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Voluntary Payments on Secured Loans After Bankruptcy

by Drew M. Edwards, Esq.

It’s very common for credit union members to declare bankruptcy without reaffirming their secured loans. In this situation, the credit union’s right to collect money from the member ceases, but its right to take possession of the collateral (e.g. repossessing a car) survives. In this article, I will be discussing auto loans, but the same principles apply to mortgages and foreclosures. In the case of an auto loan that has been discharged in bankruptcy, your only official legal remedy against the debtor is to repossess the car. However, in practical terms, the debtor usually wants to keep the car, and you want to continue to receive payments. Thus, there is usually a tacit agreement that you will not repossess as long as the member continues to make payments voluntarily. This sounds simple enough, but there are a few things to keep in mind if you want to avoid running afoul of the law.

The first thing to consider is the statements that you send to your member. According to a strict reading of the Federal bankruptcy law, any communication with the debtor about the discharged loan would be prohibited by the automatic stay and the discharge injunction. However, the New Jersey bankruptcy court has issued a special local order allowing secured creditors to communicate with bankrupt debtors in certain limited ways. The order allows you to send “informational” statements to the debtor on a regular basis, and also as a reminder if they stop paying. With this order, the court is acknowledging that it’s better for a debtor get a reminder statement than a surprise repossession. Here is the exact text of the order: “It shall not be a violation of the automatic stay or the discharge injunction for secured creditors to send regular monthly statements and payment coupons to individual debtors … In the event that debtors fail to make timely payments, it shall not be a violation of the automatic stay or the discharge injunction for secured creditors to send reminder statements, provided that the statements are informational only, and do not demand payment.” You can read the full text of the order here.

You will have to design a special type of statement to be sent to secured debtors who have been discharged in bankruptcy. The order permits “regular monthly statements,” but this refers to the frequency of the statements, and not to their content. The text of the order is slightly ambiguous, allowing “payment coupons,” but also stating that reminder statements must be “informational only.” I suggest playing it safe and sending purely informational statements that do not show a due date or amount due. The statement should only identify the collateral and show the balance, the date of last payment, and the amount of last payment. Avoid anything that uses the word “due” or implies that payments are due.

As with all bankruptcies, make sure that you flag the member’s account so that anyone who interacts with it will know that the member is bankrupt. If you are receiving regular monthly payments and sending statements, it’s easy for a new employee to miss the fact that the member has been discharged in bankruptcy, and inadvertently send a collection letter or call the member on the phone when the account becomes delinquent. Make sure that all automatic collection efforts are suspended for this account, and that everyone in the credit union knows that the member is not to be contacted.

If the member stops paying, you have two options: you can continue to send the same informational/reminder statements, or you can repossess. You can’t threaten to repossess, or make any reference to repossession in your statements. If you do repossess and sell the car, remember not to list any deficiency balance on the deficiency notice that you send after the sale. If there is a co-signer, you will have to send two separate deficiency notices: one to the co-signer listing the full balance due, and one to the bankrupt debtor listing a zero deficiency balance. You cannot send any statements, even informational statements, to the bankrupt member after the car has been repossessed.

Once you have the car in your possession, be wary of using it as leverage to negotiate payment before the sale. If your member comes to you and wants to negotiate, or if they want to talk to you about a discharged loan for any other reason, call your attorney. Your intentions may be good, but it’s easy to stumble into a violation of the bankruptcy law if you stray outside of the strict boundaries set by the court.

Lending to Non-U.S. Citizens

by Drew M. Edwards, Esq.

Whether your credit union serves a small rural town, or the employees of a global corporation, you will sooner or later receive a loan application form someone who is not a United States citizen. While it is perfectly proper to lend to non-US-citizens, there are certain risks, and certain traps for the unwary, when designing lending policies and procedures for borrowers who are not citizens of the United States.

Can You Lend?

