Opinion
No. 3:04-CV-1852-H.
April 20, 2005
FINDINGS, CONCLUSIONS, AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
The District Court referred the Motion to Set Aside Garnishment Order, filed by Defendant Connie C. Armstrong ("Armstrong") on October 26, 2004, to the United States Magistrate Judge for hearing, if necessary, and recommendation. The United States of America ("United States") opposes the motion.
Background
On September 8, 1988, Armstrong was convicted in Criminal Case No. 3:87-CR-0259-H because he "knowingly and willfully failed to file, and caused the failure to file with the Internal Revenue Service, a Currency Transaction Report (United States Treasury Form 4789) in connection with the receipt, exchange and transfer of United States currency in excess of ten thousand dollars, a violation of Title 31, United States Code Sections 5313 and 5322; and Title 31, Code of Federal Regulations, Sections 103.22 and 103.26; and Title 18 United States Code Section 2, in Count 10 of the 14 count Superseding Indictment." The Honorable Barefoot Sanders sentenced him to two years imprisonment and a fine of $100,000, payable to the United States. The judgment did not waive interest on the fine. Accordingly, the fine accrues statutory interest at the 1988 judicial rate of eighteen percent. 18 U.S.C. § 3612(f). Armstrong paid on the fine during his incarceration and continued to make payments after his release. However, his last payment was in February 1998. His total payments on the fine, including the recently garnished funds at issue in this proceeding, total $12,154. The balance due on the fine is $357,010.91.
The United States attempted to arrange a new payment schedule for Armstrong based upon his current financial situation, but Armstrong failed to respond. On August 25, 2004, the United States filed an application for a Writ of Garnishment against Compass Bank ("Compass") upon Armstrong's property and his wife's jointly managed community property. The United States sought the Writ of Garnishment under 18 U.S.C. § 3613 and 28 U.S.C. §§ 3203-06 in connection with the 1988 judgment.
The District Court granted the writ application, and the Clerk issued a Writ of Garnishment to the Garnishee, Compass. On September 3, 2004, Armstrong and his wife were personally served with copies of (1) the Application for Writ of Garnishment, (2) the Writ of Garnishment, (3) an Order for Issuing Writ of Garnishment, (4) the Clerk's Notice to Judgment Debtor on How to Claim Exemptions and Request for Hearing, (5) the Instructions to Defendant Judgment Debtor for Objecting to Answer of Garnishee and for Obtaining a Hearing on the Objection, and (6) two Claim for Exemption Forms. The Writ of Garnishment and accompanying documents were served on Compass Bank, which answered that it was holding a total of $1,065.97 in the Armstrongs' accounts.
Neither Armstrong nor his wife timely filed a claim for exemption. On September 29, 2004, the District Court entered a Garnishment Order that Compass pay the United States the garnished funds for application to the 1988 judgment. On October 21, 2004, Armstrong filed a CJA 23 Financial Affidavit and asked the Court to appoint counsel for him under the Criminal Justice Act. After the Court appointed the Federal Public Defender, Armstrong filed a motion to set aside the garnishment order under FED. R. CIV. P. 60(b)(5) and 60(b)(6). He also requested other relief.
On November 16, 2004, this Court held an evidentiary hearing during which the Court heard the testimony of witnesses, received exhibits into evidence, and heard the arguments of counsel. The Court called for and received supplemental briefing on the issue. The motion is ripe for consideration. The Court hereby enters the following findings, conclusions, and recommendation:
Findings and Conclusions
A court draws authority to issue a writ of garnishment from 28 U.S.C. § 3205. Notice to the judgment debtor is required, and the debtor must request a hearing within twenty days of receipt of the notice. 28 U.S.C. § 3202(d). When a debtor fails to request a hearing, "the court shall promptly enter an order directing the garnishee as to the disposition of the judgment debtor's nonexempt interest in such property." 28 U.S.C. § 3205(c)(7).
