On certification to the Superior Court, Appellate Division, whose opinion is reported at 281 N.J. Super. 266 (1995).
The opinion of the Court was delivered by Pollock, J. Justices Handler, O'hern, Garibaldi, Stein and Coleman join in Justice POLLOCK's opinion.
The opinion of the court was delivered by: Pollock
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
All American Auto Salvage v. Camp's Auto Wreckers
Citibank, South Dakota, N.A. v. Lisa A. Coffey (A-88-95)
Argued January 30, 1996 -- Decided August 1, 1996
POLLOCK, J., writing for a unanimous Court.
The primary issue on appeal is whether a bank may deduct a processing fee from a judgment debtor's general deposit account before paying the balance to a levying creditor. A related issue is whether the Superior Court may decide the issue in a summary proceeding under N.J.S.A. 2A:17-63.
All American Auto Salvage v. Camp's Auto Wreckers and Citibank, South Dakota, N.A. v. Lisa A. Coffey were consolidated in the Appellate Division.
In All American Auto Salvage v. Camp's Auto Wreckers, a judgment creditor, All American Auto Salvage (All American) levied on the account of Camp's Auto Wreckers (Camp's) at First Fidelity in the amount of $1,068.10. Pursuant to the deposit agreement between Camp's and First Fidelity, Camp's agreed to be bound by "all the rules, regulations, conditions, and limitations, requirements and agreements which are heretofore and hereafter adopted by the Bank." First Fidelity, in an amended schedule in its small-business account fee-schedule, notified depositors that it had a security interest in any service fees or charges to the account. First Fidelity charges a service fee of $60 for responding to levies on its depositor's accounts.
First Fidelity investigated to ensure that All American's levy was on the correct account and searched its Customer Information System for any setoffs or unpaid fees. First Fidelity deducted $60 from the account balance of $940.65 for those processing services, leaving $880.65 to satisfy partially the levy. The Special Civil Part of the Law Division permitted First Fidelity to deduct the processing fee before paying the balance in Camp's account, thereby denying All American's motion to turn over the entire amount in Camp's account.
In Citibank, South Dakota, N.A. v. Coffey, Lisa Coffey had a personal account with First Fidelity. Coffey agreed to be bound by "all rules and regulations and any amendments thereto promulgated by Federal and state authorities, the Federal Deposit Insurance Corporation, and Bank." Pursuant to the personal account agreement, Coffey agreed to pay any service fees that applied to her account and any special fees for services. First Fidelity notified the depositor that it had a security interest in the account for any fees the debtor had not paid.
Coffey failed to pay charges on her Citibank Visa Card. Citibank obtained a $1,707.28 default judgment against Coffey and levied on the $477.58 balance in her First Fidelity account. First Fidelity investigated the matter and deducted its $60 processing fee. The Special Civil Part ruled that First Fidelity had acted improperly in deducting that fee from Coffey's account before paying the balance to the levying creditor, Citibank, because it did not have a common-law right to set off the processing fee.
The Appellate Division consolidated these two cases and held that First Fidelity could not deduct its processing fee before honoring the levy. It thus affirmed the order in Coffey and reversed and remanded in All American Auto. The Appellate Division rejected First Fidelity's claim of a security interest, reasoning that the Bank had no possessory interest to control withdrawals, a prerequisite to a perfected security interest.
The Supreme Court granted First Fidelity's petition for certification.
First Fidelity does not have a security interest in the depositors' accounts. Until such time as the Legislature addresses the issue, considerations of equity and economic realities support recognition of a bank's common-law right to set off a reasonable processing fee against a deposit account, even after the creditor has levied on the account.
1. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. Security interests in general deposit accounts may arise by a pledge. To be effective, a pledge requires: 1) a pledgor and a pledgee; 2) a debt or obligation; 3) an agreement to create a security interest; and 4) possession of the pledged property by the pledgee. The first three requirements are met here: there is no dispute that the depositor is a pledgor and the bank as pledgee; deposit agreements create an obligation to pay for all fees related to the maintenance and disposal of the account; and the First Fidelity agreements reflect an intent to create security interests in the respective accounts. However, although First Fidelity intended to create security interests through the deposit agreements, it lacked exclusive possession and control over the accounts. Therefore, it did not hold security interests in the accounts. (pp. 6-10)
2. A bank has a right of set off against all monies or funds in its possession belonging to a depositor to secure the payment of the depositor's indebtedness to the bank. Ordinarily, a bank must satisfy three conditions to establish a priority right to a set off: the funds to be set off must be the property of the bank; the depositor must deposit the funds without restriction; and the depositor's indebtedness that gives rise to the set off must be due and owing. In addition, there must be a mutuality of obligation between the debtor and creditor. All American and Citibank do not dispute that the funds on deposit belonged to First Fidelity and that the funds were unrestricted. Remaining at issue is whether a debt was due and owing at the time of the liens. While courts in several other states have recognized the fairness of permitting a bank, when confronted with a garnishment on an account, to set off an obligation to the bank against the account, the issue is ripe for legislative consideration in New Jersey. Until such time as the Legislature acts, however, considerations of equity and economic realities support recognition of the Bank's common-law right to set off a reasonable processing fee against a deposit account, even after the creditor has levied on the account.
3. The processing fee is properly viewed as a charge to each depositor through the depositor's agreement with the bank. That the fee reduces the balance available to defendants is incidental; defendants still have a valid judgment against each debtor and may pursue other assets of the debtors to satisfy the judgment. Granting banks a priority in common-law set offs of levy processing fees is both fair and reasonable. To process the payment of the creditor's levy, the bank incurs costs that someone must pay. Between the bank and the levying creditor, the creditor fairly should bear the costs of processing a levy because creditors can control the risk of default by selecting the debtors with whom they do business. ...