Can your credit union lend to individuals who are not US citizens? The answer is yes. There are no restrictions on lending to individuals based on citizenship or immigration status. An individual’s citizenship may make it more difficult to comply with certain other regulatory requirements, such as those related to the Office of Foreign Asset Control, but a person’s lack of US citizenship does not, by itself, prohibit a financial institution from making a loan to that person. In the context of mortgage lending, secondary market rules permit the sale of mortgage loans on the secondary mortgage market, even if the loan was made to a non-US-citizen. For example, Freddie Mac’s rules put it very simply: “A non-U.S. citizen who is lawfully residing in the U.S. as a permanent or nonpermanent resident alien is eligible for a Mortgage on the same terms as a U.S. citizen.” (See rule 22.10.1: Permanent and nonpermanent resident aliens.) Fannie Mae has more detailed rules (See B2-2-02, Non–U.S. Citizen Borrower Eligibility Requirements and B3-4.2-05, Verification of Assets for Non-U.S. Citizen Borrowers), but they also allow “mortgages made to non–U.S. citizens who are lawful permanent or non-permanent residents of the United States under the same terms that are available to U.S. citizens.” Both Fannie Mae and Freddie Mac require that the borrower be a legal resident of the US.

Risks of Residence

While your credit union is permitted to lend to non-US-citizens, there are certain risks to consider before you decide to lend to a particular borrower. A full treatment of the risks involved in lending to non-US-citizens is beyond the scope of this article. However, I do want to address certain legal risks and compliance issues related to the fact that a particular individual may choose to leave the United States after the loan is disbursed. If you disburse a loan with a five-year term, you will have a hard time collecting on that loan if the borrower leaves the United States after two years.

You may be wondering whether using such criteria for evaluation is prohibited as discrimination on the basis of national origin. While it is true that a lender cannot discriminate on the basis of national origin, you are allowed to take immigration status into account when considering ability to repay. In The Equal Credit Opportunity Act (Reg. B), section 202.6(b)(7) states that “A creditor may consider the applicant’s immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor’s rights and remedies regarding repayment.” The staff commentary further expands on this rule:

The applicant’s immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor’s ability to obtain repayment. Accordingly, the creditor may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa… A denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin.

So, a lender is permitted to take into account the likelihood that a particular borrower may or may not remain in the USA, in terms of the lender’s ability to enforce its legal rights to repayment against that borrower in the future. That said, this is a determination that must be made on an individual, case-by-case basis. A lender may never discriminate on the basis of national origin. Thus, the permissive language in 202.6(b)(7) must be read in light of the strict prohibition in 202.6(b)(9): “a creditor shall not consider race, color, religion, national origin, or sex (or an applicant’s or other person’s decision not to provide the information) in any aspect of a credit transaction.”

Let’s say that you deny a loan to a borrower because you think that he may leave the USA and return to the Dominican Republic, his country of origin. Whether that decision violates the ECOA will depend upon your documented reasons for thinking that the borrower will leave. If you think that he will leave solely because he is from the Dominican Republic, since you think that everyone from the Dominican Republic is likely to leave the USA, that is prohibited as discrimination on the basis of national origin under 202.6(b)(9). If, however, you think that he will leave because he has only been in the country for two months, he has no ties to the local community, and he has told you verbally that he intends to return to the Dominican Republic, this is permitted under section 202.6(b)(7). Whenever you make a decision of this type, make sure that you document the individual circumstances of the borrower which lead you to believe that he or she has a high likelihood of leaving the USA during the term of his or her loan.

