the matter and deducted its $60 processing fee. The Special Civil Part ruled that First Fidelity
had acted improperly in deducting that fee from Coffey's account before paying the balance to the levying
creditor, Citibank, because it did not have a common-law right to set off the processing fee.
The Appellate Division consolidated these two cases and held that First Fidelity could not deduct its
processing fee before honoring the levy. It thus affirmed the order in Coffey and reversed and remanded in
All American Auto. The Appellate Division rejected First Fidelity's claim of a security interest, reasoning
that the Bank had no possessory interest to control withdrawals, a prerequisite to a perfected security
interest.
The Supreme Court granted First Fidelity's petition for certification.
HELD: First Fidelity does not have a security interest in the depositors' accounts. Until such time as the
Legislature addresses the issue, considerations of equity and economic realities support recognition
of a bank's common-law right to set off a reasonable processing fee against a deposit account, even
after the creditor has levied on the account.
1. A security interest is an interest in personal property or fixtures that secures payment or performance of
an obligation. Security interests in general deposit accounts may arise by a pledge. To be effective, a pledge
requires: 1) a pledgor and a pledgee; 2) a debt or obligation; 3) an agreement to create a security interest;
and 4) possession of the pledged property by the pledgee. The first three requirements are met here: there
is no dispute that the depositor is a pledgor and the bank as pledgee; deposit agreements create an
obligation to pay for all fees related to the maintenance and disposal of the account; and the First Fidelity
agreements reflect an intent to create security interests in the respective accounts. However, although First
Fidelity intended to create security interests through the deposit agreements, it lacked exclusive possession
and control over the accounts. Therefore, it did not hold security interests in the accounts. (pp. 6-10)
2. A bank has a right of set off against all monies or funds in its possession belonging to a depositor to
secure the payment of the depositor's indebtedness to the bank. Ordinarily, a bank must satisfy three
conditions to establish a priority right to a set off: the funds to be set off must be the property of the bank;
the depositor must deposit the funds without restriction; and the depositor's indebtedness that gives rise to
the set off must be due and owing. In addition, there must be a mutuality of obligation between the debtor
and creditor. All American and Citibank do not dispute that the funds on deposit belonged to First Fidelity
and that the funds were unrestricted. Remaining at issue is whether a debt was due and owing at the time of
the liens. While courts in several other states have recognized the fairness of permitting a bank, when
confronted with a garnishment on an account, to set off an obligation to the bank against the account, the
issue is ripe for legislative consideration in New Jersey. Until such time as the Legislature acts, however,
considerations of equity and economic realities support recognition of the Bank's common-law right to set off
a reasonable processing fee against a deposit account, even after the creditor has levied on the account.
(pp. 10-16)
3. The processing fee is properly viewed as a charge to each depositor through the depositor's agreement
with the bank. That the fee reduces the balance available to defendants is incidental; defendants still have a
valid judgment against each debtor and may pursue other assets of the debtors to satisfy the judgment.
Granting banks a priority in common-law set offs of levy processing fees is both fair and reasonable. To
process the payment of the creditor's levy, the bank incurs costs that someone must pay. Between the bank
and the levying creditor, the creditor fairly should bear the costs of processing a levy because creditors can
control the risk of default by selecting the debtors with whom they do business. Moreover, the amount of
the processing fee is small and it would be inconvenient and a waste of judicial resources for a bank to
institute a separate action for so small an amount. (pp. 16-18)
4. The issue of the relative rights of banks, the depositors, and judgment creditors to funds on deposit is a
matter suited for legislative treatment. The Court commends consideration of the issue to the Legislature.
Moreover, because neither the levies nor the debts are disputed, plenary hearings in these cases are
unnecessary. (pp. 18-19)
Judgment of the Appellate Division is REVERSED and the matter is REMANDED to the Law
Division for entry of judgment for First Fidelity.
JUSTICES HANDLER, O'HERN, GARIBALDI, STEIN and COLEMAN join in JUSTICE
POLLOCK's opinion.