The terms of FED. R. CIV. P. 60(b) set forth specific grounds for relief that a claimant must satisfy for a court to set aside a judgment. Edward H. Bohlin Co. v. Banning Co., 6 F.3d 350, 356 (5th Cir. 1993). Under Rule 60(b), courts should consider the following factors: (1) a court should not lightly disturb a final judgment; (2) a Rule 60(b) motion may not to be used as a substitute for an appeal; and (3) a court should liberally construe the rule to achieve substantial justice. United States v. Gould, 301 F.2d 353, 355-56 (5th Cir. 1962). Additionally, a court should consider: (1) whether the motion was made within a reasonable time; (2) whether if there was no consideration on the merits, the interest in deciding cases on the merits outweighs, in the particular case, the interest in the finality of judgments; (3) whether the movant's claim or defense has merit; (4) whether, if the judgment was rendered after a trial on the merits, the movant had a fair opportunity to present his claim or defense; (5) whether intervening equities weigh heavily in favor of granting relief; and (6) any other factors relevant to the justice of the judgment under attack. Id. A court must consider all of these factors in light of the great desirability of preserving the finality of judgments. Id.
Armstrong moved for relief within thirty days of the Garnishment Judgment's entry. The Court considers this a reasonable time. Armstrong seeks relief pursuant to the terms of Rule 60(b)(5) which allows relief "if the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application." FED. R. CIV. P. 60(b)(5). He also seeks relief pursuant to the omnibus provision, Rule 60(b)(6), which allows relief for "any other reason justifying relief from the operation of the judgment." FED. R. CIV. P. 60(b)(6). The Court will consider first whether Armstrong is entitled to relief under Rule 60(b)(5).
A court must cautiously approach motions to modify under Rule 60(b)(5). Roberts v. St. Regis Paper Co., 653 F.2d 166, 173 (5th Cir. 1981). The movant must make a clear showing of substantial change, unforeseeability, and oppressive hardship. Id. The movant's case must be almost unanswerable. Id.
Armstrong has not shown a change in circumstances brought about by new and unforeseen conditions sufficient to compel modification of the Garnishment Order. He has not sought to have the criminal judgment modified. In 1995 he agreed to modified payments of $100 per month, defaulted, and simply took no action until he sought to have the Garnishment Order set aside on October 26, 2004. The judgment in the criminal case has not been satisfied, released, discharged, reversed, or otherwise vacated as required by the first part of Rule 60(b)(5). With respect to Armstrong's claim that prospective application of the Garnishment Order is no longer equitable, he has not demonstrated that substantial changes occurred after the Court issued the Writ and entered the Garnishment Order. The District Court should not set aside the Garnishment Order based upon Rule 60(b)(5).
Rule 60(b)(6) provides that a court may act to relieve a party from a final judgment for "any other reason justifying relief from the operation of the judgment." Hess v. Cockrell, 281 F.3d 212, 215 (5th Cir. 2002) (quoting FED. R. CIV. P. 60(b)(6)). This is a catch-all provision that encompasses circumstances not covered by the other enumerated provisions of Rule 60(b). Hess, 281 F.3d at 215 (citing Batts v. Tow-Motor Forklift Co., 66 F.3d 743, 747 (5th Cir. 1995)). Rule 60(b)(6) motions "will be granted only if extraordinary circumstances are present." Hess, 281 F.3d at 215 (quoting Bailey, 894 F.2d at 160).
The United States argues that a movant may not seek relief under both Rule 60(b)(5) and Rule 60(b)(6), citing Bailey v. Ryan Stevedoring Co., 894 F.2d 157, 160 (5th Cir. 1990). This is not a correct interpretation of the teachings of Bailey. In Hess, 281 F.3d at 215, the appellate court explained that Bailey did not stand for the proposition that if relief was unavailable under Rule 60(b)(5), a Court could not award relief under Rule 60(b)(6). What is meant in Bailey is that Rule 60(b) provides six alternative grounds for relief. Hess, 281 F.3d at 215 n. 8.
