Restraining notices.

Author:Carlson, David Gray
Position:I. Restraining Notices J. Contingent Debts through II. Banks and the Exempt Income Protection Act B. A New Exemption, p. 1561-1606 - New York - Chief judge Lawrence H. Cooke Eighth Annual State Constitutional Commentary Symposium
  1. Contingent Debts

    Contingent obligations are not debts, as "debt" is defined by CPLR section 5201(a).530 As a result, in Verizon New England, Inc. u. Transcom Enhanced Services, Inc., a garnishee was able to evade a restraining notice by simply paying for services in advance, (531) Since the prepayments were not "pay[ing] over ... any ... debt" (532) (narrowly defined), the restraining notice had no bite. (533) The strategy of prepaying a contingent debt constitutes a potential threat to the efficacy of a restraining notice. Whether this is so is the topic for the remainder of this section.

    The New York Court of Appeals has issued a well-known and progressively complex series of cases on contingent debts and whether they can be garnished. I have analyzed this sequence of cases elsewhere. (534) Here I will summarize the pertinent holdings very briefly, with a digression as to a contradiction that may have recently arisen.

    The sequence starts with Glassman u. Hyder, (535) where a prejudgment defendant owned rental property in New Mexico. (536) The plaintiff sought prejudgment attachment in New York and, to that end, served an insurance company present in New York but renting space from the defendant in New Mexico. (537) The Glassman court ruled that the insurance company's obligation to pay future rent was not a debt because the future debt was contingent on the landlord not being in breach of the lease. (538) Meanwhile, the contingent obligation of the garnishee was "property" and this could be reached, but not in New York. (539) Since the rental property was located in New Mexico, so was the contingent debt to pay rent. (540) This contingent obligation could not be reached by an order of attachment in New York. (541)

    Next in the sequence is ABKCO Industries, Inc. v. Apple Films, Inc. In this famous case, a plaintiff sought to attach a film royalty. (542) The court held that the royalty obligation was not a debt because it was contingent. (543) It was not clear that enough people would pay to see the film such that a royalty "deb" would be absolutely due. (544) But the same royalty obligation was contingent (i.e., unvested) property, (545) This could be garnished. (546) Unlike the garnishee's rent obligation in Glassman, which was located in New Mexico, the obligation of the ABKCO garnishee was located in New York, and therefore garnishable. (547) The ABKCO principle fully applies to restraining notices. (548) So, for example, a restraining notice served at the time a third party owes a contingent broker's fee for property not yet purchased effectively restrains payment of the fee when the deal closes. (549)

    The ABKCO court held that a defendant's right to a film royalty could not be levied as a debt because film royalties are contingent. (550) But the royalty could be levied as property within the meaning of section 5201(b). (551)

    At this point, a digression is called for, to point out something heretofore unnoticed. The court focused on section 5201(b), which makes contingent property leviable. (552) But to levy contingent property requires a plaintiff to pass through the postern gate of section 5232(a). (553) It hardly matters that contingent debts are property under section 5201(b) if, by the terms of section 5232(a), the sheriff is not empowered to levy. (554)

    According to section 5232(a):

    A levy by service of the execution is effective only if, at the time of service, the person served... is in the possession or custody of property not capable of delivery in which he or she knows or has reason to believe the judgment debtor or obligor has an interest.... (555) The garnishment of the film distributor presupposes that the film distributor is a person "in the possession or custody of property" in which the defendant has an interest. So, implicit in ABKCO is the view that a garnishee "possesses" property of the defendant by virtue of owing the defendant a contingent debt. Owing money to and possessing property of the judgment debtor must have been the same thing.

    In Hotel 71 Mezz Lender LLC v. Falor, (556) however, the Court of Appeals ruled that a debtor (not the garnishee) "possesses" her intangible property. (557) In Falor, a defendant was served with an order of attachment. (558) This was held to encumber the defendant's right against various limited liability companies not present in New York. (559) Attachment presupposes that "property to be levied upon is in the defendant's possession or custody." (560)

    The Falor opinion holds, in effect, that a creditor possesses intangible property (not the garnishee). In other, words, owing money is not the same as possessing the debtor's intangible property. Falor arguably denies that the garnishee is in possession and, if so, it is inconsistent with ABKCO. If Falor is applied to the ABKCO facts, although the royalty agreement may have been debtor property, only the debtor had possession of it. (561) The garnishee did not have possession, so that the royalty obligation could not be levied from the garnishee. In short, when it comes to contingent debts (or even vested debts), the debtor is in possession and the creditor is out of possession. If so, the garnishment in ABKCO did not conform to section 5232(a) or section 6214(b).

