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Restraining notices.

J. 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 creditor's rights, per section 5202, are better than the garnishee's rights. If the garnishee pays after the execution is delivered to the sheriff, the garnishee's right to the debt it has "bought" is inferior to the creditor's right. The garnishee, having "paid" the judgment debtor, must pay the sheriff a second time. (570)

In effect, what section 5202 says, however inarticulately, is that service of the execution on the sheriff transfers the garnishee's obligation to the sheriff (who holds it as agent of the creditor). Once the execution is served, the only way for the garnishee to buy back his obligation (i.e., pay it) is to pay the sheriff (to the extent of the lien). Any attempt to pay the defendant does not extinguish the garnishee's obligation, which now belongs to the sheriff (on behalf of the judgment creditor).

Using this insight, we can analyze an advance payment, not as a payment, but as a transfer of collateral to the debtor. (571) Bestowing extra collateral or property of any sort on the debtor does not violate the restraining notice. (572) It does not extinguish the contingent debt simply because the debt is still contingent at the time of the prepayment. When the debt finally becomes due, the debtor is empowered to declare a setoff of the debt (narrowly defined). (573)

In the absence of Debtor & Creditor Law section 151, a levy prior to prepayment interferes with the debtor's right of setoff. Where, prior to the prepayment, an execution has been served and a levy accomplished, the debtor is divested of the claim against the garnishee and can no longer exercise the setoff right. The setoff has become triangular and therefore not permissible. The garnishee's obligation can only be satisfied by paying the sheriff. Meanwhile, the prepayment was certainly not intended to be a gift, so the garnishee would undoubtedly have a restitutionary right to retrieve the advance payment from the debtor, if he can.

Key here is that the creditor, under section 5202, has received a transfer from the debtor of the right to collect. (574) This is precisely what is absent with regard to restraining notices, which are not supposed to be liens. (575) After the restraining notice is served, the debtor is still "in possession," as it were, of the right to collect from the garnishee.

But now we must add Debtor & Creditor Law section 151 back to the mix. This allows for setoffs free and clear of any lien. (576) Whenever a countervailing debt exists, a levied garnishee need never pay the sheriff. (577) Instead of paying the sheriff, the garnishee can simply declare a setoff, even though it is quite triangular in shape. (578)

To summarize, prepayment defeats the ABKCO style levy because Debtor & Creditor Law section 151 always authorizes the setoff of a previously encumbered obligation. Prepayment is designed to give the debtor a setoff opportunity. In the absence of Debtor & Creditor Law section 151, the setoff right is defeated by the existence of a hen. But given section 151, prepayment should effectively defeat the hen by substituting the concept of setoff for the concept of payment.

Already it should be apparent that Verizon was rightly decided on the text of the CPLR. But Verizon has one more angle that requires a visit to the third in our parade of cases on contingent debt. In Supreme Merchandise Co. v. Chemical Bank, a bank issued a documentary letter of credit to a defendant. (579) Basically, the bank was obligated to pay the defendant, no questions asked, if the defendant tendered conforming documents. (580) The lower court reasoned, from ABKCO, that contingent debts are property and the garnishment is good. (581) The Court of Appeals affirmed the Appellate Division's reversal of the lower court because ABKCO, as applied to letters of credit, would undercut the certainty of payment, which is cherished by the letter of credit industry. (582)

Although the Supreme Merchandise decision casts the matter as an exception to the ABKCO principle, subsequent lower courts have analyzed that the contingent letter of credit obligation was simply "too contingent" to be property. (583) Such obligations cannot be garnished at all, because they are neither debts nor property. (584) Only "slightly contingent" debt can be property. (585)

Verizon is basically an application of the Supreme Merchandise principle that some contingent debts are simply too contingent to be considered property. In Verizon, the debtor was in the business of supplying "voice-over-internet termination services." (586) The judgment creditor had domesticated a federal judgment from Massachusetts and had served restraining notices on the debtor and on various garnishees in New York. (587)

The garnishee, Transcom, denied owing a debt or having "possession or custody of property" of the debtor. (588) Transcom's relation to the debtor was this: the parties had signed an underlying contract that did not obligate Transcom to buy services, but if Transcom paid in advance for services, the debtor would provide them. (589) The Court of Appeals characterized the "week-to-week" decision to pay in advance as an oral agreement. (590) Properly, in prepaying, (591) Transcom was offering the debtor a unilateral contract, the mode of acceptance being actually providing the service. (592) No "debt" was being paid when the prepayment was tendered. (593)

