Lakewood Credit Union v. Goodrich

• Citation: 372 Wis.2d 84,887 N.W.2d 342
• Decision Date: 07 September 2016
• Docket Number: No. 2015AP320.,2015AP320.
• Parties: LAKEWOOD CREDIT UNION, Plaintiff–Respondent, v. Theodore GOODRICH, Defendant–Appellant.
• Court: Court of Appeals of Wisconsin

372 Wis.2d 84

887 N.W.2d 342

LAKEWOOD CREDIT UNION, Plaintiff–Respondent,

v.Theodore GOODRICH, Defendant–Appellant.

No. 2015AP320.

Court of Appeals of Wisconsin.

Submitted on Briefs Feb. 9, 2016.

Opinion Filed Sept. 7, 2016.

On behalf of the plaintiff-appellant, the cause was submitted on the briefs of Eric L. Crandall of Crandall Law Offices, S.C., New Richmond.

On behalf of the plaintiff-respondent, the cause was submitted on the brief of William A. Grunewald of Jensen, Scott, Grunewald & Shiffler, S.C. of Medford.

Before STARK, P.J., HRUZ and SEIDL, JJ.

HRUZ, J.

¶ 1 Theodore Goodrich appeals a judgment dismissing his counterclaim alleging Lakewood Credit Union violated federal law when it seized and liquidated his depository accounts containing funds he originally received as social security benefits and applied those funds to the balance due on a loan. Goodrich argues Lakewood was not permitted to take security interests in the accounts in the first instance. He also argues that, in seizing the accounts, Lakewood utilized an impermissible “legal process” from which his social security benefits were exempt. We reject Goodrich's arguments and affirm.

BACKGROUND

¶ 2 Goodrich fell down a flight of stairs in 1990 and was injured. He subsequently sought disability benefits from the United States Social Security Administration on his behalf and that of his two daughters. The Administration approved Goodrich's application in late 2011 or early 2012, and Goodrich received lump sum payments for past benefits and also began receiving monthly benefits. These payments were deposited at Park City Credit Union.

¶ 3 Goodrich later transferred $20,000 from Park City to Lakewood in connection with his efforts to obtain a consumer loan from Lakewood. He placed $10,000 in an account in his name, and $5,000 in custodial accounts for each of his two daughters. On August 10, 2012, Goodrich executed a consumer note for a $20,000 loan from Lakewood, which was set to mature one year later. Goodrich pledged the funds in the three depository accounts as security for the loan. According to Goodrich, the funds in those accounts consisted entirely of social security benefits he had received. Goodrich failed to make the payment due on August 10, 2013.

¶ 4 On August 30, 2013, Goodrich filed a Chapter 7¹ bankruptcy action in the United States Bankruptcy Court for the Western District of Wisconsin. Goodrich listed the $20,000 on deposit with Lakewood as exempt personal property in the schedules attached to the bankruptcy petition. His petition also acknowledged Lakewood's $20,000 secured claim.² Goodrich's petition indicated his intention was to retain the depository accounts and repay the loan.³ Goodrich represented he had no contingent or unliquidated claims of any nature, including “counterclaims of the debtor.” He obtained a discharge, and the bankruptcy proceedings were closed in late December 2013. It is undisputed that the $20,000 Lakewood loan and corresponding security interests were not discharged in the bankruptcy action.

¶ 5 Following termination of the bankruptcy proceedings, Lakewood sent Goodrich a “Notice of Right to Cure Default.” The notice identified the loan at issue and advised Goodrich he could cure the default by February 13, 2014, by paying the amount of the balloon payment plus $279.45 in interest accrued between August 10, 2013, and January 27, 2014. Goodrich did not cure the default. As a result, on February 20, 2014, Lakewood liquidated the funds contained in the three depository accounts Goodrich had pledged as security for the loan and applied those funds to the loan. Although the funds were insufficient to pay the loan in full, Lakewood did not pursue a deficiency judgment given Goodrich's then-recent bankruptcy discharge.

¶ 6 Lakewood filed the present replevin action on February 20, 2014. The replevin action was based on a different loan transaction between the parties occurring in October 2012, in which Lakewood loaned Goodrich $17,200 to purchase a 2011 Yanmar tractor and accessories.⁴ Goodrich answered and filed counterclaims relating to the August 2012 transaction, alleging several violations of the Wisconsin Consumer Act (WCA) and asserting that, because the depository accounts Lakewood liquidated contained social security benefits, they were “exempt from seizure.” Lakewood responded that Goodrich had failed to disclose in his bankruptcy schedules any claim that Lakewood's security interests in the depository accounts were void. As a result of Goodrich's failure to identify such a claim, Lakewood raised judicial estoppel and lack of standing as affirmative defenses.

