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
"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 deliberately flout the law and refuse to cooperate with the EIPA cannot be sued for tort damages. (50) A senior citizen who has been wronged by her bank can only obtain relief in a special proceeding under CPLR sections 5239 or 5240, (51) where damages may well be unavailable. I will argue that the Court of Appeals has, in effect, used the EIPA to change the tort law of New York. Prior to 2008, anyone victimized by an intentional refusal by a third party to obey the CPLR was indeed able to bring a tort action. Whether this can still happen after Cruz is in severe doubt. For example, garnishees in pre-judgment attachment cases have a duty to report whether they owe the defendant a debt or whether they control debtor property. (52) Deliberate falsehoods in such garnishee statements gave rise to an action in tort for damages. (53) It is no longer clear that false statements that harm plaintiffs are tortious, under the law of New York.
Very closely joined with the restraining notice is the information subpoena. (54) Like the restraining notice, a subpoena may be issued without judicial intervention. (55) Indeed, before the CPLR, there was no distinction between the restraining notice and the information subpoena. (56) The subpoena implied the restraining notice. The CPLR has divided these collection tools in two, though universally they will be found together, like a divorced couple still maintaining a household. (57) Accordingly, Part III considers the scope of the information subpoena.
I. RESTRAINING NOTICES
A. What Are They?
For historic and perhaps also for good reason, most enforcement procedures in New York are delegated to judicial officers, such as judges, sheriffs, marshals or receivers. (58) Creditor self-help has long been discouraged. (59) Thus, a levy of property capable of delivery under a post-judgment writ of execution requires a sheriff to take the property into her possession. (60) This is no doubt justified by the notion that dispossession inherently threatens the peace, and we therefore want a judicial officer doing the dispossessing. A levy of property not capable of delivery pursuant to a postjudgment execution involves no dispossession. (61) It requires only the service of the execution on the garnishee. (62) Any levy under a prejudgment order of attachment is likewise accomplished by serving the execution or the order of attachment (63) on a debtor or a garnishee. (64) These we may call "paper" levies. One may question whether we really need a judicial officer to deliver the piece of paper that accomplishes the levy.
A quasi-exception to the state monopoly on debt enforcement is the restraining notice. (65) Newly introduced in 1963, (66) the restraining notice was "added to the arsenal of judgment creditors because of the 'great number of judgments which were never satisfied and those that were satisfied only after years of litigation involving great expenditures of time and money.'" (67) Only Minnesota's "garnishment" summons is similar in this respect. (68)
A restraining notice is a court order commanding its recipient to pay no debt to or transfer no property of a judgment debtor that might be levied pursuant to an execution. (69) It may issue at any time after entry of judgment. (70) In federal cases, a restraining notice may issue under the authority of Federal Rule of Civil Procedure ("FRCP") 69 (which incorporates state law), (71) although a restraining notice issued within fourteen days of entry of a federal judgment violates FRCP 62(a). (72)
A restraining notice may be issued by a court, (73) a clerk of the court, or, most significantly, "the attorney for the judgment creditor as officer of the court." (74) It may not, however, be issued by the judgment creditor directly (unless the judgment creditor is an attorney foolishly representing herself). (75) A judgment creditor without an attorney will have to apply, hat in hand, to the clerk of the court for a restraining notice. (76)
Prejudgment restraining notices are also available even earlier-- if "a verdict or decision has been rendered."77 Unlike the ordinary postjudgment restraining notice, the prejudgment version requires a motion to and order by the trial judge. (78) Separately, and even before there is a verdict, a court might issue a temporary restraining order or preliminary injunction as an adjunct to prejudgment attachment, but these too would require judicial intervention, plus grounds for the attachment. (79) Only postjudgment restraining notices can issue without a judicial seal of approval. (80)
A restraining notice is to be distinguished from a turnover order under CPLR section 5225(a) or (b) or under CPLR section 5227. (81) Only a court can issue a turnover order. (82) The CPLR commands that property be handed over to the sheriff for the purpose of liquidating it (if illiquid), or that a debt due and owing be paid to the judgment creditor. (83) Any proceeds received are to be used to satisfy the money judgment. (84) A turnover order is therefore more intrusive than a restraining notice. (85) It forces the recipient to do something, whereas the restraining notice admonishes the recipient to do nothing. (86)
Although it is rarely noticed, the levy by a sheriff of personal property not capable of delivery ends up being nothing more than a combined restraining notice and a turnover order. Section 5232(a)'s seventh sentence establishes the levy as a restraining notice:
Until such transfer or payment is made, or until the expiration of ninety days after the service of the execution upon him or her, or of such further time as is provided by any order of the court served upon him or her, whichever event first occurs, the garnishee is forbidden to make or suffer any sale, assignment or transfer of, or any interference with, any such property, or pay over or otherwise dispose of any such debt, to any person other than the sheriff or the support collection unit, except upon direction of the sheriff or the support collection unit or pursuant to an order of the court. (87)