The restraining notice was served on Transcom on Thursday, April 2, 2009. (594) On Wednesday, April 1, Transcom had sent a personal check by overnight courier, covering services to begin in the week commencing Sunday, April (5). (595) Presumably this check was not honored until the middle of the next week. (596) This meant that, while the check was pending, the debtor must have provided services to the garnishee even though the check had not cleared. If so, the check, when it cleared, in part constituted payment for services already rendered and in part constituted a payment for services not yet rendered--an advance payment. (597) None of this matters, however, if the restraining notice was not effective on April 2. If ineffective, Transcom was free to pay the debtor for any future debt when it became due any time after April 2. (598) The after acquired debt clause in section 5222(b)'s third sentence is contingent on the restraining notice being effective on April 2. (599)

Following service of the restraining notice, the creditor brought a turnover proceeding against Transcom, which had made $2,454,250 in similar payments to the debtor. (600) It also brought an action for civil contempt and a special proceeding for a money judgment in the amount of this sum. (601) The supreme court dismissed all these actions, concluding "that there is no property or debt in the instant matter subject to a restraining order, levy or turnover pursuant to Article 52 of the CPLR." (602) The appellate division and Court of Appeals both affirmed. (603)

The Court of Appeals held that Transcom could not be constrained because, at the time the restraining notice was served, Transcom owed no debt. (604) Nor was Transcom "in the possession or custody of property in which [Transcom knew or had] ... reason to believe the judgment debtor or obligor ha[d] an interest." (605)

On the debt side of the equation, recall that debt is defined as that "which is past due or which is yet to become due, certainly or upon demand of the judgment debtor." (606) On April 2, 2009, the time Transcom had been served with the restraining notice, Transcom had already issued a check intended to pay for services not yet delivered. (607) Provision of the services created a debt, but this debt was "after-acquired" and did not exist on April 2. (608) Therefore, the restraining notice was ineffective on April 2. (609) It was incapable of having an after-acquired effect on a debt (narrowly defined) that only arose the next week. (610) It seems clear that the court was correct on the debt side of the equation.

On the property side, we have the ABKCO rule that contingent debt is property. (611) But we also have the Supreme Merchandise rule that a debt that is "too contingent" is not property. (612) If Supreme Merchandise applies, the restraining notice could have no bite because Transcom possessed no debtor property on April 2.

Indeed, Verizon fell into the "super-contingent" category. 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." (613)

Suppose, however, that the contract had been of the ABKCO variety. How exactly would the restraining notice operate? The answer is that the restraining notice is impotent to prevent the prepayment dodge exploited in Verizon. Thanks to Debtor & Creditor Law section 151, not even a lien can interfere with prepayment, because prepayment establishes a setoff opportunity, which is senior to any lien. (614) If the setoff is free and clear of a lien, it is certainly free and clear of the restraining notice, which does not give rise to liens.

Meanwhile, having received the advance payment and upon the vesting of the garnishee's obligation to pay for services, the debtor does not lose the ability to declare a setoff. (615) And the garnishee is specifically invited to set off a countervailing debt, even when that debt postdates a lien on the debt that the garnishee owes the debtor.

One last consideration. We have suggested that a garnishee who pays a debt is a transferee who has "bought" the debt from the debtor. (616) We have also suggested that ABKCO implies that the garnishee is in possession of the debtor's claim against him (though Falor suggests the opposite). Assuming these two premises, it is still true that the prepaying garnishee must not "suffer" transfers of debtor property against the garnishee's will. Has the garnishee "suffered" a transfer of possession of the debt (previously contingent but now due) when the debtor exercises his unilateral right of setoff?

Earlier, we suggested that some involuntary transfers of bailed property (those not arising from court orders) technically violate the restraining notice, but given this is against the will of the garnishee, the garnishee cannot be held in contempt of court. A setoff is also an involuntary transfer, on the above-mentioned assumptions. But the setoff opportunity arises because the garnishee has consented to a tricky prepayment strategy. May we say that the willfulness of the prepayment authorizes a contempt proceeding?

Courts will be sorely tempted to punish a garnishee who is so tricky as to attempt a prepayment strategy. But on behalf of our tricky garnishee, the prepayment itself is clearly no violation of the restraining notice. (617) The later manifestation of the setoff, at that point in history, is entirely against the will of the garnishee and therefore is no different from the attachment of a lien arising from operation of law.