Even if your credit union intends to consider immigration status in a way that complies with the ECOA, this is still dangerous ground which presents a trap for your credit union. Even if your policies do not have the intent to discriminate, they can still violate the ECOA if they have a disproportionate impact on a protected class. While a full treatment of the “disproportionate impact” test is well beyond the scope of this article, the Interagency Fair Lending Examination Procedures sets out a five-point test that examiners can use to flag lenders for creating a disproportionate impact:

1. A specific policy or criterion is involved.

2. The policy or criterion on its stated terms is neutral for prohibited bases.

3. The policy or criterion falls disproportionately on applicants or borrowers in a prohibited basis group.

4. There is a causal relationship between the policy or criterion and the adverse result.

5. Either a or b:

a. The policy or criterion has no clear rationale, or appears to exist merely for convenience or to avoid a minimal expense, or is far removed from common sense or standard industry underwriting considerations or lending practices.

b. Alternatively, even if there is a sound justification for the policy, it appears that there may be an equally effective alternative for accomplishing the same objective with a smaller disproportionate adverse impact.

If your credit union considers factors such as immigration status and likelihood of remaining in the USA, you must employ procedures to guard against improper use of such criteria which could create a disparate impact on a protected class. It is all too easy for anyone to start taking shortcuts that can eventually turn into discriminatory practices. While it is perfectly proper and reasonable to consider a borrower’s immigration status in terms of the credit union’s rights and remedies regarding repayment, it is also essential to institute internal controls to ensure that your staff considers each borrower as an individual, and does not discriminate improperly. As always, ensure that you have knowledgeable legal representation and consult your credit union attorney for advice about your credit union’s specific situation.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

The Right of Setoff – What is Exempt?

by Drew. M. Edwards, Esq.

The right of setoff is one of a credit union’s best collection tools. Basically, the right of setoff enables a credit union to use the balance in a member’s deposit accounts to pay that member’s delinquent loan balance. This is often a quick and easy way for the credit union to recoup at least some of its losses when a member defaults on a loan. However, there are certain cases in which the right of setoff is not so simple, and important exceptions where it does not apply at all.

What is the right of setoff?

What we generally call “setoff” is really three different legal rights, each of which is sufficient by itself to enable a financial institution to offset a debt using the debtor’s deposit accounts:

1) The first component is the common-law “right of setoff,” where the concept gets its name. This is the common-sense concept that if a borrower defaults, a lender can satisfy the debt out of any assets that the lender holds on the borrower’s behalf. This is a very old concept, which has survived from English common law.

2) The second component to the right of setoff is a statutory lien. For a Federal credit union, this is contained in 12 USC 1757(11), which gives the credit union the power “to impress and enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him.” State credit unions will have a corresponding power in the state’s credit union act or banking law. When the member defaults, the credit union can enforce this statutory lien.

3) The third component to the right of setoff is a consensual lien contained in the credit union’s loan documents. Virtually all credit union loan documents contain language specifically allowing the credit union to setoff the member’s shares in the event of a default (if your loan documents don’t contain such a provision, they should).

Having three separate legal rights to setoff may sound good, but there are some important situations in which you won’t be able to use some or all of these rights to apply your members’ deposit account balances to their delinquent loans. Three important areas where you will probably not be able to use your right of setoff are consumer credit cards, social security funds, and retirement accounts.

Consumer Credit Cards

Section 12 CFR 1026.12(d) of the Truth in Lending regulations nullifies the common law right of setoff and any statutory liens for consumer credit cards. This regulation specifically allows a consensual lien on consumer credit card accounts, but only if certain special requirements are satisfied. In the commentary to this section, the agency speaks at length about what a creditor must do to obtain an enforceable consensual lien in the context of a consumer credit card account. The requirements are onerous:

1. Security interest—limitations. In order to qualify for the exception stated in §1026.12(d)(2), a security interest must be affirmatively agreed to by the consumer and must be disclosed in the issuer’s account-opening disclosures under §1026.6. The security interest must not be the functional equivalent of a right of offset; as a result, routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the issuer does not result in a security interest that falls within the exception in §1026.12(d)(2). For a security interest to qualify for the exception under §1026.12(d)(2) the following conditions must be met:

i. The consumer must be aware that granting a security interest is a condition for the credit card account (or for more favorable account terms) and must specifically intend to grant a security interest in a deposit account. Indicia of the consumer’s awareness and intent include at least one of the following (or a substantially similar procedure that evidences the consumer’s awareness and intent):

A. Separate signature or initials on the agreement indicating that a security interest is being given.

B. Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.