A levy pursuant to an execution is also a turnover order. According to section 5232(a)'s fifth sentence, "[t]he person served with the execution shall forthwith transfer all such property, and pay all such debts upon maturity, to the sheriff or to the support collection unit and execute any document necessary to effect the transfer or payment." (88)
Whereas the sheriff is expected to take possession of "property capable of delivery," the role of the sheriff in levying property not capable of delivery is quite passive. (89) Once the sheriff serves the piece of paper (thereby earning a fee of (5) percent), the sheriff takes no further coercive steps against the garnishee. (90) The levy is purely injunctive in nature; if the garnishee refuses to comply, the sheriff is insouciant. (91) Indeed, the levy lapses entirely after ninety days, and with it the duty of the garnishee not to transfer the debtor's property or pay debts to the debtor. (92) To perpetuate the turnover order and restraining notice that the levy consists of, the judgment creditor is expected to commence a turnover proceeding to force the turnover to the sheriff. (93) The mere commencement of a turnover proceeding has the effect of extending the restraining and the turnover aspects of the levy. (94) In comparison, in the absence of a levy, the mere commencement of the turnover proceeding creates no lien (95)--only obtaining the turnover order does. (96) In short, there is an overlap between a levy, turnover order, and restraining notice. (97) Only the last of these can be issued without judicial involvement. (98)
These same points also apply to the prejudgment order of attachment, except that, presumptively, all levies are paper levies. (99) The levy under an order of attachment is, basically, nothing but a combined turnover order and a restraining order. (100) Such a levy is purely injunctive, and purely in personam in nature, contrary to some recent careless analysis by the Court of Appeals. (101)
B. Lien Significance
Regrettably, service of the restraining notice is not to be associated with the creation of a lien on the debtor's property. The restraining notice "is but a 'junior remedy' in the arsenal of enforcement mechanisms under CPLR article 52." (102)
By way of background, a lien can be defined as a power of sale (or a power of collection, in the case of debts owed to the judgment debtor). (103) The creation of a lien constitutes a property transfer between the debtor and the creditor. (104) Once a lien arises, the debtor has been alienated from an aspect of his property. (105) The property, if illiquid, can now be sold by a court officer, whether it be the sheriff, marshal, or a receiver. (106)
In New York, liens on personal property associated with money judgments are created in two ways, as described by CPLR sections 5202(a) and (b). (107) Execution liens are authorized under CPLR section 5202(a). (108) An execution commands the sheriff to levy property of the judgment debtor. (109) This brand of lien we shall leave to one side. More pertinent for our current purpose is section 5202(b), which provides:
Where a judgment creditor has secured an order for delivery of, payment of, or appointment of a receiver of, a debt owed to the judgment debtor or an interest of the judgment debtor in personal property, the judgment creditor's rights in the debt or property are superior to the rights of any transferee of the debt or property, except a transferee who acquired the debt or property for fair consideration and without notice of such order. (110)
It is not easy to wrest from the language of section 5202(b) the point that liens are created, as the provision does not use the word "lien." (111) What one reads here is that a judgment creditor has "rights in the debt or property" upon the occurrence of enumerated events. (112) These rights are said to be "superior to the rights of any transferee of the debt or property." (113) From this we are to conclude that the creditor's power to initiate a procedure that will culminate in a sale (or in the case of a debt, a collection) is superior to the rights of a subsequent transferee. Of course, the word "subsequent" does not appear before the word "transferee." But surely this is what the legislature intended. Otherwise, a turnover order or a receivership erases any pre-existing transfer by the debtor, including absolute transfers.
It is significant that only three events trigger the judgment creditor's "right." First is the securing of "an order for delivery of ... an interest of the judgment debtor in personal property." (114) This is the turnover order described in CPLR section 5225(a) and (b). (115) Second is an order for "payment of ... a debt owed to the judgment debtor." (116) This is the turnover order described in CPLR section 5227. (117) Third is the securing of an order for the appointment of receiver of either a debt or property, accomplished pursuant to CPLR section 5228. (118) When any of these events occurs, the creditor achieves a place in the priority scheme when property is finally liquidated. (119)
Conspicuously absent from this list of lien-creating events is the issuance of a restraining notice or information subpoena. This omission has led to the conclusion that the creditor gains no property rights by virtue of serving the restraining notice or subpoena. (120) A restraining notice is supposed to have no influence on a creditor's priority. (121) Rather, the restraining notice is good against the person served, but not good against the world, which is another way of saying that no lien arises from service of the restraining notice. (122)
