Monday, April 5, 2010

FYI: 7th Cir Affirms Dismissal of 1983 Claim Against Bank for Freezing SSI Funds

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a suit brought by judgment debtors against their bank under 42 U.S.C. § 1983 for freezing their Social Security benefits, because the debtors failed to allege that the bank had taken any action under color of state law.  A copy of the opinion is attached.


Debtors' judgment creditor served a judgment enforcement proceeding seeking to discover any assets of the Debtors in possession of their bank, Charter One Bank ("Charter One").  Pursuant to the citation, Charter One froze the assets in Debtors' checking account, including Social Security benefits which were deposited monthly, despite the statement in the citation explicitly exempting such funds from being frozen. 


On various occasions, Debtors asked that their Social Security funds be released, but Charter One refused and, as a result, several of Debtors' checks and bank drafts were retuned due to non-sufficient funds.  Eighteen days after the freeze was imposed, a hearing was held on the matter in which the citation was dismissed, and the freeze subsequently ended by Charter One.


Debtors brought suit against Charter One in federal court alleging various violations by Charter One.  Specifically, Debtors sought damages under 42 U.S.C § 1983, alleging that Charter One was "acting under color of state law when, without a hearing, they froze (and later refused to release) Social Security funds they knew were exempt from legal process under 42 U.S.C. § 407(a) [(governing assignment of Social Security benefits)], actions [Debtors] say violated § 407(a) and the Due Process Clause of the Fourteenth Amendment."


The District Court granted Charter One's motion to dismiss, finding that Debtors failed to state a claim for which relief could be granted, and the Seventh Circuit affirmed.


The Seventh Circuit began by explaining that, to state a claim under § 1983, a "plaintiff must sufficiently allege that (1) a person acting under color of state law (2) deprived him of a right, privilege, or immunity secured by the Constitution or laws of the United States."  And, when a § 1983 action is brought against a private party, two conditions must be met to satisfy the first prong: (1) "the alleged deprivation of federal rights must have been caused by the exercise of a right or privilege created by the state, a rule of conduct imposed by the state, or someone for whom the state is responsible;" and (2) "the private party must be a person who may fairly be said  to be a state actor." 


Turning to the first condition, the Court found that Debtors' complaint failed "to allege that Charter One was following the directives of the citations (or any other state-imposed rule of conduct) when it froze Social Security funds it knew were exempt."  Moreover, the citation's language was derived directly from Illinois statute and "required Charter One to restrain only the [Debtors'] non-exempt funds and expressly listed Social Security benefits as exempt assets…"  Accordingly, "any action taken by Charter One against funds it knew were exempt was not in accordance with the citation and Illinois law."  Therefore, because Debtors "did not allege any action by Charter One that was taken under color of state law, Charter One may not be held liable under § 1983."
Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874


NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.