By: Trev E. Peterson
Nebraska holds that Social Security funds that are comingled in a bank account are exempt from garnishment, if the account owner can prove that the funds deposited in the account were exempt funds.
Schaefer Shapiro, LLP v. Ball, 305 Neb. 669, ___ N.W.2d ___ (2020) involved an appeal of a garnishment of a bank account. Schafer, the judgement creditor, garnished a bank account that held at some time both funds that were exempt and nonexempt from garnishment. The initial decision was made by the county court in favor of the debtor–Bell. The creditor appealed first to district court which affirmed the decision of the county court and then to the Nebraska Court of Appeals, where the Supreme Court took the case to even the workload.
Schaefer obtained a judgment against Ball in county court. Schaefer garnished Ball’s bank account and the bank returned answers that the account contained more than the $1,994.99 amount due on the judgment. Yes, the case went to district court and then to the Nebraska Supreme Court over $1,994.99.
Ball requested a hearing where Ball testified that the only funds in the garnished account were his Social Security payments. Ball estimated that the total balance in the bank account was “[$]30,000, probably.” Prior to the garnishment Ball sold real estate and deposited the proceeds from the sale of the real estate into the same account in to which the Social Security funds were deposited. At the hearing on the garnishment, Ball testified that the real estate sales proceeds had been spent, but that he did not spend the Social Security funds. The county court believed Ball and ruled that the proceeds were exempt.
On appeal, the district court highlighted the absence of evidence on how much money was in the bank account at the time of the garnishment, or any time thereafter, aside from Ball’s estimation. There was no evidence about how much was in the account before any commingling occurred or when the answers to the garnishment interrogatories were prepared. However, the district court noted that the county court found Bell credible and the district court found no error by the county court on the record. Schaefer appealed.
The standard of review for both the district court sitting as an appeal court and the Supreme Court is error appearing on the record. The inquiry is whether the decision conforms to the law and is supported by competent evidence. Here, the county court believed Ball and the appeals courts will generally not substitute their judgment for the trier of fact.
The Supreme Court noted that Social security payments are generally exempt under both federal and state law. An earlier case—Havelock Bank v. Hog Confinement Systems, 214 Neb. 783, 335 N.W.2d 765 (1983) dealt with a case where all of the funds in the account were Social Security funds. The Ball case was different because there were comingled funds. The Supreme Court noted that a majority of courts that reached the issue determined that Social Security benefits continue to be exempt even if comingled with nonexempt funds. Most courts require that the source be traceable. The Supreme Court held that exempt funds such as Social Security payments remain exempt from garnishment, even when comingled with nonexempt funds so long as the source of the exempt funds is reasonably traceable.
When an account contains comingled funds the burden of proving the exempt character of the funds is on the party claiming the exemption—normally the judgment debtor. In this case Bell did so by his testimony. No bank statements were offered. The most telling part of the Supreme Court’s analysis is the comment that “[t]he parties presented scant evidence to the county court.” Because Ball’s testimony provided a basis for the county court to rule that the funds were exempt, the Supreme Court affirmed.
There are several practice tips from this case. First, in order to avoid any doubt about whether funds in a bank account are exempt, a person receiving Social Security who has pending judgments against them should maintain two accounts, one into which only Social Security funds are deposited and another account into which other funds are deposited. By maintaining two accounts, and spending the Social Security money last, the debtor can preserve the exempt status of the Social Security funds with little risk that a court will not believe that the funds in the account are all Social Security funds.
Another practice tip: offer copies of bank statements that show the balance in the account at the time of the garnishment and also show the history of deposits and withdrawals from the account. The bank statement would clarify the exempt or nonexempt status of the balance in the account. Relying on testimony alone is risky since the county court could easily have not believed Bell and then the result would have been different.
From the creditor’s perspective, if met with an objection Social Security grounds consider asking the debtor for the bank records to prove the exemption. If should be fairly easy to track the Social Security deposits into the account and determine whether the funds in the account on the day the garnishment summons was served were in fact Social Security proceeds. The creditor can also consider subpoenaing the relevant bank records to the hearing so that there are account records to offer. However, with $2,000 involved it hardly seems worth the effort to subpoena bank records.