C. Reference to a specific amount of deposited funds or to a specific deposit account number.

ii. The security interest must be obtainable and enforceable by creditors generally. If other creditors could not obtain a security interest in the consumer’s deposit accounts to the same extent as the card issuer, the security interest is prohibited by §1026.12(d)(2).

These requirements are very strict, and there have been several cases involving credit unions in which the judge ruled that generic language in the credit union’s card agreement was insufficient to allow a right of setoff. For example, language like the following has been held insufficient to create a valid consensual lien for a credit card account when placed in the “fine print” of an account information booklet: “you pledge and grant as security for all obligations you may have now or in the future, except obligations secured by your principal residence, all shares and dividends and all deposits and interests, in any, and all accounts you have with us now and in the future.” If your card agreement is not specifically tailored to fall within the narrow exception above, you can’t apply a member’s shares to a delinquent credit card account.

Social Security

Social Security funds are also exempt from the right of setoff. This exemption arises from Section 207 of the Social Security Act (42 USC 407): “The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” Based on this, the courts have decided that a financial institution cannot offset Social Security benefits against any other debts held by the financial institution. However, this exception also has its own exception: a financial institution can use Social Security funds to offset a debt only if the debt arose from the account in which the Social Security benefits are placed (i.e., an overdraft). This means that you can offset an overdraft with a future deposit of Social Security funds into the same account, but you cannot apply Social Security funds in a member’s share account to a separate delinquent loan account.

Retirement Accounts

The Federal statute creating IRAs states that in order for an account to be an IRA, the account documents must provide that “the interest of an individual in the balance in his account is nonforfeitable.” In addition, remember that an IRA account is not technically an account in the member’s name; instead, it is a trust created for the benefit of the member. Considering these two factors, courts have held that IRA accounts are not subject to setoff.

As you can see, our courts and our legislature have found plenty of ways to complicate something as simple as the right of setoff. If you have any questions about using your right of setoff, be sure to contact your credit union attorney.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

Patent Troll Litigation

by Stephen J. Edwards, Esq.

Patent trolls are becoming an increasing problem for all businesses in the United States, including credit unions. These companies own patents, but produce no goods or services. In fact, they often own nothing at all except their patent portfolios. Their business model focuses on sending threatening letters and filing lawsuits, in the hope of scaring your credit union into paying a settlement fee, rather than facing the possibility of litigation. For this reason, these companies have earned the pejorative name, “Patent Troll.”

You may think that your credit union is safe from such demands, because you do not produce, let alone steal, any technology. Instead, you buy technology from third parties to better serve your members. Unfortunately, merely using technology can open the door to a lawsuit from a patent troll. Credit unions have been harassed and sued by patent trolls for simply using Wi-Fi technology, or for ambiguous concepts such as “Methods and Systems for Facilitating Transmission of Secure Messages Across Insecure Networks.” Even if such a patent is invalid, proving this can cost many thousands of dollars in legal fees. The patent troll hopes that its target will make a settlement rather than fight in court.

Small credit unions and community banks are especially vulnerable as targets because they do not have the resources to defend themselves and see settlement as an easy option.  Trolls are looking for a quick payday.  They are really not interested in protecting their patent.  Since 2005 the number of defendants sued by patent trolls has quadrupled.  In 2012 they sued more than 7,000 defendants and sent thousands more threat letters.  US companies paid $29 billion to trolls in direct payouts.

This is a very real threat.  Many credit unions in Vermont, Maine, NY NH and Georgia have been sued by these patent trolls.  Congress is now considering legislation to make it more difficult for trolls to sue, but with the gridlock in Washington, no one can predict if or when such a useful law will pass.

