With both consumers and small businesses receiving funds from the Paycheck Protection Program (PPP) and CARES Act, questions have come up as to whether these amounts can be frozen or garnished by debt collectors or creditors. Is garnishing PPP or CARES Act funds an option for satisfying outstanding monies owed to judgment creditors?
Although New York has liberal laws on judgment enforcement, CPLR Sect 5222-a provides a laundry list of funds exempt from creditors’ reach. For commercial judgment debtors, although an unintended consequence, an exemption of $2,850 is applied.
Now, with the introduction of additional funding and support to businesses and consumers, the question becomes, are these additional benefits exempt?
With respect payments to consumers, the attorney general’s guidance is clear: economic impact payments to consumers are exempt in New York.
What About Businesses?
It’s not so clear cut when it comes to business benefits. Currently, and prior to the introduction of PPP, payroll accounts were not exempt from enforcement by creditors. A judgment creditor could freeze a payroll account belonging to a commercial judgment debtor. The funds, although earmarked for payroll, were not exempt.
PPP allows entities to apply for low-interest private loans to pay for their payroll and certain other costs. Although technically a loan, the loan could be forgiven if used specifically to cover payroll costs, rent, interest, and utility and meet other requirements.
After reviewing the CARES Act, PPP, and the Healthcare Enhancement Act (CARES Act 2.0), nothing explicitly grants any exemption from garnishment by private creditors for either economic impact payments or PPP loan proceeds. The act authorizes the treasury secretary to issue guidance or a rule regarding whether the funds are exempt or not. Exercising that authority could quickly resolve the issue by making EIPs exempt from garnishment by creditors. To date, however, Treasury Secretary Steven Mnuchin has chosen not to exercise that authority. This leaves states with the responsibility of declaring whether funds were exempt or not.
Garnishing Economic Impact Payments
New York State Attorney General Letitia James has elected to protect economic impact payments from garnishment. In a statement, James declared she will treat – and prosecute – garnishment of CARES Act payments as a violation of local, state, and federal law. James cited her authority to bring an action “[w]henever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business.” Similarly, she cited a section of New York’s General Business Law that declares “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state” unlawful, and authorizes the NYAG to bring an action “to enjoin such unlawful acts or practices and to obtain restitution of any moneys or property obtained directly or indirectly by any such unlawful acts or practices.”
Therefore, CARES Act payments are exempt from garnishment in New York, and any person who garnishes or attempts to garnish these payments will have engaged in fraudulent or illegal conduct under executive law and deceptive conduct under general business law.
Because CARES Act payments are exempt from garnishment, they are also exempt from bank setoffs. Setoffs incur when a consumer owes a bank money and the bank takes the owed funds before making the economic impact payment available to the consumer. The AG stated such setoffs would be unfair and abusive, and therefore also exempt. The AG urged all financial institutions to follow the lead of the nation’s largest banks, which have paused collection on negative account balances to give their customers access to vital stimulus payments.
Garnishing PPP Proceeds
The circumstances regarding PPP are different in that businesses are not afforded the same protections that consumers are under both federal and state law. As stated before, there is no specific exemption from garnishment by private creditors for PPP loan proceeds. The section of the CARES Act that contains specific uses for PPP loan proceeds conflicts with state laws that would subject those proceeds to garnishment. To determine whether state laws authorizing garnishment orders impermissibly conflict with this section of the CARES Act, an analysis of whether federal law is in conflict with state law on garnishments may need to play out in court.
Unfortunately, it is unclear if PPP proceeds are exempt from creditors until/if Treasury Secretary Mnuchin issues a clarification, or if PPP funds are levied on by a creditor and a court case ensues as to whether such it violates of the federal law. Until further guidance is issued, PPP is not exempt.
For more information about navigating debt collection during this time, contact Frank, Frank, Goldstein and Nager.