Restraining notices.

• Author: Carlson, David Gray
• Position: II. Banks and the Exempt Income Protection Act C. Notices to the Debtor in the Case of Bank Accounts through IV. Conclusion, with footnotes, p. 1606-1641 - New York - Chief judge Lawrence H. Cooke Eighth Annual State Constitutional Commentary Symposium

3. Notice to the Debtor in the Case of Bank Accounts

   New section 5222-a piles extra burdens on the shoulders of creditors who would restrain bank garnishees. (820) These restrictions equally apply to sheriffs levying under executions. (821) The judgment creditor serving the restraining notice must provide the bank an exemption notice that the bank can mail its customer, plus two copies of exemption claim forms for the bank to send to the customer. (822) The content of these forms is precisely set forth in the statute. (823) Failure of a creditor to tender the proper forms renders the restraining notice invalid. (824) The bank is commanded not to restrain the account if the proper forms are not received. (825) Earlier, we saw that a garnishee can choose to be bound by a restraining notice that is not technically valid. (826) But after 2008, this is no longer true in consumer cases, where a bank is the garnishee into which exempt funds are wired.

   As of 2008, the sheriff is similarly burdened when levying a bank under an execution. (827) If the sheriff fails to provide these forms, the entire execution is void. (828) Suppose a sheriff levies on a Monday but forgets the required forms. The sheriff corrects the mistake on Tuesday. Too late. The levy was void as of Monday.

4. Bank Duties in the Case of Restraining Notices and Executions

   The EIPA imposes new obligations of banks served with restraining notices and executions. Unlike section 5222(d), which was added in 1985 to address constitutional issues, CPLR section 5222-a may not correct constitutional errors, but is based on sub-constitutional notions of fairness. (829)

   Under CPLR section 5222-a, the bank, within two business days, must serve the judgment debtor with a copy of the restraining notice, the exemption notice, and the two exemption claim forms. (830) Service must be at the last known address of the judgment debtor. (831)

   Although section 5222-a generally applies only to "banking institutions," (832) there is a sentence that applies to "depository institutions." (833) According to this sentence, "[t]he inadvertent failure by a depository institution to provide the notice required by this subdivision shall not give rise to liability on the part of the depository institution." (834) "Depository institution" is not a defined term, (835) and it may well be that the legislative pen slipped here. I will therefore assume that the legislature intended banking institutions to have this immunity.

   If inadvertent failure to perform these duties engenders no liability, it certainly would seem fair to conclude that purposeful failures do give rise to liability. One New York justice has so held. (836) But the New York Court of Appeals has recently disagreed. Cruz v. TD Bank, N. Am. (Cruz III), (837) involved certified questions from two class actions commenced in federal court claiming that banks were deliberately ignoring their EIPA duties. (838) In one of these cases, plaintiffs alleged that a bank received a restraining notice without the required exemption notices for the bank to forward to their customers. (839) Properly, the restraining notices were invalid. (840) The bank nevertheless improperly restrained the bank accounts and also charged a fee against their customers, which was improper, given the invalidity of the restraining notice. (841)

   In the other case, a different bank allegedly failed to forward the required notifications and forms to their customers. (842) Both these class actions were dismissed, and the plaintiffs appealed.

   In the certification proceeding, the New York Court of Appeals, in an unconvincing opinion, came down squarely on the side of the banks and against senior retirees. As a result, banks are informed that, if they deliberately ignore the EIPA, they will not owe damages in a plenary action and probably not under any circumstances. To understand the weakness of the court's opinion, however, it is best to consider the state of New York law in 2008, when the EIPA was enacted.

   1. Debtor Remedies When the CPLR Is Violated

      As we have seen, courts routinely award damages to judgment creditors when a garnishee violates a restraining notice. (843) Indeed, the court of appeals, in Aspen Industries, Inc. v. Marine Midland Bank, (844) stated in dictum, "violation of the restraining notice by the party served... subjects the garnishee to personal liability in a separate plenary action or a special proceeding under CPLR article 52 brought by the aggrieved judgment creditor." (845) A plenary action is one commenceable by formal pleadings sounding in tort (846) or contract (847) as opposed to summary proceedings connected with enforcement of judgments, which are much less formal). (848)

      Plenary actions for damages when a restraining notice is violated suggested to the Cruz court that there is a link between violation of a court order authorized by the CPLR and the right to damages in a plenary action. (849) Where, however, there is no court order, yet the garnishee violates the law, the violation will not constitute a tort generating a plenary action.