Prior to the CPLR, the restraining notice was an adjunct to an information subpoena. Without a court order, attorneys for the judgment creditor could serve a subpoena on a third party. (123) The subpoena implied an injunction against alienating property of or paying a debt to the debtor. (124) In Wickwire Spencer Steel Co. v. Kemkit Scientific Corp., (125) the New York Court of Appeals held that service of a subpoena on a garnishee constituted commencing a supplementary proceeding, thereby creating a lien on the debtor's assets. (126) Since subpoenas were also restraining notices, the case established that the restraining notice was lien significant--that is, it effectuated a transfer of property from the debtor to the creditor. (127)
Wickwire was controversial because the only reference to the lien significance of subpoenas was in former Civil Practice Act section 808, which presupposed the appointment of a receiver. (128) Section 808(1) and (2) provided that the title of a receiver to the debtor's property related back to the service of a subpoena upon either the debtor or a garnishee. (129) Yet there was no receiver in Wickwire. (130) The Wickwire court induced from the receivership statute a state policy that commencement of a supplementary proceeding creates a lien, and that serving a subpoena on the judgment debtor or garnishee was tantamount to starting a supplementary proceeding. (131)
After the enactment of the CPLR, it has proved difficult to claim that the subpoena or a restraining notice is a lien-significant event. (132) Section 5202(b) seems to endow lien significance on just the three enumerated equitable remedies--the two species of turnover order and the commencement of the receivership. (133) Since the newly created restraining notice is not referenced there, the restraining notice, like the information subpoena, has no property significance. (134)
Nevertheless, the New York Court of Appeals briefly entertained the notion that service of a restraining notice gave rise to a lien. In International Ribbon Mills, Ltd. v. Arjan Ribbons, Inc., (135) a judgment creditor served a restraining notice on the debtor. (136) Shortly after, the judgment debtor made an assignment for the benefit of creditors. (137) The judgment creditor then sought a turnover against the assignee pursuant to section 5225(b). (138) Obviously, a turnover was appropriate only if the judgment creditor already had a lien prior to the transfer of property to the assignee. If the creditor had to rely solely on section 5202(b) for its lien right, the earlier assignment for the benefit of creditors made any turnover order too late. There would have been no debtor property to which the judgment creditor's lien could attach. The assignee would have had it all before the turnover order could issue.
Nevertheless, Judge Charles Breitel ruled that, by virtue of the pre-assignment restraining notice, the judgment creditor was senior to the assignee. (139) He so ruled even as he acknowledged that the legislative history disfavored lien significance for the restraining notice. (140) Early drafts of CPLR section 5222, it seems, had expressly provided that creditors had a lien upon serving a restraining notice. (141) This provision, however, was later deleted. (142)
The thrust of Judge Breitel's analysis is the truism that an assignee takes the same rights as the assignor had. (143) Since the assignor was enjoined from making conveyances, the assignee was likewise enjoined. (144) The restraint was inherited, as it were, by the assignee. (145) Or, in our previous terms, the restraining notice was good against the "world" (and more specifically, against the assignee) even though the assignee had never been served. (146) The only way to escape the injunction was for the assignee to pay the judgment creditor the amount of the judgment. (147)
If logic holds sway, this ruling cannot be contained to assignments for the benefit of creditors. All transfers convey only the rights of the debtor; any transferee inherits the restraining obligation if the judgment debtor was so restrained. So
International Ribbon Mills attributes universal lien significance to service of the restraining notice. (148) This would, incidentally, make the lien for the restraining notice better than the lien for the turnover order or receivership. According to section 5202(b), the lien for the turnover or receivership is inferior to the rights of "a transferee who acquired the debt or property for fair consideration and without notice of such order." (149) No express bona fide purchaser protection would exist (at least by statute) with regard to the lien arising from the restraining notice. (150)
Oddly, in International Ribbon Mills, Judge Breitel overruled his own earlier opinion for the Appellate Division in City of New York v. Panzirer. There, a judgment creditor ([JC.sup.1]) served a restraining notice on a garnishee, who held proceeds from the sale of the judgment debtor's business. (151) A different judgment creditor ([JC.sup.2]) obtained a levy before [JC.sup.1] could obtain a turnover order. (152) Judge Breitel, citing the very legislative history he scorned in International Ribbon Mills, ruled in favor of [JC.sup.2]:
The result, then, is that in order for a judgment to attain status in the ranking of priorities there must either be a levy, an order directing delivery of property, or the appointment of a receiver. Any other measures taken by the judgment creditor, no matter how diligent, on an absolute or comparative basis, do not suffice to qualify for priority. (153)
This was quite opposite to the holding in International Ribbon Mills.
While International Ribbon Mills attributes lien-creating significance to a restraining notice, the Court of Appeals soon sang a different tune (albeit in the key of dictum) in Aspen Industries, Inc. v. Marine Midland Bank. (154) Astonishingly, it cited International Ribbon Mills as authority for its dictum, (155) even though International Ribbon Mills held the dead opposite.