Solutions

What can your credit union do to defend itself against patent troll lawsuits? As with many such unpredictable risks, the best choice may be insurance. Although there is no coverage for this type of claim under your standard insurance policies, CUNA Mutual has recently introduced Enhanced Defense Reimbursement coverage that pays certain defense costs associated with claims that are not covered by liability policies.  Patent troll litigation activity is one of the areas covered.

Another way to protect yourself from patent trolls is to insist that any technology vendor you deal with indemnify the credit union against such claims. They will resist, but you don’t want to do business with a company that won’t stand behind their product. In addition, make sure that you have your attorney review the contract language to make sure that the protection is adequate. Very often, companies will write extensive indemnification language into their contracts, only to eviscerate this protection by limiting the vendor’s liability to a few thousand dollars.

If you do receive a letter from a patent troll, don’t overreact.  Other credit unions or community banks are probably being targeted also.  Most of these cases start with a letter.  The initial response is critical.  Contact your attorney, your insurance company, and the League.  They can help you find others to possibly join in the fight.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

Commercial and Residential Underground Storage Tanks in New Jersey: A Primer

by Drew M. Edwards, Esq.

It seemed like a good idea at the time. For most of the 20th century, homeowners and businesses across the country buried their oil storage tanks underground to save space and hide an eyesore. Unfortunately, after a few decades many tanks began to leak, costing property owners significant money and causing an environmental disaster that has prompted state and federal regulations. Today, approximately 581,000 underground storage tanks (USTs) exist in the USA. What should you do if one of them is on your property? The answer depends on a number of factors including: 1) whether you are a buyer or a seller, 2) the age and type of tank, 3) whether or not it has leaked, and 4) the applicable laws and regulations.

What are the dangers?

The basic danger with any UST is that it may leak and discharge toxic chemicals into the soil. If this happens, the property owner will be required to remove and replace the contaminated soil — an expensive and time-consuming process. In many circumstances, such as when the contaminated soil is beneath the building’s foundation, it is difficult or impractical to remove all contamination. The task becomes vastly more complicated when the contaminants migrate into the groundwater. In that case, the property owner is required to hire a licensed environmental contractor to monitor the groundwater for many years. In addition to possible environmental damage, USTs that are regulated by NJ or Federal law may cause licensing and permit liabilities for property owners who fail to comply with these laws.

USTs on residential property

Underground heating oil tanks on residential property are not covered by either Federal or NJ state UST law, though local ordinances may apply. Residential tanks do not have to be registered with the NJ DEP (though any contamination that results from a leaking tank will still have to be remediated by law). This may sound like good news for homeowners, but it is a double-edged sword. While a homeowner with a UST on her property can avoid regulatory compliance burdens, this also means that an unregulated residential UST can leak and contaminate a property for years or decades without the homeowner’s knowledge. Many property owners remain unaware of the contamination until they are ready to sell their homes. Note that even though NJ and Federal law do not cover these tanks, many municipalities in NJ have adopted local ordinances covering USTs. Always check with your town before taking any action regarding a UST on residential property.

USTs on residential property most often become an issue when a house is sold. If you are buying property with a UST, it is usually safest to require the seller to remove the tank. This is true even if the tank has been decommissioned and unused for years. There may be contamination directly beneath the tank that may be difficult to detect unless the tank is removed. Make sure that the company that removes the tank tests the surrounding soil for contamination as well. It typically costs around $500.00 to remove a residential UST. Since residential USTs are such a problem,most buyers will not purchase a house with a UST on the property and sellers will almost always bear the cost of removal. This should be stated in the contract of sale.

Of course, you may not know whether the property has a UST before you sign the contract. Even if the seller tells you that there is no UST on the property, there may be an old tank that even the seller does not know about. For this reason, you should always hire a qualified contractor to search the property for USTs, and include language dealing with USTs in every real estate contract. If the property has any history of commercial use, make sure that any regulated tanks have been removed properly, and that the tanks are all registered as “closed” with the NJ DEP (see below).