    In order to avoid this conclusion, somehow it must be possible that the garnishee and the debtor are cotenants of the royalty. If so, ABKCO and Falor can coexist without contradiction. But this seems absurd. Possession is, fundamentally, the right to exclude others. (562) Surely the debtor has the right to exclude the garnishee from intangible property. For example, the debtor might forgive the contingent obligation to pay, because the debtor is in possession of her intangible property. The garnishee could not forgive itself and abrogate its obligation to pay. This implies that the garnishee is out of possession. The right of forgiveness, or the right to be paid, is exclusive to the debtor who is in possession. It will take some fancy word chopping to show that ABKCO has not been overruled by Falor. The best I can do to defend ABKCO from Falor is that property is a bundle of sticks, as the Verizon court acknowledged. (563) Of this bundle, the garnishee "possesses" some sticks and the debtor possesses some. By owing a contingent debt, a garnishee possesses just enough sticks to eke out a levy under section 6214(b). (564) But the debtor owns enough sticks to sustain a levy against the debtor's property pursuant to section 6214(a). (565) They are not cotenants in that the garnishee's set of sticks is disjoint from the debtor's set of sticks. In topological terms, garnishees and debtors occupy disjoint normal Hausdorff spaces. (566) On this view, both parties have possession, but somehow they are not cotenants.

    But what is the garnishee's set of sticks when the defendant has only an in personam claim against the garnishee? The best that could be said is that the garnishee possesses the means by which payment of the contingent debt could be realized. But, as the defendant's claim is in personam, the defendant owns none of these means before the garnishee voluntarily conveys them to the defendant, or before the defendant obtains some judicial lien against specific property of the garnishee. In short, possession of intangible property in section 6214(b) means one thing, and it means quite the opposite thing in section 6214(a). By considerable violence to the English language and common sense, it might be possible to rule that ABKCO is not overruled.

    But let's set aside the interesting contradiction between ABKCO and Falor. Let us assume that an ABKCO garnishment is still possible on some sort of stick-partitioning gambit. What does a levy actually mean in the case of a levied contingent debt? In particular, since Verizon involved the status of prepayments for services, could the ABKCO garnishment have been defeated by a careful scheme of prepaying the defendant for royalties not yet due? I contend that the garnishment, if valid, can be defeated by prepayment. And if garnishments can be defeated, so can restraining notices pertaining to contingent debt.

    Ordinarily, creation of a lien on a debt, contingent or vested, would interfere with the strategy of setoff. But we have already seen that Debtor & Creditor Law section 151 plays havoc with liens. First, recall that a sheriffs levy is both a restraining notice and a turnover order. (567) But an execution, which authorizes the levy, gives rise to a lien. We know this from CPLR section 5202(a), which provides:

    Where a judgment creditor has delivered an execution to a sheriff, the judgment creditor's rights in a debt owed to the judgment debtor or in an interest of the judgment debtor in personal property, against which debt or property the judgment may be enforced, are superior to the extent of the amount of the execution to the rights of any [subsequent] transferee of the debt or property .... (568) While this section does not mention the word "lien," it refers to the plaintiffs "right" to a debt or to personal property. (569) This "right," whatever it is, is better than the right of subsequent transferees.

    Section 5202 establishes that a creditor's rights are better than a transferee's rights. The challenge is that the creditor needs to have better rights than the garnishee, who claims to have paid a debt in advance. Therefore, we must contrive to make the garnishee into a transferee of debtor property, such that the creditor's right is better than the garnishee's subsequent right.

    The key to the interpretive move is to see that payment does not extinguish the garnishee's obligation but transfers it to the garnishee. The garnishee is thus like a corporation that buys its public debt on the market. It is a buyer of its own debt. To buy a debt (when one owes the debt) is to extinguish it. In that sense, every payor is a transferee. So, on this basis, flimsy as it may seem, the...

To continue reading