¶ 7 Lakewood filed a motion seeking summary judgment on both its claim and Goodrich's counterclaims. Lakewood noted Goodrich did not contest any of its allegations regarding the October 2012 loan; rather, his arguments were all directed toward the validity of Lakewood's security interests and subsequent enforcement efforts with respect to the August 2012 loan. In addition to arguing that both judicial estoppel and a lack of standing barred Goodrich's counterclaims, Lakewood asserted that its conduct in liquidating Goodrich's depository accounts did not violate the WCA or federal law.

¶ 8 Goodrich responded with an affidavit and brief in opposition to summary judgment. Goodrich's affidavit included a wide-ranging discussion of the August 2012 loan transaction's background, including certain alleged extra-contractual promises the loan officer made at the time. His brief asserted Lakewood had violated the WCA by, among other things, engaging in “nonjudicial enforcement of a security interest” based upon deficient notice of right to cure default. However, Goodrich then took the seemingly inconsistent position that Lakewood had violated federal law by employing “legal process” to seize Goodrich's depository accounts containing social security benefits, contrary to 42 U.S.C. § 407(a). Goodrich also argued his bankruptcy documents were accurate at the time of their filing and, therefore, his counterclaims should not be dismissed for a lack of standing or by virtue of judicial estoppel.

¶ 9 Following further responsive submissions by Lakewood, the circuit court held a motion hearing. The court determined that Lakewood was entitled to summary judgment on its replevin claim related to the October 2012 loan transaction. It then considered whether summary judgment was warranted on Goodrich's counterclaims related to the August 2012 loan transaction. The court concluded there had been no WCA violation and dismissed those counterclaims. However, the court withheld decision on Goodrich's counterclaim based on federal law, expressing its desire to review the United States Supreme Court's decision in Washington State Department of Social & Health Services v. Guardianship Estate of Keffeler, 537 U.S. 371, 123 S.Ct. 1017, 154 L.Ed.2d 972 (2003), as it pertained to the proper interpretation of the phrase “other legal process” found within 42 U.S.C. § 407(a).

¶ 10 The circuit court subsequently issued a decision granting Lakewood summary judgment on Goodrich's counterclaim for an alleged violation of 42 U.S.C. § 407(a). It observed that Keffeler “holds that the ‘other legal process' prohibition against accessing social security benefits is very narrow, and requires some judicial or quasi-judicial mechanism to effectuate.” The court determined that “[t]he voluntary assignment of the account by Goodrich does not require any judicial mechanism [to effectuate] and isn't included in [the] definition of other legal process.” Goodrich now appeals.

DISCUSSION

¶ 11 Goodrich's sole argument on appeal is that the circuit court erroneously dismissed his counterclaim alleging a violation of 42 U.S.C. § 407(a).⁵ All facts relevant to this argument are undisputed. Accordingly, the only issue is whether Lakewood was entitled to judgment as a matter of law. See WIS. STAT. § 802.08(2). We decide this issue de novo. Fortier v. Flambeau Plastics Co., 164 Wis.2d 639, 651, 476 N.W.2d 593 (Ct.App.1991).

¶ 12 Goodrich alleges two violations of 42 U.S.C. § 407(a). First, he claims Lakewood impermissibly took security interests in his depository accounts, with knowledge that those accounts contained funds originally received as social security benefits. Second, Goodrich alleges Lakewood violated a separate clause of § 407(a) by enforcing those security interests and seizing “the benefits” contained in the accounts. To the extent these arguments require us to interpret and apply § 407(a), we do so as a matter of law, using a de novo standard of review. See Racine Harley–Davidson, Inc. v. State Div. of Hearings & Appeals, 2006 WI 86, ¶ 14, 292 Wis.2d 549, 717 N.W.2d 184.

¶ 13 We first consider Goodrich's argument that Lakewood could not validly take security interests in his depository accounts containing funds originally received as social security benefits. The initial hurdle Goodrich must overcome, as Lakewood observes, is whether Goodrich can even make such a claim at this time. Goodrich has availed himself of the protections afforded by the federal bankruptcy laws; as part of that process, he was required to submit a schedule of assets to the bankruptcy court. See 11 U.S.C. § 521(a)(1) B.i. “It goes without saying that the Bankruptcy Code and Rules impose upon bankruptcy debtors an express, affirmative duty to disclose all assets, including contingent and unliquidated claims. ” Browning Mfg. v. Mims, 179 F.3d 197, 207–08 (5th Cir.1999). The debtor's disclosure obligation extends to all potential causes of action, even if the debtor does not know all the facts or even the legal basis for the cause of action. Id. at 208 (citing Youngblood Grp. v. Lufkin Fed. Sav. & Loan Ass'n, 932 F.Supp. 859, 867 (E.D.Tex.1996) ). If the debtor has sufficient information to suggest a possible cause of action, the cause of action must be disclosed. Id.

¶ 14 Courts have taken two approaches to the problem of debtors...