Commercial USTs

Most USTs used for commercial purposes will be covered by either NJ or Federal regulation, meaning that they must be registered and monitored while in use, and that the NJ DEP and/or the Federal government must be notified before they are removed or decommissioned. NJ’s Department of Environmental Protection has a handy guide listing the types of USTs which are subject to state and federal regulation. It is available here: http://www.nj.gov/dep/srp/bust/regulated_ust_fact_sheet.pdf

What a buyer will choose to do with a UST will be dependent on many factors. For example, could the buyer use the UST in her business? If so, she will have to decide whether the regulatory burden outweighs the benefits of continued use. Any buyer, whether they are removing, decommissioning, or retaining a UST, will have to first determine the type of tank and whether or not it complies with regulations.

Old tanks, specifically those from the 1970s and earlier, should be removed for the same reasons as residential USTs. These single-walled steel tanks often have no safety features and simply cannot be monitored or operated safely. As with residential tanks, even if such a tank has been decommissioned, it is often best to remove it completely to be sure that no contamination has occurred in the past.

Removing a regulated commercial UST is a time-consuming and complicated process. You should make your final decision about whether or not to remove the tank at least 6 weeks before your due diligence period ends. Don’t assume that you will be able to leave it to the last minute and quickly hire a contractor to remove the tank. The applicable regulatory requirements will depend on the contents of the tank; for USTs that also fall under Federal regulations, there may be additional Federal requirements. At the bare minimum, the NJ DEP requires a 14-day notice prior to a commercial heating oil tank’s removal, but many steps must be completed before even this notice can be given. The contractor who does the physical removal work must be licensed for UST removal, and any problems with the tank’s registration must be corrected before the 14-day notice can be given. Allow two weeks to find and solicit bids from licensed contractors, two weeks for preliminary paperwork, and another two weeks for the 14-day notice period. If you discover a UST late in the due diligence period (for example, after your Phase I is complete), don’t be afraid to ask for an extension so that you can deal with it properly.

Removing a large commercial UST is also much more costly than removing a small unregulated residential tank, mostly due to the extensive environmental consulting and paperwork that is required. Expect costs of around $10,000.00 for a 5000 gallon commercial heating oil UST. The issue of who will bear this cost must be negotiated between the buyer and seller. The older the tank, the more leverage a buyer will have when asking the sellers to bear the cost of its removal.

Regulated tanks can also be decommissioned in place, but the regulatory burden is comparable to removal. Also keep in mind that when you sell the property, a future buyer may request that you remove the decommissioned tank, so it could become a problem for you later.

Whatever type of property and underground tank you are dealing with, you should start the process early and hire a knowledgeable attorney and environmental professional to ensure that the situation is handled properly.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

Summons, Subpoena, Garnishment: What do they mean to your credit union or business?

by Stephen J. Edwards, Esq.

It is possible that you may receive a number of legal documents during the course of running your business.  Some of those documents have similar names and can be very confusing.  They are also full of obscure legal terms.  The purpose of this article is to clear up some of that confusion.

SUBPOENA: A subpoena is a court order which requires a representative of the business to either appear in court to give testimony on a certain matter, or to produce certain documents.  Subpoenas are generally issued by courts and should be specifically directed to the business, or its officers.  The subpoena should contain the names of the plaintiff and defendant involved in the action, and should have the word “SUBPOENA” in some prominent place at the top or side of the document.  The business must comply with the terms of a subpoena or be subject to contempt of court.
Your credit union or business is under the jurisdiction of the federal government, New Jersey and any other states in which you have a branch office or significant presence.  You do not have to comply with a subpoena from a state where you do not do business.  Administrative agencies also have the authority under some laws to issue subpoenas.  In all cases, if you have any questions concerning the authority of the court or agency issuing the subpoena, consult your attorney.
With regard to credit unions, most subpoenas are issued in matrimonial actions where one spouse wants a share of whatever assets the other has at the credit union.  To avoid wasting your employees’ time it is recommended that the credit union call the attorney issuing the subpoena to determine exactly what is sought and suggest that a certified copy of the records requested be sent instead of having to make a personal appearance.

