What if your judgment debtor has a line of credit (LOC), and you have the Sheriff garnish their bank account(s); will you eventually recover not only what is in their account(s), but also recover up to the credit-limit of their LOC? How would their LOC, either the outstanding balance, or its potential credit limit; affect what is available to you in the debtor’s savings and checking accounts?
One of many judgment-related articles: I am a judgment broker, not a lawyer, and this article is my opinion based on my experience, please consult with a lawyer if you need legal advice.
There is case law in the Eighth Circuit, that says if a LOC is automatically attached to a checking account, it means that checks will be honored by that LOC without human intervention of a loan officer, then that LOC must be used to pay a levy on that account. Very few banks work in this way, especially after a certain appeal court case’s ruling on that law.
While few banks would tap a customer’s LOC in response to a court garnishment, occasionally they do. In the case of Southwestern Glass Company, Inc. v. The Bank of Arkansas, N.A., in the Eighth Circuit U.S. Court of Appeals; the court ruled that the bank was liable for over $500,000, because they failed to attach the debtor’s LOC.
At least in Missouri, Nebraska, and Arkansas; are within the Eighth Circuit and are subject to this ruling. The Bank of Arkansas was found liable because the LOC was linked automatically to the customer’s direct deposit account. Because the customer wrote a NSF check, and the check was automatically covered by the LOC; the appellate court held that the garnishment of the LOC should be treated the same as the customer’s checking account. Should you find your bank will not touch the debtor customer’s account (that is linked to a LOC), consult with an attorney; if you wish to proceed against the bank.
In my opinion, LOCs should not be automatically linked to a direct deposit account. As long as a loan officer’s approval is required before payment of the item, no case law exists, stating that a LOC is subject to a garnishment.
Why there are any possible lien rights to an LOC at all, is in the legal language of every loan document that every bank uses, and is similar to: “As security for this loan, in addition to any pledged collateral, borrower also pledges the contents of any deposit account(s) with this institution, up to and including the total outstanding balance on this note”.