K. After-Acquired Property and After Arising Debts

One of the reasons Verizon seems so provocative is that, on April 2, the garnishee knew perfectly well that, starting the next Sunday, the garnishee would receive services from the judgment debtor. (618)

Yet the restraining notice was ineffective on April 2. (619) Restraining notices served on third parties other than a judgment debtor are effective only if the third party knew or had reason to believe, at some level, that she was in possession of debtor property. (620) With regard to knowledge in any of its forms, the test is to be performed at the time the restraining notice is received. (621) If none of the enumerated forms of knowledge exists, the restraining notice is not effective as to after-acquired property or after-arising debts. But if on that date the restraining notice is effective, it does succeed in applying to after-acquired property.
   All property in which the judgment debtor or obligor is
   known or believed to have an interest then in and thereafter
   coming into the possession or custody of such a person,
   including any specified in the notice, and all debts of such a
   person, including any specified in the notice, then due and
   thereafter coming due to the judgment debtor or obligor, shall
   be subject to the notice except as set forth in subdivisions (h)
   and (i) of this section. (622)

This third sentence of CPLR section 5222(b) is conditioned by the second sentence, which states that the restraining notice is completely ineffective if, at the time of service, the garnishee "possesses" (that word again!) no property or owes no debt that is (or is believed to be) property of the debtor. (623)

For example, suppose a garnishee is served with a restraining notice on Monday. At that time the garnishee possesses no property of the debtor. On Tuesday, however, the garnishee borrows the judgment debtor's lawn mower. It is no violation of the restraining notice to return the lawn mower to the judgment debtor on Wednesday, because on Monday the garnishee held no property of the debtor. The reason for this is apparently that garnishees who have no connection with the judgment debtor on Monday are not expected to watch for after-acquired property thereafter. (624)

Oddly, if we read the CPLR literally, the after-acquired property clause of the third sentence is triggered if the creditor designated (wrongly) some thing that the garnishee owns is really debtor property. We may apply this observation to the Verizon facts. Suppose the restraining notice in that case had falsely alleged, "the garnishee has possession of the judgment debtor's stapler." The restraining notice is effective on April 2 because "the judgment creditor ... has stated in the notice that ... the judgment debtor ... has an interest in specified property in the possession or custody of the person served." (625) Later, on Sunday, when a debt for services rendered actually accrues, the restraining notice bars effectively payment. Though a check was written on April (1), it probably had not cleared by Sunday. Therefore, the garnishee has a duty to stop payment of the check because if it is cashed, it satisfies, in part, a debt, as the CPLR narrowly defines that term. (626)

It is unlikely courts will read the CPLR literally, because it rewards judgment creditors who tell base falsehoods in official court orders. Rather, it must be the case that the restraining notice is effective on April 2 only if it accurately claims that the garnishee possesses the debtor's stapler.

The key to after-arising debts is that, on the day of service, the garnishee must owe a debt or be in possession of debtor property. In the case of banks, it has been held that the restraining notice is ineffective if, at the time the restraining notice is served, the judgment debtor's bank account is overdrawn. (627) If later wire transfers post funds into that same account, the now-healthy bank account is not restrained because of the overdraft on the day the restraining notice was received. (628)

It is possible, however, to argue that the restraining notice is effective if served on a bank at a time when the account is temporarily overdrawn. True, the bank owes no "debt" at that time, as the CPLR defines it. But the bank has a contractual relation with the customer that obliges the bank to accept deposits, and so forth. Because of this, it could be said that the customer has a contingent claim against the bank. Since, in New York, contingent claims are garnishable property, (629) the restraining notice is effective after all. Because it is effective, any after-acquired deposits are restrained as well. Of course, tempering this point is the observation that the bank's right of setoff is completely senior to any judicial process, thanks to New York Debtor & Creditor Law section 151.

But to reach the conclusion that a restraining notice is effective if the bank account is overdrawn on the day of service, we must find that the overdrawn bank is in "possession" of debtor property. This is what the second sentence of CPLR section 5222(b) requires:
   A restraining notice served upon a person other than the
   judgment debtor or obligor is effective only if, at the time of
   service, he or she ... is in the possession or custody of
   property in which he or she knows or has reason to believe
   the judgment debtor or obligor has an interest. (630)

Once again, New York law is deeply ambiguous on the question of who, between a contingent debtor and a contingent creditor, "possesses" intangible property. The conflict between ABKCO and Falor as to who possesses property not capable of delivery is fully present in CPLR section 5222, which governs restraining notices.