In this case, Armstrong and his wife had legal notice and the opportunity to claim an exemption to the garnishment writ and request a hearing. They failed to do either. Armstrong claims that he notified an attorney of a scheduled hearing and that the attorney failed to appear because Armstrong could not pay him. This claim is not supported by the record, which shows that no hearing was ever requested or scheduled. After the requisite time had passed, the garnishment judgment was duly entered. The garnishment notice and exemption forms are written in plain language that a person of ordinary intelligence can understand. The Armstrongs could have appeared pro se, or asked the Court to appoint counsel as they did later. A judgment debtor's difficulty paying counsel is not an extraordinary circumstance. Although a judgment on the merits potentially outweighs the interest in finality of the Garnishment Order, the Armstrongs' failure to timely request exemptions and a hearing does not constitute an extraordinary circumstance justifying relief from the Garnishment Order. Nevertheless, the Court will consider whether the Armstrong's claimed exemptions have merit.
Collection of Fines
For purposes of collection, federal criminal fines and restitution orders are to be treated as delinquent tax debts. 18 U.S.C. § 3613(a), (c); United States v. Sowada, No. 03-420, 2003 WL 22902613, at *2 (E.D. La. Dec. 8, 2003); United States v. Rice, 196 F. Supp. 2d 1196, 1202 (N.D. Okla. 2002). In this case, the United States does not base its garnishment upon the lien it filed in the Dallas County tax records. Accordingly, Armstrong's claim that the Notice of Lien is defective is not relevant. The United States garnished Armstrong's funds under the authority of 18 U.S.C. § 3613, which specifically provides that he is not entitled to any protection under the Social Security Act. The Court will first consider Armstrong's argument that the Consumer Credit Protection Act ("CCPA") only permits garnishment of twenty-five percent of the funds in his account because his bank account contained his Social Security "earnings."
The CCPA's Exemption for Earnings
The CCPA provides in pertinent part that "the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed . . . 25 per centum of his disposable earnings for that week. . . ." The terms of 28 U.S.C. § 3002(6) define earnings as "compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments pursuant to a pension or retirement program." 28 U.S.C. § 3002(6).
Armstrong contends that the funds in his bank account were Social Security retirement benefits and retained their character as "earnings" under the CCPA even after the Social Security Administration deposited them in his bank account. The United States argues that the fund are not exempt because Texas law provides that they lost their status as "current wages" under the Texas Constitution when the Social Security Administration deposited them in Compass. The CCPA exemption applies to "earnings" rather than "current wages," and for this reason, the Texas exemption is not equivalent to the exemption found in the CCPA. Accordingly, Texas law does not answer the question before the Court.
Neither the United States Supreme Court nor the Fifth Circuit Court of Appeals has addressed the precise issue of whether Social Security retirement benefits retain their character as "earnings" after the funds have been deposited in the debtor's bank account. However, the Supreme Court has held that the restrictions on garnishment of disposable earnings in the CCPA, 15 U.S.C. § 1673, do not constitute an exemption of such cognizable earnings in bankruptcy. Kokoszka v. Belford, 417 U.S. 642, 652 (1974). In other words, income tax refunds are not considered "earnings" within the meaning of the CCPA even if such funds can be traced to compensation in the form of wages. Id. Federal courts interpreting the CCPA earnings exemption and state courts interpreting its state law equivalents have consistently held that payments that would otherwise constitute earnings lose their status as earnings once they pass to the hands or bank accounts of the debtor.