SUMMONS: A summons is often confused in the public’s mind with a subpoena.  A summons is also a court document but is served upon you only when you are a party to the litigation.  In other words someone is suing your business, and uses the summons, with a copy of a complaint attached, to advise you of that.  If you receive a NJ summons, you must file an answer within 35 days.  Consult with your attorney immediately.  The complaint may be covered by insurance.  If coverage exists, the insurance company will retain counsel to appear on your behalf.

WRIT OF EXECUTION (LEVY): A Writ of Execution is the unfortunate name given to the legal documents that the court issues to one of its officers to levy on (seize) assets.  It has nothing to do with killing someone.  If your credit union has accounts in the name of the person against whom a judgment has been entered, then you may be served with a Writ of Execution.  The creditor secures the writ from the court and it is served on the credit union by a deputy sheriff or a court officer.  The writ requires the credit union to freeze all money in the member’s account.  Do not give any money to the officer.  The creditor has to obtain an additional court order directing the credit union to turn over the money to the officer.  Any funds deposited in the account after the date when the officer serves the writ on the credit union are not subject to the writ and belong to the member.  If you are a business that owes money to one of your customers, then the same procedures apply to any of that money that is still in your possession.

IRS LEVY: The other popular form of levy is from the Internal Revenue Service.  The IRS levy contains language designed to scare you to death.  Don’t worry, they are not after you.  Once the levy is served, all funds at the business which belong to the member or the customer must be frozen for 21 days.  The business must release the funds to the IRS at the end of that period unless it receives a notice from the IRS that the lien has been released, or the holding period extended.  In the event your credit union has a pledge of shares, then you should contact the IRS office and advise them of that.  If the loan is in default, then they will probably let you retain the pledged shares.  The levy may be for more or less than the amount of the shares.  If more, forward what you have.  If less, send the amount demanded in the levy.

GARNISHMENT: This is a levy against the wages of one of your employees.  It will specify the percentage of money to be deducted each pay period; either 10% of the gross salary, or 25% of the net salary.  Net salary is basically the gross salary less the various tax deductions.  The levy documents provide a formula for calculating the net amount.  Remittances are made each pay period to the sheriff or to the court officer, until the total amount shown on the writ has been paid.  A garnishment is only against your employee’s wages, not any other accounts the employee may have at the business or credit union.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

New Rules on Credit Union Charitable Giving

by Drew Edwards, Esq.

With the New Jersey Credit Union Foundation’s silent auction coming up on September 30, now is a perfect time to examine NCUA’s recent changes to regulations on charitable giving by credit unions.  Before the recent changes, credit unions could only give to non-profit organizations in the credit union’s local community, or to tax-exempt charities operating “primarily to promote and develop credit unions.”  In addition, all charitable contributions had to be approved by the board of directors.  RegFlex relaxed this rule for well-capitalized credit unions, but those without access to RegFlex were still bound.

On July 2 of this year, a new rule went into effect which eliminated both RegFlex and the charitable contributions rule.  All credit unions are now able to make charitable donations as part of their incidental powers, without approval from the board of directors.  While this gives credit unions substantially more freedom, charitable giving is still not completely unrestricted.  All actions taken under a credit union’s incidental powers must be free from conflicts of interest — specifically, “No official, employee, or their immediate family member may receive any compensation or benefit, directly or indirectly” as a result of charitable giving.  This prohibits your credit union from, for example, sponsoring a little league baseball team if your teller’s daughter is a team member.  Or, if an employee were to take up a collection for his spouse’s medical costs, the credit union itself could not make a donation (employees and officers could, of course, donate personally).

The important thing to remember is that these new rules make it easier for your credit union to make a purchase at the NJ Credit Union Foundations’ silent auction.  Enjoy the conference, and don’t be afraid to be generous.

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