BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Juan Vargas, Chair AB 2364 (Wagner) Hearing Date: June 27, 2012 As Amended: April 30, 2012 Fiscal: Yes Urgency: No SUMMARY Would authorize depository institutions with fewer than ten California branches and require depository institutions with ten or more California branches to designate a central location for service of process for attachments and enforcement of judgments against deposit accounts and the contents of safe deposit accounts held by those institutions, would require that service of such process be made at the central location in all cases where there is such a designation, and would restrict the reach of levies served at the central location to deposit accounts and safe deposit boxes maintained at those financial institutions' California locations. Would establish mechanisms for use by judgment creditors, in cases where a financial institution has not designated a central location for service of process, and make other technical, conforming, and clarifying changes. DESCRIPTION 1. Would provide that a financial institution may, and if it has more than nine branches or offices in this state, shall designate one or more central locations for service of writs of attachment, execution levies, and other legal process for enforcement of judgments within the state, and would provide that each designated location shall be referred to as a "central location." 2. Would require any financial institution that designates a central location for service of levies and other legal process for attachments and enforcement of judgments to file a notice of that designation with the Department of Financial Institutions (DFI), as specified. The information required to be included in this notice is intended to allow an entity that wishes to perform service of process directed at deposit accounts or safe deposit boxes held at an AB 2364 (Wagner), Page 2 institution to learn the location, days and hours of service, and other relevant information necessary to allow such service of process to be accomplished. 3. Would provide that, if a financial institution required to designate a central location fails to do so, each branch or office of that institution located in this state shall be deemed to be a central location, and all of that institution's branches and offices shall be deemed to be branches and offices covered by central process. If such a central location has not been identified, this bill would also provide a mechanism for use by a judgment creditor to determine the branch at which a judgment debtor holds an account, in order to facilitate the levy by that judgment creditor of assets held by that judgment debtor at that financial institution. 4. Would provide that, except as specified, service of legal process at a central location of a financial institution shall be effective against all deposit accounts and all property held for safekeeping, as specified, if those accounts and that property are described in the legal process and held by the financial institution at any branch or office covered by central process and located in this state. 5. Would further provide that, unless a financial institution voluntarily elects to act upon process served at a location other than its central location, that service of process shall not be effective (thus, in order to be assured that service of process to attach or execute upon a deposit account or safe deposit box is effective, a process server would have to serve that process at one of a financial institution's central locations for service of process). 6. Would require DFI to provide any person requesting it with a copy of each current filing made by a financial institution pursuant to this act, either by posting such information on its Internet web site or by imposing a reasonable fee for furnishing that information in another manner, and would require DFI to update the information available to the public within ten business days of receiving any modification or revocation of a designation from a financial institution. 7. Would authorize a financial institution to modify or revoke AB 2364 (Wagner), Page 3 any designation of a central location for service of legal process by filing that modification or revocation with DFI, provide a process by which the updated information would become effective, and authorize judgment creditors to rely on the superseded designation during the 30-day period immediately following the effective date of a revocation or modification. 8. Would make a variety of other technical and conforming amendments to related code sections, which are intended to facilitate the operation of the proposed changes described above. EXISTING LAW 9. Provides that attachment and execution levies served on financial institutions affect only the accounts or property held by the particular branch of the institution at which service of process is made (Code of Civil Procedure Section 684.110). 10. Authorizes, but does not require, a financial institution to designate a central location at which it will accept service of process related to levies in a manner that can affect all accounts throughout the institution's branch system, but does not clarify the manner in which a levying creditor would learn whether such a designation had been made. Further extends the reach of any levy served at such a central location to any account maintained by that institution anywhere in the United States or in any other country (Code of Civil Procedure Section 700.140). COMMENTS 1. Purpose: This bill is sponsored by the Consumer Financial Services Committee of the Business Law Section of the California State Bar, to modernize the service of levies on bank accounts and safe deposit boxes, and ensure that judgment creditors will no longer have to identify the branch of a bank at which an account or safe deposit box is maintained in order to serve a levy. 2. Background and Discussion: According to information provided by this bill's sponsor, the process by which garnishments involving bank accounts are served and processed in California is in need of modernization and AB 2364 (Wagner), Page 4 clarification. California's existing rules were enacted in 1982, and reflected a period of time when bank account and safe deposit box information was kept on index cards at individual branches, rather than in electronic databases accessible from multiple locations via computer. Under existing law, attachment and execution levies served on depository institutions only affect the accounts or property held by the particular branch of the institution at which service of process is made. Because of this, a plaintiff seeking an attachment or a judgment creditor seeking to enforce a judgment on assets held by a financial institution must identify and separately serve every branch of that institution at which the defendant or judgment debtor has an account or safe deposit box, in order to reach all of the deposits or safe deposit boxes of that defendant or judgment debtor. In the current age of computers, most banks that operate more than a few branches elect to process levies on a centralized basis, so that levies served on a particular branch are forwarded to the bank's centralized levy processing department, which then handles all aspects of levy processing and prepares the bank's responses. Current law allows depository institutions to designate a central location at which they will accept service of levies that would affect all accounts throughout their branch systems, but does not mandate service at the designated locations. Existing law also lacks