SUPREME COURT OF NEW JERSEY
A-
88 September Term 1995
ALL AMERICAN AUTO SALVAGE,
Plaintiff-Respondent,
v.
CAMP'S AUTO WRECKERS,
Defendant.
CITIBANK, SOUTH DAKOTA, N.A.,
Plaintiff-Respondent,
v.
LISA A. COFFEY,
Defendant.
Argued January 30, 1996 -- Decided August 1, 1996
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
281 N.J. Super. 266 (1995).
Michael A. Lampert argued the cause for
appellant, First Fidelity Bank, N.A. (Saul,
Ewing, Remick & Saul, attorneys; Mr. Lampert
and Carl E. Ailara, Jr., on the briefs).
Steven P. McCabe argued the cause for
respondents (Pressler & Pressler, attorneys).
Michael F. Spicer argued the cause for amicus
curiae, New Jersey Bankers Association
(Jamieson, Moore, Peskin & Spicer,
attorneys).
The opinion of the Court was delivered by
POLLOCK, J.
The primary issue is whether a bank may deduct a processing
fee from a judgment debtor's general deposit account before
paying the balance to a levying creditor. Another issue is
whether the Superior Court may decide the issue in a summary
proceeding under N.J.S.A. 2A:17-63.
The appeal involves two cases that were consolidated in the
Appellate Division. In the first case, All American Auto Salvage
v. Camp's Autowreckers, a judgment creditor, All American Auto
Salvage (All American) levied on the account of Camp's Auto
Wreckers (Camp's) at First Fidelity. The Special Civil Part of
the Law Division permitted First Fidelity to deduct a processing
fee before paying the balance in Camp's account. In the second
case, Citibank, South Dakota, N.A. v. Coffey, the Special Civil
Part ruled that First Fidelity had acted improperly in deducting
a processing fee from the account of Lisa Coffey before paying
the balance to the levying creditor, Citibank, South Dakota, N.A.
(Citibank).
The Appellate Division held that First Fidelity could not deduct its processing fee before honoring the levy. It thus affirmed the order in Coffey and reversed and remanded in All American Auto. 281 N.J. Super. 266, 274 (App. Div. 1995). We
granted First Fidelity's petition for certification,
142 N.J. 515
(1995), and now reverse both judgments.
I.
In the lead case, All American Auto, defendant, Camp's,
opened a small-business account with First Fidelity on November
8, 1991. Pursuant to the deposit agreement, Camp's agreed to be
bound by "all the rules, regulations, conditions, limitations,
requirements and agreements which are heretofore and hereafter
adopted by the Bank." Camp's also executed a resolution stating:
That any account of any type whatsoever that this
corporation establishes at the Bank secures any and all
indebtedness and liability of this corporation to Bank,
however and whenever incurred or evidenced, whether
direct or indirect, absolute or contingent, due, or to
become due, and the corporation transfers and coveys to
Bank all balances, credits, deposits, monies or items
of any type whatsoever, now or hereafter, held by the
Bank and Bank is authorized at any time to charge such
indebtedness or liability against any such accounts or
items whether or not the same is then due, and the Bank
shall not be liable for dishonoring items where the
making of such charge or charges results in there being
insufficient funds in said account(s) to honor such
items.
On March 19, 1993, First Fidelity amended its small-business-account fee-schedule. The new schedule stated that
"[t]he Bank has a security interest in any service fees or
charges to the account." First Fidelity charges a service fee of
$60 for responding to levies on its depositors' accounts.
On August 17, 1993, All American obtained a judgment against
Camp's. By serving a writ of execution, All American levied on
Camp's account at First Fidelity for $1,068.10. First Fidelity
investigated to ensure that the levy was on the correct account
and searched its Customer Information System for any set offs or
unpaid fees. It deducted $60 from the account balance of $940.65
for those processing services, leaving $880.65 to satisfy
partially the levy. The Special Civil Part denied All American's
motion to turn over the entire amount in Camp's account without
deducting the processing fee.