The temptation of common law judges to equate a defendant's equitable duty with a property right in the plaintiff is strong. For example, real estate law makes contracts enforceable by specific performance. (156) To assure remedy's bite against transferees of the contracting seller, it is said that, just as the seller holds title in trust for the buyer, so the seller's (bad faith) transferee equally holds property in trust for the buyer. (157) As a result, a third party with knowledge of the equitable duty takes this "trust" property from the seller and holds it for the buyer. (158) Similarly, where an owner of real estate agrees to hold land as security for some obligation, courts are quick to say that there is an "equitable lien" on the property. (159) Such doctrines guarantee that a bad faith purchaser is fully subject to an injunction that a court might issue with regard to the real property. (160) Only bona fide purchasers for value take free of such equitable encumbrances. (161)
Accordingly, in spite of Aspen's discouraging dictum, some courts, following this strong instinct, have induced lien-like properties in the restraining notice. In Kates v. Marine Midland Bank, a judgment creditor served a restraining notice on a trustee of the judgment debtor. (162) After the restraining notice, the garnishee advanced funds to the judgment debtor. (163) It then sought to set off its loan to the judgment debtor against the corpus of the trust, thereby defeating the judgment creditor's restraining notice. (164)
The court did not permit the setoff, although setoffs are generally good against levies. (165) In effect, the stuff of the prohibited setoff was made available to satisfy the judgment creditor's judgment. This can only be explained if the restraining notice had already encumbered the corpus of the trust prior to the assertion of the setoff. (166)
Similarly, in Rafkind v. Chase Manhattan Bank, IV. A, (167) the SEC had enjoined a bank from paying a bank account. (168) Admittedly, the restraining injunction had a federal origin, but the court cited CPLR section 5201(b) to the effect that "[a] money judgment may be enforced against any property which could be assigned or transferred." (169) The court reasoned that the judgment creditor could not bring a turnover proceeding against the bank under section 5227, because the injunction prohibited the bank from paying anyone but the SEC. (170) If this is correct, then restraining notices generally have a lien effect on bank accounts (at least when they have a federal origin). They reserve for the beneficiary of the injunction the sole right to collect in satisfaction of a judgment.
In W.J. Towell & Co. v. Perfumer's Workshop Inti, Ltd., (171) attorneys served with a restraining notice had control over a debtor's certificate of deposit. (172) The attorneys asserted a "retaining lien" over the account--something that the common law of New York permits. (173) The "retaining lien" was held to be invalid because the judgment creditor had already served the attorneys with a restraining notice. (174) This result only makes sense if the restraining notice endowed the creditor with a lien.
In spite of these rare examples, it must be concluded that, on the text of the CPLR, only those orders enumerated in CPLR section 5202(b) create liens on the debtor's property. (175) Undoubtedly, courts will tend to assume that the service of a restraining notice and subpoena no longer give rise to liens, as they did in the fondly remembered days before the CPLR. (176) An execution can be issued by the creditor's attorney. (177) If an execution generated by the judgment creditor's attorney gives rise to a lien when delivered to the sheriff, why shouldn't issuance of the restraining notice when delivered to a debtor or garnishee?
Meanwhile, the levy of property incapable of delivery (i.e., delivery of the execution to the garnishee) constitutes both a turnover order and a restraining notice. (178) But only the sheriff may levy. (179) Yet all the sheriff does is deliver a piece of paper. Why couldn't the attorney for the judgment creditor deliver this piece of paper? (180) As it stands, the restraining notice, a piece of paper delivered by the attorney, has no lien significance. (181) But a piece of paper delivered by the sheriff constitutes the strengthening of a preexisting execution lien. (182)
To be sure, a levy of property not capable of delivery lasts only ninety days. (183) But the levy is perpetuated if the judgment creditor commences a turnover proceeding prior to lapse. (184) In effect, with regard to property not capable of delivery, a levy is nothing more than the anticipation of a formal turnover order. Why can't the attorney for the judgment creditor perform the levy, whenever it consists only of delivering a piece of paper?
It should be the case that delivery of the restraining notice should be both a restraint and an order to surrender property to the sheriff. There is no particular reason I can see why the restraining notice should be as impotent as it is. As it stands, the restraining notice is already a half-levy (since all levies are also restraining notices). Other judgment creditors less diligent than the server of the restraining notice are invited to sneak ahead of the server if they motivate the sheriff to act. (185) Why should this be?
Presumably the restraining notice was invented for the case where the sheriff was insufficiently motivated to levy fast enough. But if that is the motive, why not empower the judgment creditor's attorney to levy a garnishee? Then we could simply skip the restraining notice altogether, insofar as third-party garnishees are concerned, and proceed directly to a levy.
