Daugherty v. Central Trust Co. of Northeastern Ohio, N.A.

• Decision Date: 30 December 1986
• Docket Number: No. 86-180,86-180
• Citation: 28 OBR 492,504 N.E.2d 1100,28 Ohio St.3d 441
• Parties: , 28 O.B.R. 492 DAUGHERTY, Appellee, v. CENTRAL TRUST COMPANY OF NORTHEASTERN OHIO, N.A., Appellant.
• Court: Ohio Supreme Court

Page 441

28 Ohio St.3d 441

504 N.E.2d 1100, 28 O.B.R. 492

DAUGHERTY, Appellee, v. CENTRAL TRUST COMPANY OF NORTHEASTERN OHIO, N.A., Appellant.

No. 86-180.

Supreme Court of Ohio.

Dec. 30, 1986.

Thomas G. Bedall, Canton, for appellee.

David T. Tarr, Canton, for appellant.

PER CURIAM.

We are asked to resolve two important questions. The first is whether personal earnings which are exempted by R.C. 2329.66 from execution, garnishment, attachment or sale by judgment creditors retain their statutory exemption when deposited in a bank checking account. The second question is whether personal earnings exempt from judicial process pursuant to R.C. 2329.66(A) are also exempt from a bank's right to set off those funds against a matured debt of a depositor. ²

We first consider the question of whether personal earnings exempt from creditors' reach pursuant to R.C. 2329.66(A) retain their exempt status when deposited in a personal checking account. Appellant would have this court adopt the approach taken by the court of appeals in Society Natl. Bank v. Tallman, supra. In Tallman, the court reasoned that personal earnings voluntarily deposited in a checking account were not exempt from garnishment under R.C. 2329.66(A) because they lost their character as "personal earnings" once deposited. The Tallman decision is in conflict with that of the reviewing appellate court in the instant case, which held that statutorily exempt personal earnings deposited in a checking account retain their exempt status, so long as the source of the exempt funds is reasonably traceable. The opinion of the court of appeals herein parallels those issued by the Court of Appeals for Hamilton County in Bethesda Hospital v. Wolf (1979), 11 O.O.3d 168, and First Natl. Master Charge v. Gilardi (1975), 44 Ohio App.2d 383, 324 N.E.2d 576 .

In each of the foregoing cases, various federal court decisions on related issues were analyzed and applied. The first of these federal decisions is Porter v. Aetna Cas. & Sur. Co. (1962), 370 U.S. 159, 82 S.Ct. 1231, 8 L.Ed.2d 407. In Porter, a judgment creditor of an incompetent veteran attached deposits in two federal savings and loan accounts established for his disability compensation. By federal statute, veterans benefits were exempt from attachment by creditors. The precise question posed in Porter was whether those benefits retained their exempt status after being deposited in the accounts. The court held at 162, 82 S.Ct. at 1233, that the funds remained exempt after deposit, stating:

"Since legislation of this type should be liberally construed, * * * [citations omitted] we feel that deposits such as are involved here should remain inviolate. The Congress we believe, intended that veterans in the safekeeping of their benefits should be able to utilize those normal modes adopted by the community, for that purpose--provided the benefit funds, regardless of the technicalities of title and other formalities, are readily available as needed for support and maintenance, actually retain the qualities of moneys, and have not been converted into permanent investments."

The high court followed Porter in Philpott v. Essex County Welfare Bd. (1973), 409 U.S. 413, 93 S.Ct. 590, 34 L.Ed.2d 608. Philpott involved a suit brought by the welfare agency to reach a bank account containing the depositor's social security disability benefits. Again, by federal statute, these benefits were exempt from court action brought by creditors. The court similarly held at 417, 93 S.Ct. at 592 that the funds on deposit retained their exempt status and were protected against the use of any legal process to reach them.