First Fidelity processes over 15,000 levies annually. It
maintains a separate department with six full-time employees
whose only responsibility is to process claims of levying
creditors. Although the processing fee is minimal, it adds up to
a cumulative charge of over $900,000. In 45% of the cases,
although no levy or processing fee is ultimately paid, the bank
must still investigate and notify the Sheriff and the judgment
creditor of the absence of an account relationship or available
funds.
In Citibank, South Dakota, N.A. v. Coffey, the defendant, Lisa Coffey, opened a personal account with First Fidelity. Coffey agreed to be bound by "all rules and regulations and any amendments thereto promulgated by Federal and state authorities,
the Federal Deposit Insurance Corporation, and Bank." The
Personal Account Agreement stated:
You agree to pay any service fees which apply to your
Account and to pay special fees for services such as
stop payment orders and dishonored checks. The Bank has
a security interest in your account for any fees you
haven't paid. The amount of the fees may change from
time to time. You will be given prior notice of any
change in fees. The notice may be sent by mail or
included with the periodic statement of your Account,
if one is sent.
The Agreement also provided that
[i]f you owe the Bank money for any reason, the Bank
can, without prior notice, charge any Account you have
with the Bank for the amount owed.
Coffey failed to pay charges on her Citibank Visa Card.
Citibank obtained a $1,707.28 default judgment against Coffey,
and levied on the $477.58 balance in her First Fidelity account.
First Fidelity investigated the matter and deducted its $60
processing fee.
The trial court granted Citibank's motion for an order
turning over the balance of the account without a deduction for
First Fidelity's processing fee.
281 N.J. Super. 311, 314 (Law
Div. 1994).
In Coffey, the Special Civil Part held in part that Coffey was not indebted for the processing fees until after Citibank had levied on the account. Thus, First Fidelity did not have a common-law right to set off the processing fee. Id. at 315. The
court also determined that the Bank's security interest in the
account did not give it priority over the levying creditor.
According to the court, the language of the deposit agreement
applied only to fees incurred in the past, and "[s]ince no debt
existed until after the levy, the security interest provided for
by the Agreement had not attached." Id. at 317.
The Appellate Division affirmed substantially for the
reasons stated by the Special Civil Part.
281 N.J. Super. 266,
269 (App. Div. 1995). It supplemented its opinion by discussing
the issue "whether the security interest allegedly created in
either situation gives the bank priority over a levying judgment
creditor." Id. at 271. The court rejected the bank's claim of a
security interest, reasoning that the bank had no possessory
interest to control withdrawals, a prerequisite to a perfected
security interest.
II.
First Fidelity claims that both a common-law security
interest and a right of set off support its deduction of the
processing fees. We turn first to common-law security interests.
A.
As defined by statute, a "security interest" is "an interest
in personal property or fixtures which secures payment or
performance of an obligation." N.J.S.A. 12A:1-201(37). N.J.S.A.
12A:9-104(k) specifically excludes security interests in deposit
accounts. "Such transactions are often quite special, do not fit
easily under a general commercial statute and are adequately
covered by existing law." N.J.S.A. 12A:9-104, 1972 Official
Comment to U.C.C., ¶ 7; see also Pittsburgh Nat'l Bank v. United
States,
657 F.2d 36, 39 (3d Cir. 1981) (stating that article 9 of
the UCC does not apply to bank's set off of amount due on loan
against depositor's checking account); Gillman v. Chase Manhattan
Bank,
534 N.E.2d 824, 831 n.1 (N.Y. 1988) (same); Duncan Box &
Lumber Co. v. Applied Energies, Inc.,
270 S.E.2d 140, 142 (W. Va.
1980) (holding that UCC does not apply to security interests in
deposit accounts even when created for the purpose of providing
collateral for the bank); Barkley Clark & Barbara Clark, The Law
of Bank Deposits, Collections and Credit Cards ¶ 18.03, at 18-6
(Revised ed. 1995 & Supp. 1996).
