Introduction I. Restraining Notices A. What Are They? B. Lien Significance C. Order of Which Court? D. Who May be Served and How? 1. Service on the Judgment Debtor or Obligor 2. Service on Third Parties E. Transfers F. Property 1. Personal 2. Secured Creditors as Garnishees 3. Purchasers of Restrained Personal Property 4. Real Property Analogies 5. Exempt Property 6. Fraudulently Conveyed Property 7. Alter Ego Cases G. Debts H. Right to Setoff I. Paying Debts v. Setting off Debts J. Contingent Debts K. After-Acquired Property and After Arising Debts L. Rent as Conditional Debt M. Voluntary Compliance N. Effectiveness and Reason to Believe O. Specified in the Notice P. Duration Q. Court Permission for a Second Restraining Notice R. Twice the Amount of the Judgment S. Foreign Entities Present in New York T. The Effect of a Bankruptcy Petition II. Banks and the Exempt Income Protection Act A. In General B. A New Exception C. Notice to the Debtor in the Case of Bank Accounts D. Bank Duties in the case of Restraining Notices and Executions 1. Debtor Remedies When the CPLR Is Violated 2. The Immunity For Banks 3. The Adequacy of Other Remedies 4. The Implications for Pre-Judgment Attachment 5. The Judgment Creditor's Liability for Bank Failures 6. Bank Liability Under Federal Civil Rights Legislation E. Claims of Exemption III. Information Subpoenas IV. Conclusion INTRODUCTION
"In many respects this topic gives law its ultimate test." (1)
In Verizon New England, Inc. v. Transcom Enhanced Services, Inc., (2) a dodgy internet provider lost a major money judgment. (3) The judgment creditor served a restraining notice on a customer of the debtor. (4) The restraining notice prohibited the customer from paying any debt to the internet provider or from assigning, transferring, or interfering with property in which the internet provider had an interest. (5) Anticipating such a court order and anxious to receive services from the debtor, the customer had simply arranged to pay in advance. (6) According to the New York Court of Appeals, this had the effect of completely negating the restraining notice served on the customer. (7)
Dissenting from the appellate division opinion in the case, Justice Angela M. Mazzarelli warned, "[t]he majority's narrow view of what constitutes property for purposes of CPLR article 52 ... places in [the customer's] hands a virtual road map for frustrating the efforts of judgment creditors." (8)
In this Article, I will assess whether Justice Mazzarelli's remark is justified. My conclusion is that Verizon exposes serious weaknesses in the New York law of money judgment collection. Nevertheless, the decision in Verizon seems eminently correct on the existing statutory scheme in New York. The fault is not with the stars who populate the Court of Appeals but in ourselves, whose elective representatives enacted the CPLR and, in particular, an overzealous extension of the common law right of setoff in New York Debtor & Creditor Law section 151.
Verizon reveals many flaws in the CPLR's governance of the restraining notice and in the surrounding environment of money judgment enforcement. First, the CPLR defines "debt" in a distinctly old fashioned way. According to CPLR section 5201(a), "[a] money judgment may be enforced against any debt, which is past due or which is yet to become due, certainly or upon demand of the judgment debtor." In New York, contingent debts are not debts at all. (9)
As is well known, in ABKCO Industries, Inc. v. Apple Films, Inc., (10) the Court of Appeals attempted to palliate this defect by ruling that contingent debts are also contingent property interests of the judgment debtor. (11) According to CPLR section 5201(b), "[a] money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested." (12) "Vested" means not subject to a condition precedent. (13) So, unvested property is contingent property. ABKCO implies that all debts are property, so all contingent debts are property. As such, contingent debts can be levied. (14)
In Supreme Merchandise Co. v. Chemical Bank, (15) the Court of Appeals discovered that some contingent debts are so contingent that they can't be considered property at all. (16) As such, super-contingent debts can never be levied. And that is what the Court of Appeals also found before it in Verizon. (17) The advance payment scheme was merely a unilateral offer by the customer to enter into a contract for the provision of services, the mode of acceptance being actually providing the desired services. (18) This arrangement did not rise to the dignity of property. (19) Therefore the restraining notice was incapable of restraining prepayment for services not yet rendered. (20) According to the Verizon court, "the expectation of any continued or future business is too contingent in nature and speculative to create a present or future property interest." (21)