C. Order of Which Court?
The restraining notice is an order of the court--but which court? The answer may be induced from CPLR section 5222(a)'s fourth sentence, which provides that the restraining notice
shall specify all of the parties to the action, the date that the judgment or order was entered, the court in which it was entered, the amount of the judgment or order and the amount then due thereon, the names of all parties in whose favor (186) and against whom the judgment or order was entered, it shall set forth subdivision (b) and shall state that disobedience is punishable as a contempt of court, and it shall contain an original signature or copy of the original signature (187) of the clerk of the court or attorney or the name of the support collection unit which issued it. (188)
It is reasonable to assume, from the emphasized passage, that the restraining notice is an order of the court that entered the judgment in the first place. (189)
Now according to CPLR section 5221(b), a "notice" (as in restraining notice) may be issued from "any court in which a special proceeding authorized by this article could be commenced if the person served with the notice ... were respondent." (190) Venue for special proceedings is described in section 5221(a). (191) There we learn, for example:
If the judgment sought to be enforced was entered in ... the civil court of the city of New York, and the respondent resides or is regularly employed or has a place for the regular transaction of business in person within that city, a special proceeding authorized by this article shall be commenced in the civil court of the city of New York. (192)
In Zarsky v. Law Office of Maury B. Josephson, (193) a creditor had a judgment from the Civil Court of the City of New York. (194) Her attorney issued a restraining notice to a bank in which the judgment debtor's professional corporation had an account. (195) This bank had branches in New York City, but the corporation's particular branch was in Nassau County. (196) The court proclaimed it had no jurisdiction over the bank and so the restraining notice had no bite. (197)
As we shall see, banks in New York sometimes enjoy the protection of a "branch rule," whereby a creditor must serve judicial process against the very branch with which the debtor does business. (198) This rule is in the course of imploding, because courts have noticed that banks increasingly have instantaneous worldwide capacity to communicate by computer with any given branch. (199) Nevertheless, the Zarsky court must have been applying the separate branch doctrine, which requires that garnishment must occur at the Nassau branch where the judgment debtor actually opened the account. (200) If, however, as some courts think, the branch rule is dead for computerized domestic banks, the garnishee bank was indeed present in New York City, and the restraining notice would have been proper. But, because of the restricted venue rule of section 5221(a), coupled with the "separate branch" rule, the attorney for the creditor could not issue the restraining notice to the Long Island branch of the debtor's bank. (201)
What should the judgment creditor have done to obtain a proper restraining notice? The matter is surprisingly complicated. According to CPLR section 5221(a)(4):
In any other case, if the judgment sought to be enforced was entered in any court of this state, a special proceeding authorized by this article shall be commenced, either in the supreme court or a county court, in a county in which the respondent resides or is regularly employed or has a place for the regular transaction of business in person or, if there is no such county, in any county in which he may be served or the county in which the judgment was entered. (202)
For the creditor in Zarsky to effectuate a restraining notice against the "respondent" in Nassau County, several steps are required. First, the judgment creditor would have to file a transcript of the civil court judgment with the county clerk in New York County. (203) Thereafter, the judgment creditor must obtain a transcript from the county clerk in New York County and file it with the clerk for Nassau County, where the bank branch in Zarsky was located. (204) "A judgment docketed by transcript ... ha[s] the same effect as a docketed judgment entered in the supreme court within the county where it is docketed." (205) In other words, we may now consider the judgment to have been entered in Nassau County. The New York City attorney for the judgment creditor, as officer of the Nassau County Supreme Court, may now properly issue a restraining notice as if it were a Nassau County court order. (206)
Federal cases have similar restrictions. In Hassett v. Goetzmann, (201) the United States Bankruptcy Court for the Southern District of New York issued a judgment, and the judgment creditor issued a restraining notice against a garnishee. (208) The creditor then sought enforcement in the Northern District of New York. (209) The Northern District sent the creditor packing back down south. (210) The creditor had attempted to register the Southern District judgment in the Northern District but did not succeed in doing so. (211) Had the registration been successful, undoubtedly the Northern District would have entertained the supplementary proceeding against the garnishee. (212) But, absent local registration, only the Southern District of New York could enforce a restraining notice in connection with a judgment entered therein. (213)
A different case presents itself when the restraining notice is served on a debtor. Such a notice is always valid, because if the underlying money judgment is valid, there is jurisdiction over the debtor's person. (214) But where a garnishee is served, the order is valid only if the garnishee can be made to answer in the venue where the judgment was entered. (215)
The point can be expanded nationally. A restraining notice served on a person not domiciled in New York is valid only if that person has sufficient minimum contacts in the International Shoe Co. v. Washington (216) sense:
Without due process limits on the territorial reach of a restraining notice, it would be fundamentally unfair for a party to issue a restraining notice that restrains property of a garnishee located anywhere in the world, with no minimum contacts to the forum where the restraining notice is issued, whereas the garnishee might only be able to challenge the validity of the restraining notice in the state where it was issued, instead of in forum where he or she was served. (217)
D. Who May Be Served and How?
A restraining order may be served "in the same manner as a summons (218) or by registered or certified mail, return receipt requested or if issued by the support collection unit, by regular mail, or by electronic means as set forth in subdivision (g) of this section." (219) A debtor, obligor, or third party may be served with a restraining notice. (220)
1. Service on the Judgment Debtor or Obligor
A judgment debtor "or obligor" may be served with a restraining notice. (221) According to CPLR section 105(m), "a 'judgment debtor' is a person, other than a defendant not summoned in the action, against whom a money judgment is entered." (222)
While it is tolerably clear who the judgment debtor is, it is less clear who the "obligor" is supposed to be. The term appears in CPLR section 5222(b) and occasionally appears without definition throughout Article 52 of the CPLR. (223)
A review of New York Domestic Relations Law reveals many references to "support obligors" in connection with child support proceedings. (224) New York Lien Law section 65(1) refers to a lien (for "[t]he New York state office of temporary and disability assistance") on:
real property owned by a support obligor when such support obligor is or was under a court order to pay a child support or combined child and spousal support to a support collection unit and such support obligor has accumulated support arrears/past due support in an amount equal to or greater than the amount of support due pursuant to such order for a period of four months. (225)
CPLR Section 5234(b), governing priorities between multiple executions delivered by the same sheriff, contemplates that executions will be delivered to enforce a "past-due child support order." (226) Therefore, it is probably the case that the invocation of the word "obligor" in CPLR section 5222 is intended to refer to those liable on child support orders, which are not, strictly speaking, money judgments. (227)
Although restraining notices are effective against "obligors" so defined, we shall, for ease of reference, refer only to restraints on judgment debtors, with the understanding that the rules also apply to "obligors."