Under the common law, however, parties may provide specifically for a security interest in an agreement. Gillman, supra, 534 N.E. 2d at 831 (finding security interest in demand deposit account created by language in security agreement). Security interests in general deposit accounts may arise by a pledge or an assignment. See Peoples Nat'l Bank v. United States, 777 F.2d 459, 461 (9th Cir. 1985). First Fidelity does not contend that a security interest arose by assignment. It claims, however, that such an interest arose from the depositor's
pledge of sufficient funds in the account to satisfy the
processing fees.
Generally speaking, a pledge is a security interest in
personal property created by a bailment to secure payment of a
debt or performance of a service. See Ray A. Brown, The Law of
Personal Property § 15.1, at 469 (3d ed. 1975); 72 CJS Pledges §
1 (1987). To be effective, a pledge requires 1) a pledgor and a
pledgee; 2) a debt or obligation; 3) an agreement to create a
security interest; and 4) possession of the pledged property by
the pledgee. See CJL Co. v. Bank of Wallowa County (In re CJL
Co.),
71 B.R. 261, 264 (Bankr. D. Or. 1987); 72 CJS Pledges § 5
(1987).
No one disputes that the depositor acts as pledgor and the
Bank as pledgee. The deposit agreements, moreover, create an
obligation to pay for all fees related to the maintenance and
disposal of the account. At issue are the final two
requirements: an agreement to create a security interest and
possession of the property to effectuate that interest.
The First Fidelity agreements reflect an intent to create security interests in the respective accounts. Specifically, in All American Auto, Camp's agreed that "any account . . . that this corporation establishes at the Bank secures any and all indebtedness and liability of this corporation to the Bank."
Further, the account fee schedule states that the Bank "has a
security interest in any service fees or charges to the account."
Similarly, in Coffey, the personal account agreement included a
promise "to pay any service fees which apply to your Account" and
gave the bank "a security interest in your account for any fees
you haven't paid."
The Law Division read the Coffey agreement to refer only to
fees past due. 281 N.J. Super. at 317. A more realistic reading
is that the agreements were intended to confer on First Fidelity
a security interest for all fees, past or future.
For a bank to satisfy the requirement of possession, it must have exclusive possession and control over the account. See CJL Co., supra, 71 B.R. at 264-65 (finding that bank had security interest in deposit account because bank had exclusive and unequivocal control over account); Duncan Box, supra, 270 S.E. 2d at 145-46 (ruling that reserve account to which only bank had access met requirement for common law security interest); cf. Miller v. Wells Fargo Bank Int'l Corp., 540 F.2d 548, 563 (2nd Cir. 1976) (concluding that bank failed to prove it had exclusive control over overseas deposit account and thus could not claim security interest in account). When a depositor may withdraw funds from an account, "it would be difficult, if not impossible for the bank to demonstrate that the account constitutes a pledge" of a security interest. Duncan Box, supra, 270 S.E 2d at
146 n.11. Here, the depositors could have withdrawn the balances
at any time.
Although First Fidelity intended to create security
interests through the deposit agreements, it lacked exclusive
possession and control over the accounts. Consequently, it did
not hold security interests in the accounts.
B. Generally, a bank has a right of set off "against all monies or funds in its possession belonging to a depositor to secure the payment of the depositor's indebtedness to the bank." Federal Deposit Ins. Corp. v. Pioneer State Bank, 155 N.J. Super. 381, 389 (Law Div. 1977); Hudson United Bank v. House of Supreme, Inc., 149 N.J. Super. 153, 156 (Ch. Div. 1977); 5A Michie on Banks and Banking Ch. 9 § 114, at 413 (1994 Replacement Volume). Our analysis of the common-law right of set off begins by recognizing that the relationship between a bank and a depositor is that of debtor and creditor. Pagano v. United Jersey Bank, 143 N.J. 220, 233 (1996); Elsinore Shore Assocs. v. First Fidelity Bank, N.A., 67 B.R. 926, 943 (Bankr. D.N.J. 1986). The deposit of funds into a general account transfers ownership of the funds to the bank and constitutes the depositor as the bank's creditor. Ibid. By borrowing money from the bank in a separate transaction, a depositor may also become the bank's debtor. If so, the bank may have the right to set off any amount due on the
debt against the funds on deposit. Ibid.; Pioneer State Bank,
supra, 155 N.J. Super. at 389; see also Clark, supra, ¶ 18.01, at
18-2 (stating that right of set off arises out of debtor-creditor
relationship between bank and its depositor).