Usery v. First Nat'l Bank, 586 F.2d 107, 110 (9th Cir. 1978) (limiting the CCPA's earning exemption to garnishments on employers (or those who stand in the position of employers by virtue of paying or owing compensation for services to the individual debtor) and holding that garnishee banks and financial institutions are not required to determine the amount of funds on deposit attributable to earnings); Dunlop v. First Nat'l, 399 F. Supp. 855, 857 (D. Ariz. 1975) (concluding that the CCPA restriction of wage garnishment did not apply to funds deposited in a financial institution); Frazer, Ryan, Goldberg, Keyt Lawless v. Smith, 907 P.2d 1384, 1387-88 n. 5 (Ariz.Ct.App. 1995) (holding that an Arizona garnishment exemption statute modeled after 15 U.S.C. §§ 1672-73 did not extend the exemption to earnings deposited into a debtor's bank account); Edwards v. Henry, 293 N.W.2d 756, 757-58 (Mich. Ct. App 1980) (holding that the CCPA restrictions on garnishment did not shelter from garnishment that portion of worker's checking account funds attributable to her wages and noting that "[t]he CCPA has never, to our knowledge, been afforded by a federal court the reach the defendant would ask to give it"); John O. Melby Co. Bank v. Anderson, 276 N.W.2d 274, 276-78 (Wis. 1979) (holding that the CCPA's garnishment restrictions do not apply to wages after payment to an employee and deposit in his bank checking account). See also In re Lawrence, 219 B.R. 786, 796 (E.D. Tenn. 1998) (holding that the Tennessee equivalent of the CCPA does not exempt in bankruptcy disposable earnings after the earnings have been distributed and paid to debtors).
This Court finds instructive the discussion of the CCPA's legislative history and statutory scheme and the reasoning of the District Court in Dunlop, 399 F. Supp. at 857. The question presented in Dunlop was essentially the same as the issue in this case. The garnishee bank had been served with writs of garnishment for the purpose of attaching funds held for depositors. The court concluded that the CCPA was concerned with the relationship between employers and employees and not with the protection of a given fund. Id. The court in Dunlop found that the CCPA restrictions on wage garnishment did not apply to funds deposited in financial institutions. Id.
Nothing in the legislative history of the CCPA or in federal law supports the interpretation of the CCPA exemption that Armstrong urges here. This Court finds that Armstrong failed to prove that any of the funds garnished from his Compass Bank Account are exempt under the CCPA as "earnings."
Community Property
The Court issued the writ of garnishment under 28 U.S.C. § 3205, which provides that "[c]o-owned property shall be subject to garnishment to the same extent as co-owned property is subject to garnishment under the law of the State in which such property is located." 28 U.S.C. § 3205. Under Texas community property laws, one spouse cannot be held personally liable for a debt incurred individually by the other spouse. However, the non-liable spouse's interest in joint management and control community property is subject to execution to satisfy the debt. Nelson v. Citizens Bank and Trust Co., 881 S.W.2d 128, 131 (Tex.Civ.App.-Houston [1st Dist.] 1994, no writ). All property that either spouse possesses during a marriage is presumed to be community property unless the property is separate property acquired by one spouse by gift, devise, or descent. TEX. FAM. CODE § 3.003 (Vernon 1998); Grost v. Grost, 561 S.W.2d 223, 228 (Tex.Civ.App.-Tyler 1977). A spouse's separate property is not subject to the liabilities of the other spouse, and community property subject to a spouse's sole management, control, and disposition is not subject to any nontortious liabilities that the other spouse incurs during the marriage. TEX. FAM. CODE § 3.202(a), (b). A person has sole management, control, and disposition of the community property that he or she would have owned if single. Few v. Charter Oak Fire Ins. Co., 463 S.W.2d 424, 426 (Tex. 1971). Sole management community property, therefore, includes personal earnings. Id. Co-mingled funds are considered joint management community property under Texas law. TEX. FAM. CODE § 3.102(c) (Vernon 1998). To overcome the presumption that property acquired during the marriage is joint management community property, the spouse claiming separate property must trace and clearly identify the property claimed to be separate. See Whorrall v. Whorrall, 691 S.W.2d 32, 35 (Tex.Civ.App.-Austin 1985, writ dism'd) (citing McKinley v. McKinley, 496 S.W.2d 540, 543 (Tex. 1973)). Tracing involves establishing the separate origin of the property through evidence showing the time and means by which the spouse originally obtained possession of the property. Ganesan v. Vallabhaneni, 96 S.W.3d 345, 354 (Tex.Civ.App.-Austin 2002, pet. den.).
The terms of TEX. FAM. CODE § 3.003 provide:
(a) Property possessed by either spouse during or on dissolution of marriage is presumed to be community property.