A restraining notice served on corporate judgment debtors is also binding on the agents of the corporate debtor, and a corporate officer might be found in contempt for causing the debtor to make prohibited transfers. (228) In this regard, New York resembles FRCP Rule 65(d)(2), which states that:
The order binds only the following who receive actual notice of it by personal service or otherwise:
(A) the parties;
(B) the parties' officers, agents, servants, employees, and
(C) other persons who are in active concert or participation with any one described in Rule 65(d)(2)(A) or (B). (229)
This provision is a codification of the common law of injunctions (230) and therefore probably reflects the law of New York with regard to injunctions like the restraining notice. If so, any agent with notice, not just those who were personally served, can be held liable for violating a restraining notice. (231)
Still, courts must not convert restraining notices into liens. Whereas federal courts enforce injunctions against third party buyers of assets, (232) any such holding in New York implies that the restraining notice is a lien, which is not to be tolerated. A challenging case on this score is Stone Container Corp. v. Tradeway International Corp., (233) where, following service of the restraining notice on the corporate debtor, the president and sole shareholder dipped into his personal funds to pay competing creditors of the debtor. (234) The president then made a claim against the debtor for reimbursement. (235) The judgment creditor sought an order holding the debtor in contempt for violating the restraining notice. (236) Rather creatively, the court ruled that what the president paid from his personal funds was a "gift" for which he could not seek reimbursement. (237) Therefore, the corporate debtor was not in violation of the restraining notice, but the debtor was ordered to reduce its liability to the president by the amount of the payments the president had made. (238) The gift was no gift after all! Stone Containers stands for the proposition that third parties can volunteer to pay the debt of a judgment debtor and be a subrogee without violating the restraining notice. (239) This seems to presage the Verizon result, where advanced payment of a too-contingent debt was held not to violate the terms of CPLR section 5222(b). (240)
It is not entirely clear in Stone Container that the officer in question was personally served with a restraining notice. (241) Perhaps this was unnecessary if the corporate debtor was properly served and if the corporate officer knew about it. Officers could also separately be considered garnishable. Indeed, they are third parties with custody (242) of the debtor's property. But where the corporate debtor has been served and the agent violates the order, this should be enough to render the corporate debtor liable for violating the restraining notice.
2. Service on Third Parties
A restraining notice may be served on third persons other than the judgment debtor. (243) The State of New York might be garnished, though extra procedures are heaped upon creditors. (244) Courts, however, have proclaimed that executors of estates may not be served, as that would interfere with the orderly distribution of estates. (245)
At first by case law (246) and then by express statute, (247) restraining notices are ineffective against employers who owe wages. (248) The reason for exempting employers is that the CPLR has a complex set of rules for income executions. In order to save judgment debtors from shame in the workplace, the CPLR requires the sheriff to serve the income execution on the judgment debtor, either by personal service or by certified mail. (249) The income execution demands that the debtor pay the sheriff directly, (250) with the warning that the employer will be garnished if the debtor defaults. (251) This procedure was designed "to avoid annoyances to third parties and to give the judgment debtor an opportunity to make payment without embarrassment." (252)
Obviously, if a restraining notice could be served directly on an employer, the judgment debtor would suffer embarrassment and so the practice is forbidden. Nevertheless, information subpoenas can be served on employers forthwith, embarrassment notwithstanding. (253)
If either a judgment debtor or garnishee is served with a restraining notice, such person "is forbidden to make or suffer any sale, assignment, transfer or interference with any property in which he or she has an interest." (254) As of 2008, new exceptions apply with regard to bank accounts. These will be separately considered. (255)
"Transfer" is a term that the CPLR neglects to define. In contrast, the United States Bankruptcy Code defines "transfer" very broadly to include "each mode ... voluntary or involuntary, of disposing of or parting with ... property." (256) So broad a definition (257) leaves open the possibility that a judgment debtor violates a restraining notice if, say, the IRS assesses a tax against the judgment debtor, thereby obtaining a federal lien on restrained property. (258) Such a debtor has "suffered" a transfer, within the meaning of section 5222(b). (259)
The creation of a judicial lien under section 5202(a) or (b) is an involuntary transfer, but it is no violation of the restraining notice. A restraining notice bars transfers "except upon direction of the sheriff or pursuant to an order of the court." (260) An execution is a court order, (261) which when delivered to a sheriff results in a transfer--the creation of a lien. (262) In contrast, the federal tax lien is not created by a court order. (263) Issuance of a state tax warrant (which gives rise to a lien once it is docketed) is a court order, since the sheriff is instructed to enforce a tax warrant "with like effect, and in the same manner prescribed by law in respect to executions issued against property upon judgments of a court of record." (264) Since an execution is a court order and a tax warrant is an execution, then a tax warrant is a court order.