A situation different from that in Porter, supra, and Philpott, supra was presented in Usery v. First Natl. Bank of Arizona (C.A. 9, 1978), 586 F.2d 107. In Usery, the court held that a bank was not required to determine a debtor's right to a wage earner's exemption under the Consumer Credit Protection Act when served with a garnishment directed at the depositor's account. The Usery court, in determining that these wages were not exempted by the Act once deposited, distinguished its judgment from that of the Supreme Court in Porter and Philpott. In Usery, the court concluded at 111 that the broad statutory exemptions on which Porter and Philpott were based were not present in the Consumer Credit Protection Act stating:

"* * * In Porter the Court held that veterans' benefits remain exempt from process even when deposited in a federal savings and loan association account. However, the statute interpreted by the Court in that case explicitly stated that such benefits 'shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary.' 38 U.S.C. § 3101(a). The clear statement in that statute of a restriction on a creditor's ability to reach veterans' benefits even though they had already passed into the hands of the beneficiary, suggests that in drafting the Consumer Credit Protection Act Congress would have chosen similar unequivocal terms to restrict garnishment of wages already received by an employee if it had intended such a restriction. The Social Security Act, interpreted in Philpott to protect from legal process social security payments on deposit in a bank account, has similarly broad language: '[N]one of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process....' 42 U.S.C. § 407. Unlike the Social Security Act, the Consumer Credit Protection Act protects the funds concerned only from garnishment. If Congress had meant to restrict creditors' access to wages even after they left the control of the employer, it seems anomalous that it did not provide for protection from attachment of such monies while in the hands of the employee, as they did in the case of social security benefits." (Emphasis added.)

In the case at bar, the lower courts interpreted and applied the holdings of Porter, Philpott and Usery but reached conflicting results. The Tallman court relied on Usery in deciding that personal earnings deposited in a checking account do not retain the statutory exemption from garnishment once deposited. We believe, however, that this reliance was mistaken. The Tallman court failed to analyze the language of R.C. 2329.66 in order to determine whether its protection would continue after the wages left the control of the employer. Ohio's exemption statute is not so narrowly drafted as the statute at issue in Usery. R.C. 2329.66(A) provides in relevant part:

"Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order * * *." (Emphasis added.)

That statutory language strongly indicates that exempted earnings are to remain exempt even after receipt by an employee. Unlike the Consumer Credit Protection Act, R.C. 2329.66(A) protects the funds concerned not only from garnishment, but also from attachment and execution. Thus, in contrast to the Consumer Credit Protection Act, the General Assembly apparently did intend to restrict creditors' access to exempt wages by providing for protection from attachment of such monies while in the hands of the employee. Therefore, the Tallman court's holding is without basis.

The better view, which is consistent with the language of R.C. 2329.66(A), is that statutorily exempt funds do not lose their exempt status when deposited in a personal checking account. Accord Porter, supra; Philpott, supra; GMAC v. Deskins (1984), 16 Ohio App.3d 132, 474 N.E.2d 1207 (social security benefits); Goodyear Service Store v. Speck (1976), 48 Ohio App.2d 115, 355 N.E.2d 886 (welfare benefits); Gilardi, supra (welfare benefits); Wolf, supra (personal earnings). The legislature's purpose, in exempting certain property from court action brought by creditors, was to protect funds intended primarily for maintenance and support of the debtor's family. Dennis v. Smith (1932), 125 Ohio St. 120, 180 N.E. 638. This legislative intent would be frustrated if exempt funds were automatically deprived of their statutory immunity when deposited in a checking account which a depositor commonly maintains in order to pay by check those regular subsistence expenses he incurs.

In the instant case, the parties agreed that appellee's wages were exempt from legal process pursuant to R.C. 2329.66(A)(13). The parties also agreed that the proceeds of her checking account were from these wages. Thus, the source of the exempt funds was not only reasonably traceable, it was conclusively known. Consistent with the foregoing, then, we therefore affirm the judgment of the court of appeals below and hold that personal earnings exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order pursuant to R.C. 2329.66(A)(13) retain their exempt status when deposited in a personal checking account, so long as the source of the exempt funds is known or reasonably traceable. ³

Having decided that appellee's personal earnings retain the statutory exemption from judicial process when deposited in a personal checking account we must now determine whether those funds are also exempt from the bank's right of setoff exercised in the instant case.

Bank setoff is an extrajudicial self-help remedy based on general principles of equity. It allows a bank to apply general deposits of a depositor against a depositor's matured debt. Courts have found that this right arises from the contractual debtor-creditor relationship created between depositor and bank when an account is opened. ⁴ See TeSelle, Banker's Right of Setoff-Banker Beware (1981) 34 Okla.L.Rev. 40; Note, Banking Setoff: A Study in Commercial Obsolescence (1972), 23 Hastings L.Rev. 1585, 1586-1587.

The banker's right of setoff asserted in the instant case is rooted in the ancient...