- Setoff Against Direct Deposit Disability Payment to Satisfy Judgment Violates Social Security Act and Constitutes Unfair Trade Practice
- March 7, 2013
- Law Firm: Kaufman Canoles A Professional Corporation - Norfolk Office
A member who had a checking account linked to her share account co-signed for a loan for her husband. They both signed a security agreement and a disclosure statement. After the husband defaulted on the loan, the credit union obtained a judgment in the amount of $18,443.96 against the member. Thereafter, the member applied for social security disability benefits and requested direct deposit to her checking account but without providing the two-digit suffix associated with her checking account. She then closed her checking account, but not her share account, before receiving any benefit payments.
When the United States Treasury attempted to make a direct deposit of retroactive disability benefits in the amount of $13,801 through the ACH network, the credit union redirected the payment to the member's share account, which was still open, and applied the funds to partially satisfy its judgment against her. The member filed suit alleging conversion, civil theft and a violation of the Connecticut Unfair Trade Practices Act ("CUTPA"). According to the member, Section 407 of the Social Security Act prevented an assignment or transfer of her future social security payment and its seizure by legal process. The credit union argued that it did not resort to legal process to enforce its judgment and that it had a statutory lien against the disability funds pursuant to the loan agreement the member had signed and 12 U.S.C. § 1757, which states in part: "A Federal credit union shall have succession in its corporate name during its existence and shall have power . . . (11) 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. . . ."
The court agreed with the credit union that it had a statutory lien, noting however, that the Code of Federal Regulations precluded the lien from attaching to the extent prohibited by federal or state law. The court also concluded that neither federal law nor the loan agreement authorized the credit union to satisfy its judgment by setoff against the disability payment. Because the setoff was unauthorized and improper, the court ruled for the member on her claims of conversion and civil theft. Additionally, the court held that the member was entitled to an award on her CUTPA claim because the credit union was aware that the funds were social security funds, that the funds were sent for deposit to a closed account and was notified that the funds could be exempt from setoff before redirecting the funds and setting off against them. The credit union’s actions harmed the member, who was unable to use the funds to bring her mortgage payments current and who lost her house in foreclosure. Odell v. Wallingford Municipal Federal Credit Union.