Liens on a judgment debtor's real estate arise upon the local docketing of a money judgment. (265) As with the federal tax lien, the docketing procedure requires no court order, and no intercession of the sheriff. (266) Technically, a judgment debtor violates the restraining order by "suffering" the docketing of some second money judgment against him (not that he could resist this, of course). But as these occur involuntarily by operation of law, it is hard to imagine a court punishing a judgment debtor for contempt when the transfer was entirely outside the control of the debtor. Indeed, according to CPLR section 5251, "[r]efusal or willful neglect of any person to obey a ... restraining notice issued, or order granted, pursuant to this title ... shall each be punishable as a contempt of court." (267)
Courts would do well to proclaim simply that, when CPLR section 5222(b) uses the word "transfer," only voluntary transfers are implicated. CPLR section 5222 may prevent judgment debtors (if served with the restraining notice) from "transferring" property, but nothing in CPLR section 5222 prevents transferees from taking property against the will of the debtor. Otherwise, we might as well say that restraining notices create liens. For better or worse, this is precisely what we must not say.
If service of a restraining notice is made on the judgment debtor or garnishee "[s]uch a person is forbidden to make or suffer any sale, assignment or transfer of, or any interference with, any such property ... to any person other than the sheriff or the support collection unit." (268) "Such property" means, inter alia, "[a]ll property in which the judgment debtor ... is known or believed to have an interest." (269) Payment of debts (narrowly defined) is also restrained, but we shall leave that to one side for the moment.
The application of this prohibition with respect to property, as applied to garnishees, requires some interpretation. A judgment debtor served with the restraining notice clearly has full power to alienate her property, as the restraining notice creates no lien in favor of the judgment creditor. (270) Using this power of alienation would, of course, violate the restraining notice. (271) The alienation would nonetheless be effective. Otherwise, restraining notices create liens, which is not to be tolerated.
The garnishee in possession of the judgment debtor's property may well have no power to alienate the judgment debtor's interest in property, as where the garnishee is a bailee of the debtor's personal property. (272) The bailee's interest in the debtor's thing might itself be alienated in a sub-bailment. (273) But this would not alienate the debtor's interest in the thing. (274) In order to assess the restraining notice on a bailee, it is necessary to comprehend what the following words mean: "All property in which the judgment debtor ... is known or believed to have an interest." (275)
What is "property"? There are two interpretive possibilities. One is that "property" is the thing in which the debtor has an interest. This is the crude unsophisticated usage of the word "property." The other possibility is that "property" is the debtor's interest in a thing. This is a more philosophically respectable definition. Choice between these two definitions is a standard theoretical issue that is posed in many commercial law contexts. The United States Supreme Court faced this question in the context of bankruptcy in United States v. Whiting Pools, Inc. (276) In that case, the IRS had achieved a tax levy on all tangible property, including pool chemicals, previously in possession of the taxpayer. (277) The taxpayer filed for bankruptcy and, as debtor-in-possession, sought turnover from the IRS on the theory that the chemicals were property of the estate. (278) Turnover was sought pursuant to Bankruptcy Code section 542(a), which provides, in relevant part: "[A]n entity ... in possession, custody, or control, during the case, of property [of the bankruptcy estate] ... shall deliver to the trustee ... such property." (279) On the debtor-in-possession's view, "property" was the pool chemicals. (280)
The IRS argued that "property of the bankruptcy estate" did not mean the pool chemicals. (281) It meant the debtor's interest in the pool chemicals. (282) By the time of the bankruptcy petition, the debtor's interest was reduced. (283) It no longer included the right to possess the chemicals. (284) It merely encompassed the debtor's power to redeem the chemicals by paying in full the amount of the tax, or the right to a cash surplus, if any, following an IRS foreclosure sale. (285) The right to possess the collateral was outside the purview of the bankruptcy estate, or so said the IRS. (286)
The Supreme Court took the Neanderthal approach to the concept of property. It ruled that "property of the bankruptcy estate" meant pool chemicals, not the right to redeem the pool chemicals or the right to receive surplus proceeds of the chemicals following the foreclosure sale. (287) The chemicals were entirely within the bankruptcy estate. (288) Therefore, the IRS had to surrender the chemicals to the debtor-in-possession. (289)
The same difficulty underlies the interpretation of CPLR section 5222(b). Is "property" the debtor's thing or the debtor's interest in the thing? The former definition is totemistic and crude. Airy philosophy strongly prefers the second definition. (290)
Under the CPLR, the answer is clear. Both the grammar and the purpose behind CPLR section 5222(b) point to the troglodytic view that property is the un-Hohfeldian thing in which the debtor has an interest. (291) It is not the Hohfeldian debtor's interest in the thing. (292) With regard to the grammar, it is impossible to read CPLR section 5222(b) to mean that property is a debtor's interest in a thing. Otherwise the statute would have said something to the effect that the garnishee is "forbidden to transfer the debtor's property interest," not "property in which the judgment debtor... ha[s] an interest." (293) "Property," as used in CPLR section 5222(b), is some thing in which the debtor has an "interest." (294)
Pace the philosophers, the non-Hohfeldian reading corresponds to the purpose of restraining notices generally. (295) The idea of the restraining notice is to freeze the status quo until such time as the judgment creditor can establish a lien on the debtor's property. (296) This can only be achieved if property is some thing, not the debtor's legal right to the thing.