L. Rent as a Conditional Debt

Justice Mazzarelli has said of the Verizon result that, "[t]he majority's narrow view ... hands a virtual road map for frustrating the efforts of judgment creditors." (631) To what extent does the strategy of advance payment of contingent debt compromise the worth of restraining notices? A vital test case is prepayment of rent not yet due. Under Glassman v. Hyder, rent obligations are not debts (narrowly defined). (632) They are contingent obligations. (633) And these obligations are the debtor-landlord's property, but not his personal property.

We saw in a prior section that when the creditor has an execution lien, advance payment of a contingent debt relieves the garnishee from the obligation to pay the sheriff, since Debtor and Creditor Law section 151 invites triangular setoffs at the sheriffs expense. As applied to the garnishment of rent, we note first that rent receivables are not considered personal property at all. They are considered real property. (634) Therefore, rent cannot properly be levied under CPLR section 5232(a), which applies only to personal property. (635)

How can a judgment creditor obtain rent? The Court of Appeals gives helpful advice in Glass man: the appointment of a receiver is required to reach rents. (636) Under New York law, the rule is that a tenant of real property must pay the owner of the reversionary interest until that owner is dispossessed. The act of dispossession is the court appointment of a receiver. (637) Once the receiver is in "possession," the tenant owes rent to the receiver. In this scheme, a levy of the tenant can play no part.

So far we may observe that when a tenant prepays rent, the tenant is not paying a debt because at the time of the prepayment, the debt is contingent, as the Glassman court emphasizes.

Suppose a tenant who has paid last month's rent on time receives a restraining notice. The restraining notice cannot restrain the payment of next month's rent because that future obligation is contingent at the time the tenant received the restraining notice. Therefore, assuming the tenant has not borrowed the landlord's power drill or lawn mower, the restraining notice is completely ineffective under the second sentence of section 5222(b). (638) Therefore, when next month's rent becomes overdue, the tenant properly pays the debtor-landlord without violating the CPLR.

To further complicate matters, suppose, by coincidence, at the exact moment the creditor serves the tenant with the restraining notice, the tenant owes back rent. Overdue rent qualifies as a debt (narrowly defined). (639) Therefore, the restraining notice is effective when served. Now, under the third sentence of section 5222(b), all debts that thereafter become due are subject to the restraining notice.

So far, we have established that a tenant who is paid up on rent owes no debt (narrowly defined) on the day she receives the restraining notice. The ABKCO principle applies to say that the rent obligation is unvested property--not personal property, to be sure, but real property. Could we now say that the restraining notice served on a tenant who is current on rent is binding?

According to the troublesome second sentence of section 5222(b), the restraining notice is effective only if the tenant is "in the possession or custody of property in which he or she knows or has reason to believe the judgment debtor ... has an interest." (640) A tenant is obviously in possession of the land, but is the tenant also in possession of the landlord's entitlement to receive rent?

A classic New York case on receiverships in mortgage foreclosures indicates that (a) the tenant is in possession of the land but (b) the landlord is in possession of the rent receivable. In Holmes v. Gravenhorst, (641) a mortgage lender had obtained the appointment of a receiver. (642) The mortgagee was still in residence, and so the receiver thought the mortgagee should have to pay rent for occupancy after the commencement of the receivership. (643) The court ruled that the receiver was not entitled to rent. (644) The receiver was only entitled to "take possession" of a rent income stream, if any. (645) In the case of rent, the word "possession" was used in the following way: the tenant was in possession of the land. (646) But the landlord was in possession of the rent receivable. (647) The receiver had no right to take possession of the land from either the landlord or the tenant, but the receiver did have the right to take possession of the landlord's right to receive rent. (648) Here is an extended passage from Holmes in which such usage is apparent.
      Where, however, the mortgagor is not in possession during
   the foreclosure ... a receiver may be appointed in a proper
   case to take possession of the premises, collect the rents and
   apply them to the payment of the carrying charges on the
   property and the reduction of the mortgage debt.