specificity as to how a financial institution would designate a central office, and how a levying creditor would determine whether such a designation had been made. Existing law also has the unfortunate characteristic of extending the reach of any levy served at a central location to every account of that institution, which is maintained anywhere in the United States or in any other country. Multi-state and multi-national depository institutions have refrained from using existing central designation provisions, in part to avoid having to search accounts and safe deposit boxes in other states and countries, based on a California levy. Another unfortunate consequence of existing law falls on levying judgment creditors. Under existing law, in order to identify the bank branch at which a debtor's account is held, the levying creditor must first obtain an Order of AB 2364 (Wagner), Page 5 Examination of the Debtor and conduct a debtor examination pursuant to specified sections of the Code of Civil Procedure, or must notice a deposition or conduct other post-judgment discovery to obtain this information. A judgment debtor who wishes to frustrate collection of a judgment is free to withdraw his or her funds upon being served with an Order of Examination or discovery request, or, alternatively, after testifying, and before the judgment creditor has served the notice of levy and memorandum of garnishee on the bank branch. One alternative, used by a small number of creditors' attorneys, is to serve levies on all bank branches within a short distance of the judgment debtor's location, in the hope that the judgment debtor maintains an account at one of them. However, because service by a process server costs approximately $50 per levy, and debtor examinations and depositions can cost hundreds or thousands of dollars, these are wasteful procedures. The sponsor observes that these procedures can also add to the amount of the judgment owed by the judgment debtor. This bill would solve several of the problems inherent in existing law, which are described above, by doing the following: a) requiring financial institutions with ten or more branches in California, and authorizing financial institutions with nine or fewer branches in California, to designate one or more central locations for service of legal process for attachment and enforcement of judgments in the state; b) establishing procedures for service of attachments and other process for enforcement of judgments at the financial institution's central location(s) and other branches, c) requiring DFI to maintain a database of current information regarding the central locations designated by financial institutions in California, and to make information in that database available to the public, as specified; and d) establishing new procedures to be used by judgment creditors and others seeking to attach or enforce judgments against deposit accounts or safe deposit boxes, which reflect the existence of central locations. According to this bill's sponsor, the bill would not affect procedures for service of a summons or complaint subpoena. 3. Summary of Arguments in Support: The Consumer Financial Services Committee of the Business Law Section of the State AB 2364 (Wagner), Page 6 Bar is sponsoring this bill for all of the reasons stated above. The California Bankers Association writes that it worked collaboratively with the State Bar on this measure, which it believes will modernize the procedures applicable to service of attachment and execution of levies. The Civil Justice Association of California is also supportive, because the bill would limit the liability of financial institutions when carrying out attachment and levy procedures. Although existing law authorizes financial institutions to designate a central location for court orders to be served, the law is unclear about how a central location is designated, and whether a central location would have to reach outside of the state. AB 2364 clarifies these issues and reduces the associated discovery costs of carrying out those orders. The bill will also help deter debtors from gaming the system by hiding assets in different locations of a bank, or withdrawing them when creditors seek to identify those locations. 4. Summary of Arguments in Opposition: None received. 5. Outstanding Issue: Although no amendments are suggested to address this issue at this time, there is one outstanding issue presented by this bill, which deserves mention. This bill would require DFI to collect service of process information not only from its licensees, but also from any financial institution doing business in California, including federally-chartered financial institutions with California branches and branches of banks chartered in other states that have California branches. Staff of DFI have expressed concern that DFI lacks a database with which to track the central designation information this bill would require financial institutions to submit to the department pursuant to this bill. Because the Secretary of State's office already maintains a database of similar information, DFI staff has suggested that the Secretary of State's office would be better suited to accepting the information this bill would require certain financial institutions to provide. The sponsor of this bill acknowledges the concerns expressed by DFI staff, but believes they are misplaced. The sponsor observes that existing law requires service of a levy against a bank account at the branch where the target of the levy maintains his or her account. Service of a levy on AB 2364 (Wagner), Page 7 tangible personal property, such as the contents of a safe deposit box, is also served where the assets are located. Judgment creditors would not normally rely on Secretary of State records to determine where to serve a levy, because they need to know where the assets are. The sponsor is also uncertain whether the Secretary of State's office has any way to distinguish financial institutions from non-financial institutions within its databases. There was insufficient time in which to resolve this issue prior to the date this analysis was finalized. However, Committee staff is reaching out to the Secretary of State's office, in an attempt to determine whether they agree with DFI staff on this topic, and to assess whether future amendments might be warranted to make the Secretary of State, rather than DFI, the recipient of the centralized designations for service of process by financial institutions. 6. Amendments: a. One provision of this bill requires a declaration to be signed under penalty of perjury. Given concerns about the cost of felonies to the state, the Senate follows a policy of substituting language that avoids the creation of new penalties of perjury. The following language is suggested, to delete the penalty of perjury from this bill, while still furthering the bill's intent: Page 14, line 14, strike "A declaration" and insert: An affidavit Page 14, line 31, strike "request" and insert: affidavit b. The sponsor of this bill is also proposing several technical amendments to make important, but nonsubstantive changes. A mockup of this language is expected to be available for review by Committee members at the hearing. The amendments are too technical to warrant description. AB 2364 (Wagner), Page 8 LIST OF REGISTERED SUPPORT/OPPOSITION Support Consumer Financial Services Committee of the Business Law Section of the California State Bar (sponsor) California Bankers Association Civil Justice Association of California Opposition None received Consultant: Eileen Newhall (916) 651-4102