Let us test this interpretation with a simple hypothetical involving a bailment. Suppose that a garnishee borrows the judgment debtor's lawn mower on a Monday. On Tuesday, a creditor serves the garnishee with a restraining notice. On Wednesday, the debtor purports to end the bailment. If the garnishee surrenders the lawn mower to the judgment debtor, has the garnishee violated the restraining notice?
The answer has to be yes. The property is the lawn mower (not the debtor's interest in the mower as bailor). The garnishee transfers "it" by surrendering possession to the judgment debtor. So the garnishee has wrongfully "transferred" the lawn mower in the prosaic sense of handing over physical control. This interpretation comports with the purpose of restraining notices. The status quo is preserved, and the judgment debtor is denied access to the lawn mower. This mower the garnishee must hold pending the sheriffs levy (297) or a receiver's demand (298) or a turnover order from a court, (299) which orders the garnishee to hand the mower over to the sheriff for sale.
In effect, the meaning of the restraining notice is that the debtor is deprived of the right to terminate the bailment. In the absence of the restraining notice, the debtor could have terminated the bailment and could even repossess the lawn mower without the garnishee's consent. But in light of the restraining notice served on the garnishee, has the debtor acted wrongly by doing so?
The debtor has indeed acted wrongly, but it does not turn on whether the debtor himself has been served with a different restraining notice. If the debtor has been served, he is forbidden from "transferring" his property, but taking back the lawn mower is receiving the property, not transferring it. The debtor is also enjoined from "interference with any property in which he or she has an interest." (300) Interference probably means any act designed to reduce the chances that the sheriff will end up controlling the thing. It is possible, but not entirely clear, that taking back the mower reduces the sheriffs ability to levy the mower. It might be the case that the debtor intends to hide the lawn mower from the sheriffs sight, in which case receipt of the property is "interference." (301)
If anything, it is the garnishee who is at fault for letting the debtor take back the lawn mower, even if this occurs without the garnishee's consent. The garnishee is "forbidden to... suffer any... transfer of... any such property." (302) Based on what we said before, "transfer" includes surrendering the lawn mower back to the debtor. "Suffer" hints that the garnishee has a duty to resist the debtor's attempt to end the bailment.
Nevertheless, in spite of the forgoing, the judgment debtor acts wrongly if he takes back the lawn mower, whether or not the debtor has also been served with a restraining notice. Without the restraining notice, the debtor has a license to enter upon the garnishee's real estate to fetch the mower. (303) The restraining notice (served on the garnishee) means that the debtor has no such right. (304) Rather, the restraining notice makes the debtor's possession wrongful, as the garnishee is forbidden to "suffer" the transfer. For the same reason, the debtor's privilege to use force against the garnishee to retrieve the property following proper demand (305) is suspended. (306) In fact, both of the following statements are true: A debtor served with a restraining notice does not necessarily violate it by receiving the lawn mower. (307) And, if the bailee is served with a restraining notice, the debtor's right to terminate the bailment is suspended. (308) The bailment is perpetuated against the will of the judgment debtor. That is to say, the restraining notice assures that the garnishee's continued possession is rightful, even though the debtor has attempted to end the bailment.
Accordingly, the bailee violates the restraining notice if he "suffers" the bailor to take the bailed property back. (309) "Transfer" must mean surrender of the bailed property back to the debtor. (310) We have already seen that the term "transfer" might encompass involuntary transfers. (311) So section 5222(b) implies a duty in the bailee to prevent the debtor from taking possession. (312) Meanwhile, whether or not served with a restraining notice, the judgment debtor has no right to take back the bailed property and commits a tort against the garnishee if she does so.
Sometimes a bailment is coupled with the power to sell the debtor's interest in the bailed property. For example, a consignee is a bailee coupled with a power to sell. (313) In recent times, a consignee is identified as a secured party in Article 9 of the UCC. (314) A restraining notice served on a consignee bars the exercise of the consignee's power of sale, because the sale puts the property beyond the reach of the sheriff. This point can be extended to secured creditors generally, as we shall see.
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|Title Annotation:||Introduction through I. Restraining Notices F. Property 1. Personal, p. 1489-1529; New York; Chief judge Lawrence H. Cooke Eighth Annual State Constitutional Commentary Symposium|
|Author:||Carlson, David Gray|
|Publication:||Albany Law Review|
|Date:||Jun 22, 2014|
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