"A bank may apply general deposits to debts due it from a
depositor whether such debts consist of a balance on general
account or any other indebtedness." 5A Michie, supra, Ch. 9 §
119a, at 473. Sometimes, a set off involves separate debts
established through independent contracts. See Elsinore Shore,
supra, 67 B.R. at 943; Walter v. National City Bank,
330 N.E.2d 425, 427 (Ohio 1975). Here, however, both debts arise from the
same source, the deposit account agreement. First Fidelity is
indebted to Camp's and Coffey for the balance of funds in their
accounts, and they are obligated to it for the processing fees.
In one sense, the depositors' obligation for the processing fees technically does not become due until after service of the writ of execution. 281 N.J. Super. at 274. Before the creditors levied on the account, Camp's and Coffey were not indebted to First Fidelity for those fees. Through the deposit agreement, however, Camp's and Coffey recognized First Fidelity's right to the fees if creditors levied on the accounts. Cf. Schuler v. Israel, 120 U.S. 506, 510, 7 S. Ct. 648, 650, 30 L. Ed. 707, 708 (1887) (finding that where debtor is insolvent at time of garnishment, bank may set off payment of any obligation whether
due or not); Elsinore Shore, supra, 67 B.R. at 944 (stating that
under bankruptcy provisions, claims that are contingent or not
yet due may be the subject of set off). But cf. 5A Michie,
supra, Ch. 9 § 115b, at 441 (stating that off set is authorized
if debt is mature or past due, not if debt is only contingent).
Processing fees may thus be considered as common-law set offs.
Ordinarily, a bank must satisfy three conditions to
establish a priority right to set off: the funds to be set off
must be the property of the bank, the depositor must deposit the
funds without restriction, and the depositor's indebtedness that
gives rise to the set off must be due and owing. Pioneer State
Bank, supra, 155 N.J. Super. at 390; 5A Michie, supra, Ch. 9 §
115a, at 433. Also, mutuality of obligation shall obtain between
the debtor and creditor, meaning that the debts must involve the
same parties and mutual demands must exist between the debt and
the funds deposited. Pioneer State Bank, supra, 155 N.J. Super.
at 390; 5A Michie, supra, Ch. 9 § 115c, at 442.
All American and Citibank do not dispute that the funds on deposit belonged to First Fidelity and that the funds were unrestricted. Remaining is the issue whether the bank's claim to its fees take priority over the judgment creditor's lien. The question becomes whether a debt was "due and owing" at the time of the levies. See Victor Werholf Aviation Ins. v. Garlick, 771 P.2d 962, 965-66 (Mont. 1989) (finding that bank could set off
debt at time of garnishment); Walter v. National City Bank,
330 N.E.2d 425, 427 (Ohio 1975) (noting general rule that bank may
set off debt despite fact that bank has been garnished by
creditor).
First Fidelity claims that its fee is automatically "due and
owing" simultaneously with the receipt of the garnishment. Thus,
First Fidelity asserts that its set off has a prior claim to
funds in the account.
All American and Citibank argue that their levies take
priority over First Fidelity's fees. They contend that until
service of the writ of execution, the depositors did not owe
First Fidelity anything. Pointing to the depositors' right to
withdraw the full balance of funds from the account, they assert
that no debt was "due and owing" at the time of the levy.
Both First Fidelity and the levying creditors rely on
Tumarkin v. First National State Bank,
75 N.J. 373 (1979), aff'g
p.c.o.b.
142 N.J. Super. 304 (App. Div. 1976), in which we
permitted a garnishee bank to set off funds on deposit against a
loan that the depositor had guaranteed. The depositor, which
became insolvent, made an assignment for the benefit of
creditors. On learning of the assignment, the bank set off the
funds on deposit against the loan. This Court sustained the
bank's set off over the claim that the depositor's debt did not
mature until after the levy. 75 N.J. at 373. To the extent that
Tumarkin is relevant, it supports First Fidelity's claim that the
depositors' obligation to pay the processing fees arose at the
moment that All American and Citibank effected the levies on the
accounts.