Although Verizon arose in the context of restraining notices, it certainly implies that a levy of the customer would be equally ineffective. The prepayment scheme was neither debt nor property. Verizon simply makes express what Supreme Merchandise implied: not all contingent debts are property. (22)
Verizon also entails the second defect in the CPLR--the failure to associate the restraining notice with liens. Prior to the enactment of the CPLR, service of a restraining notice did create a lien. (23) In its first opinion on the CPLR version of the restraining notice, the Court of Appeals associated the restraining notice with a lien. (24) But, inexplicably, the Court of Appeals overruled itself by dictum. (25) Since then lower courts, with some exceptions, have insisted that restraining notices do not create liens. (26)
This defect should be corrected, but it would not actually have changed the result in Verizon. Even if the creditor in Verizon had obtained a valid lien against the customer of the debtor--because the customer-debtor relation was ABACO-style property--the result would have been the same. The deeper problem exposed by Verizon is that New York law allows for what most states prohibit--the triangular setoff. (27) This is accomplished in New York Debtor & Creditor Law section 151, which is the unacknowledged culprit in Verizon. (28)
Verizon brings a third defect to light: the restraining notice contains an after-acquired provision. (29) Not only is the garnishee restrained as to property she presently possesses or debts (narrowly defined) she currently owes, but also she is restrained as to debtor property obtained after the restraining notice is served, or debts that become due after service of the restraining notice. (30) But this rule applies only if, on the day of service, the garnishee possessed debtor property or owed a debt to the judgment debtor. (31) If the restraining notice was not effective at the time of service, it is never effective. (32) In the context of Verizon, the restraining notice simply did not cover the payment of a super-contingent debt. (33) When the contingent debt became vested a few days later (as the parties knew it would), the after-acquired debt principle in section 5222(b)'s third sentence did not apply because, at the time the restraining notice was served, the customer owed no debt to the judgment debtor and possessed no property belonging to the debtor. (34)
This article explores the weaknesses of the restraining notice, but also emphasizes its strength. The restraining notice is especially powerful when it is served on a third-party who actually owes a debt (narrowly defined) or who possesses debtor property. Serving a solvent third-party permits the judgment creditor to recover damages if the third-party violates the terms of the restraining notice. (35) Of course, the restraining notice must restrain, which is precisely what it did not do in Verizon.
This article constitutes the first full exploration of the New York institution of the restraining notice. (36) With most of the devices of debt collection, the intercession of a court or a sheriff is necessary. For example, only a sheriff may levy personal property. (37) Only a court may order the judgment debtor or third party to turn property over to the sheriff for sale or to pay a debt to the judgment creditor. (38) The restraining notice constitutes a quasi-exception to this judicial monopoly of debt collection procedure. (39) The restraining notice, to be sure, is a court order, (40) but the CPLR appoints the attorney for the judgment creditor as an officer of the court for the purpose of issuing such a notice. (41) As a result, a creditor's attorney can "costless[ly]" launch this important collection tactic without making a motion to any court. (42)
In exploring the strengths and weaknesses of the restraining notice after Verizon, this Article is divided into three parts. Part I deals with all aspects of the restraining notice, except for those restraining notices served on third party banks whose customers receive exempt income stream. Part I analyzes New York's unfortunately narrow definition of "debt" and how it plays havoc with restraining notices. (43)
Restraints on banks are governed by the Exempt Income Protection Act ("EIPA"), (44) enacted in 2008, which is considered in Part II. This legislation is designed to force banks to protect its customers who receive exempt income streams, such as social security payments. (45) Already class actions abound, claiming that banks are failing to conform to the EIPA. (46) So far these class actions have been barred or at least inhibited, on the theory that the legislature did not intend to authorize private rights of action under the EIPA. (47) This very question has been certified by the federal court to the New York Court of Appeals. (48)
In Cruz v. TD Bank, N.A., (49) the New York Court of Appeals ruled that banks who...