(b) The degree of proof necessary to establish that property is separate property is clear and convincing evidence.
TEX. FAM. CODE § 3.003 (Vernon 1998).
The terms of TEX. FAM. CODE § 3.102(c) provide:
(a) During marriage, each spouse has the sole management, control, and disposition of the community property that the spouse would have owned if single, including:
(1) personal earnings;
(2) revenue from separate property;
(3) recoveries for personal injuries; and
(4) the increase and mutations of, and the revenue from, all property subject to the spouse's sole management, control, and disposition.
(b) If community property subject to the sole management, control, and disposition of one spouse is mixed or combined with community property subject to the sole management, control, and disposition of the other spouse, then the mixed or combined community property is subject to the joint management, control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney in writing or other agreement.
(c) Except as provided by Subsection (a), community property is subject to the joint management, control, and disposition of the spouses unless the spouses provide otherwise by power of attorney in writing or other agreement.
TEX. FAM. CODE § 3.102(c) (Vernon 1998).
Armstrong alleges, without more, that his wife's bank account should not have been garnished because it was subject to her sole management, control, and disposition. The United States responds that the account is community property and subject to garnishment. Garnishee (Compass Bank) states in its Answer to Plaintiff's Application for Writ of Garnishment simply that "Garnishee held the accounts of Connie Armstrong and Harriet Armstrong," without specifying account numbers, individual account-holders, or signatory records. Armstrong testified that his wife's account contained her Social Security Retirement Benefits, which she used to pay for her supplemental health insurance. His testimony failed to provide account numbers, statements of accounts, dates of transfers, amounts transferred in or out, sources of funds, or any semblance of asset tracing. He provided no documentation to satisfy the tracing requirement. Armstrong's testimony in this regard is conclusory and not entirely credible. His wife did not testify at the hearing. The United States presented evidence that Armstrong used the funds in his account to pay community debts and monthly living expenses that benefitted both Armstrong and his wife. (App., Tabs 6-8.) The Government's evidence also indicated that the funds in Armstrong's wife's account have been co-mingled with his funds. (App., Tab 9.) Armstrong did not meet his burden to show by clear and convincing evidence that the funds garnished from his wife's bank account were her separate property or community property subject to her sole management, control, and disposition. He failed to overcome the presumption that the account is community property subject to the Armstrongs' joint management and control. Armstrong did not meet his burden to show extraordinary circumstances that would justify vacating the Garnishment Order under Rule 60(b)(6).
Armstrong's argument that garnishing "his wife's funds" raises serious constitutional issues is without merit. The funds were community property subject to garnishment for his criminal fine. Similarly, his argument that the United States failed to follow proper procedures for co-owned property is meritless. The Writ of Garnishment was personally served on Armstrong's wife, along with specific written instructions from both the United States Clerk and the United States Attorney's office. See 28 U.S.C. §§ 3202 3205. His wife received due process.
Other Arguments
Armstrong argues that this is an independent action to set aside a civil judgment, and therefore, he is entitled to relief even if he does not meet the standards of Rule 60(b). His argument is without merit. Similarly without merit is his argument that the Garnishment Order is void because he committed the criminal offense before the enactment of the Federal Debt Collections Procedures Act ("FDCPA"). The FDCPA applies to judgments on debts owed to the United States ten years before its enactment, that is, all judgments issued after May 29, 1981. See 28 U.S.C. § 3205. Armstrong's criminal judgment is dated September 8, 1988. Finally, the District Court granted the United States a continuing garnishment. Armstrong has shown no reason that warrants setting aside the Garnishment Order.
Recommendation
The Court recommends that Armstrong's "Motion . . . to Prevent Further Garnishment of Social Security Retirement Benefits of Connie C. Armstrong and his spouse, Harriett Armstrong and to Restore Benefits Previously Seized Pursuant to Garnishment and to Follow Proper Fine Collection Procedures Applicable to this Matter and Motion to Set Aside Garnishment Order" be denied.