As a leading authority states, "the courts have generally given priority to the depository institution's right of setoff, even if setoff is not `exercised' until after the depository institution receives notice of the garnishment." Clark, supra, ¶ 21.04, at 21-4. Courts in several states have recognized the fairness of permitting a bank, when confronted with a garnishments on an account, to set off an obligation to the bank against the account. An Ohio court has allowed such a set off, even in the absence of statutory authority. McKinney, Inc. v. Wyman Corp., 657 N.E.2d 812, 814 (Ct. App. Ohio) (stating, absent statute, that bank has right of set off against depositor's account even after bank is served with garnishment notice), appeal not allowed, 654 N.E.2d 986 (1995). Admittedly, the judicial role is more certain in a heavily-regulated industry, such as banking, when the legislature has adopted dispositive legislation. Several states have granted priority to a bank's right of set off by statute. See Arizona Dep't of Economic Sec. v. Arizona Bank, 650 P.2d 435, 436 (Ariz. 1982) (holding that Ariz. Rev. Stat. Ann. § 12-1591 permitted garnishee to set off its costs for responding to a writ of garnishment); Aspen Indus.
Inc. v. Marine Midland Bank,
421 N.E.2d 808, 812 (N.Y. 1981)
(holding that N.Y. Debt. & Cred. Law § 151 authorizes set off of
unmatured debt upon receipt of levy); Pan Am. Nat'l Bank v.
Ridgway,
475 S.W.2d 808, 808 (Tex. Civ. App. 1972) (holding that
Rule 677 of Texas Rules of Civil Procedure permits garnishees'
costs in responding to writ to be deducted from sum owed to
creditor); see also Clarke, supra, ¶ 18.02, at 18-4 - 18-6. The
New York legislature has enacted legislation specifically
addressing the issue before us. See N.Y. Debt. & Cred. Law § 151
(McKinney 1990 & Supp. 1996) (stating, "Every debtor (bank) shall
have the right upon . . . (d) the issuance of any execution
against any of the property of a creditor (depositor) . . . to
set off and apply against any indebtedness, whether matured or
unmatured, of such creditor to such debtor, any amount owing from
such debtor to such creditor, at or at any time after, the
happening of the . . . [writ of execution,] notwithstanding the
fact that such right of set off shall not have been exercised by
such debtor prior to the making, filing, or issuance, or service
upon such debtor of, or of notice of, any . . . issuance of
execution . . . ."); see also Industrial Comm'r v. Five Corners
Tavern, Inc.,
393 N.E.2d 1005, 1008 (N.Y. 1979) (stating that
legislative history of § 151 indicates intent to preserve set off
for use by garnishee bank against levying creditor any time after
issuance of execution). We likewise believe that the issue is
ripe for legislative consideration in this State.
Until such time as the legislature acts, however, we
conclude that considerations of equity and economic reality
support recognition of a bank's common-law right to set off a
reasonable processing fee against a deposit account--even after a
creditor has levied on the account.
All American and Citibank do not dispute that the contract
between the Bank and its depositors requires payment of the levy-processing fee. They contend, however, that the Bank should
recover the fee from its depositor in a separate action.
According to defendants, deduction of the fee before satisfaction
of the levy results in charging them the fee.
The fee, however, is more properly viewed as a charge to
each depositor through the depositor's agreement with the bank.
That the fee reduces the balance available to defendants is
incidental. The creditors still have a valid judgment against
each debtor and may pursue other assets of the debtor to satisfy
the judgment.