      Yet counter-examples exist. According to CPLR 6219, a garnishee is obligated to

      serve upon the sheriff a statement specifying all debts of the garnishee to the defendant, when the debts are due, all property in the possession or custody of the garnishee in which the defendant has an interest, and the amounts and value of the debts and property specified. (850) value of the debts and property specified. (850) In Leber-Krebs, Inc. v. Capitol Records, (851) a plaintiff had obtained an ex parte order of attachment, which must be reaffirmed by a court within five or perhaps ten days of a levy. (852) The levy of an order of attachment restrains the garnishee from paying a debt to the defendant or conveying defendant property and to pay a debt or deliver property to the sheriff. (853) The levy is, however, not a court order. The order of attachment is an order, but it is an order to the sheriff, not the garnishee. (854) The garnishee knowingly filed a false report, claiming no debt was owing. As a result of the false report, the court dissolved an order of attachment. The garnishee, then, never did violate a court order. The garnishee's falsehood sustained a plenary action for damages, even though the garnishee never violated a court order.

      Here we have at least one example of a case that de-links contempt of court and the right to damages. Of course, Capitol Records is an "Erie guess" on the content of New York law. In due course, we will consider, then, whether Cruz III overrules Capitol Records, inviting garnishees to file false reports free of tort liability.

      Another example of damages awarded for technical violations of the CPLR in the absence of a court order is Adinolfi v. Solimine. (855) In this case, a city marshal had the duty to "forthwith serve a copy of the execution... upon the person from whose possession or custody the property was taken." (856) The marshal did not do this, which justified a new action against the marshal in small claims court. (857) In this respect, the marshal can be compared to a garnishee with duties not stemming from a direct court order. Both cooperate in the levying process and are assigned duties by the CPLR.

      For our present purpose, it can be observed that, as of 2008, when the legislature enacted the EIPA, plenary actions were authorized for violation of court orders and for violation of CPLR duties imposed on garnishees or sheriffs, where no court injunction is involved.

      Separately, CPLR 5239 provides for a "special proceeding" against garnishees. A special proceeding, governed by Article 4 of the CPLR, greatly accelerates the pace of the litigation. (858) According to CPLR Section 5239:

      Prior to the application of property or debt by a sheriff or receiver to the satisfaction of a judgment, any interested person may commence a special proceeding against the judgment creditor or other person with whom a dispute exists to determine rights in the property or debt.... The court may... direct that damages he awarded.... If the court determines that any claim asserted was fraudulent, it may require the claimant to pay to any party adversely affected thereby the reasonable expenses incurred by such party in the proceeding, including reasonable attorneys' fees, and any other damages suffered by reason of the claim. The court may permit any interested person to intervene in the proceeding. (859) By its terms, CPLR section 5239 actions must be commenced before "application of property... by a sheriff." (860) Thus, a bank that has somehow misbehaved cannot be reached under CPLR section 5239 if the bank has paid over the bank account to the sheriff and the sheriff has forwarded that money to the judgment creditor. Nevertheless, if this deadline is a problem, a judgment debtor can seek relief under CPLR section 5240, which invites the court "at any time... [on] the motion of any interested person... [to] make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure." (861) It is to be noted that CPLR section 5239 refers directly to the award of damages, whereas CPLR section 5240 does not. Rather, CPLR section 5240 invites the court to extend or limit an enforcement procedure. It is difficult to characterize the award of tort damage as the modification of a procedure authorized by CPLR Article 52.

      To summarize, without question debtors prior to EIPA had rights under CPLR sections 5239 and 5240. But they also had the right to bring plenary actions for violations of duties imposed by the CPLR. This was so even if a court order did not generate contempt penalties for violating the order. The point is important in that, according to CPLR section 5222-a(h): "Nothing in this section shall in any way restrict the rights and remedies otherwise available to a judgment debtor, including but not limited to, rights to...