Granting banks a priority in common-law set offs of levy processing fees is both fair and reasonable. To process the payment of the creditor's levy, a bank incurs costs. The costs are real. Someone must bear them. By agreement with its customers, the bank understandably tries to pass those costs to the depositors who incur them. When the funds on deposit suffice
to pay both the levy and the processing fees, the bank charges
the fees to the account and pays the levying creditor the balance
up to the amount of the levy. In that case, the depositor pays
the processing fee. If, however, the funds in the account are
not sufficient both to satisfy the levy and the processing fees,
and the bank is prohibited from offsetting the fee, the
inevitable result will be that the bank will pass those costs to
other depositors as part of the cost of doing business.
As between the bank and the levying creditor, the creditors
fairly should bear the costs of processing a levy. Creditors
control the risk of default by selecting the debtors with whom
they do business. Here, the creditors, Citibank and All
American, can distribute the risk of default to all debtors by
increasing the cost of credit in the future.
The amount of the processing fee, moreover, is small. As
inconvenient as levying on additional assets may be for the
creditor, it would be even more inconvenient for First Fidelity
to institute a separate action for so small an amount. Requiring
banks to bring a separate action would waste judicial resources.
See Arizona Dep't of Economic Sec., supra, 650 P.
2d at 437
(vindicating deduction from depositor's account rather than
requiring separate action, acknowledging the adverse effects on
the judicial system of requiring separate action against
depositor).
Our conclusion that First Fidelity may set off the
processing fees is consistent with the general principle that a
garnishor's rights can rise no higher than the rights of the
debtor. Russell v. Fred G. Pohl co.,
7 N.J. 32, 41-42 (1951).
Here, Camp's and Coffey agreed to pay a $60 processing fee if a
judgment creditor levied on their accounts. When All American
*and Citibank levied on the accounts, First Fidelity was entitled
to deduct the processing fee. The levying creditors possess no
greater rights to the funds in the accounts than the depositors.
Consequently, the creditors would be entitled to those funds only
after First Fidelity deducted the processing fees.
The issue of the relative rights of banks, their depositors,
and judgment creditors to funds on deposit is a matter suited for
legislative treatment. As previously indicated, supra at __,
slip op. 14-15, some state legislatures have expressly granted
banks the right to deduct fees before paying funds on deposit to
levying creditors. Other legislatures have granted banks
security interests in deposit accounts. See Cal. Com. Code §
9104 (1990) (including "deposit accounts" in the types of
property covered by Article 9 security interests); Haw. Rev.
Stat. § 490:9-104 (1995) (same); Ill. Rev. Stat. ch. 26, para. 9-104 (1993) (same); La. Rev. Stat. Ann. § 10:9-104 (West 1993)
(same); see also 5A Michie, supra, at § 14-10;. We commend
consideration of the issue to the Legislature.
III.
Finally, we turn to First Fidelity's contention that this
dispute should have been adjudicated in a plenary hearing, not in
the context of a turnover motion under N.J.S.A. 2A:17-63.
Neither the levies nor the debts are disputed. We therefore
agree with the lower courts that plenary hearings in these case
are unnecessary. 281 N.J. Super. at 313 n.1.
The judgment of the Appellate Division is reversed, and the
matter is remanded to the Law Division for entry of a judgment
for First Fidelity.
JUSTICES HANDLER, O'HERN, GARIBALDI, STEIN and COLEMAN join
in JUSTICE POLLOCK's opinion.
SUPREME COURT OF NEW JERSEY
NO. A-88 SEPTEMBER TERM 1995
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
ALL AMERICAN AUTO SALVAGE,
Plaintiff-Respondent,
v.
CAMP'S AUTO WRECKERS,
Defendant.
CITIBANK, SOUTH DAKOTA, N.A.,
Plaintiff-Respondent,
v.
LISA A. COFFEY,
Defendant.
DECIDED August 1, 1996
Justice Handler PRESIDING
OPINION BY Justice Pollock
CONCURRING OPINION BY
DISSENTING OPINION BY
CHECKLIST
REVERSE &
REMAND
JUSTICE HANDLER
X
JUSTICE POLLOCK
X
JUSTICE O'HERN
X
JUSTICE GARIBALDI
X
JUSTICE STEIN
X
JUSTICE COLEMAN
X
TOTALS
6
Converted by Andrew Scriven