      It seems to us that there is no inconsistency in holding, in
   the absence of an express agreement in the mortgage to that
   effect, that while a mortgagor-owner in possession during the
   pendency of a foreclosure action ... may not be disturbed in
   his possession or required to pay rent which he was not
   theretofore obligated to pay, when he has relinquished that
   possession to others and is receiving an income from the
   premises which might be applied to the payment of carrying
   charges and the reduction of the mortgage debt, a receiver
   upon a proper showing may be required to take possession
   and control of the premises and so apply the revenue. Under
   the law governing the relation of mortgagor and mortgagee
   of real property as now firmly established in this State, a
   mortgagee himself has no right of possession by virtue of a
   mortgage pending its foreclosure, and he does not acquire
   such a right by applying for and having appointed a receiver
   .... The right of possession given to a receiver is incidental
   to the purpose for which the receiver is appointed, namely,
   the collection of the rents and profits, and if there be no rents
   and profits because actual possession is in one having the
   right of possession inherent in his ownership, no right of
   possession exists which may be conferred upon a receiver.

      It is conceivable that a receiver might find applicable to
   the maintenance of the property and reduction of the
   mortgage debt an income from property wholly in the actual
   possession of the mortgagor-owner, as where the mortgagor-owner
   in full possession of the premises is receiving income
   therefrom. As illustrative of this possible situation, we
   might suggest a case where the exterior walls of a dwelling
   house are used for the display of advertising matter not
   connected with the business of the mortgagor-owner in
   possession and for which a rental is being paid or could be
   collected. Right of possession, beyond the extent of its
   existence in the lessee of the advertising space, would not
   thereby be conferred upon the receiver. While he
   undoubtedly would be entitled to collect such rental for
   advertising space, his right would not extend to the use in
   that manner of premises where advertising space was not
   theretofore in use, as to accord to him possession of premises
   not theretofore so used for such a purpose would be to
   interfere with the actual possession of the owner. (649)

The import of this passage is that the landlord is in possession of the rent receivable, and the tenant is not. Therefore, although the rent receivable is definitely "property," it is not property that the tenant possesses. Since CPLR section 5222(b)'s second sentence requires garnishee possession, the restraining notice must fail, if all we have before us is a garnishee that owes the landlord some rent next month. If the garnishee has also borrowed the landlord's lawn mower, that is another matter entirely. The lawnmower bailments makes the restraining notice effective when served and thereby triggers the after-acquired debt feature in the third sentence of section 5222(b).

True, the tenant possesses the land. We have seen that the tenant must not, apparently, abandon possession of the land back to the landlord, as that would violate the restraining notice. (650) But the tenant's obligation to pay rent is something that the landlord possesses and as to which a receiver might dispossess him.

M. Voluntary Compliance

Reverting to our prior lawn mower example, where the garnishee has borrowed nothing on Sunday, receives the restraining notice on Monday, and borrows the debtor's mower on Tuesday, the restraining notice is not effective, because on Monday the garnishee was not in possession of any debtor property at the moment of service.
   A restraining notice served upon a person other than the
   judgment debtor ... is effective only if, at the time of service,
   he or she ... is in the possession or custody of property in
   which ... the judgment debtor or obligor has an interest.... (651)

The garnishee may return the mower at any time. But what if the garnishee chooses to honor the restraining notice, even though it is not effective? May the garnishee resist the debtor's demand for the lawn mower?

One might be tempted to conclude that there is no court order in this case. The garnishee violates the debtor's rights by retaining the mower against the debtor's demand for return. The court in Palestine Monetary Authority ("PMA") v. Strachman (652) has implied that garnishees can choose to be bound. (653) The decision involved an intermediary bank in the middle of a chain of wire transfers. (654)

In this case, the PMA was a judgment debtor. (655) The PMA had an account with the Palestine International Bank ("PIB"). (656) PIB had an account with the Bank of New York (BNY). (657)

To understand the holding in PMA, it is necessary to fathom how wire transfers work. Let us imagine that PMA wished to pay X for some reason. PMA (the originator) has an account with PIB (the originator bank). (658) PIB has account with BNY. BNY has an account at X Bank. X has an account with X Bank. A chain exists linking PMA to X through three banks.

To accomplish the payment, PMA must instruct PIB to debit PMA's account at PIB (659) and to debit PIB's account at BNY, on further condition that PIB instruct BNY to takes the steps to accomplish payment of X. None of the banks in the chain has any discretion. The steps are very mechanically set forth by the originator. (660) Thus, on instruction from PIB, BNY debits PIB and credits X Bank. X Bank credits X and X is successfully paid. Each accepts the payment order from a prior party in the chain when it executes the order it has received. (661)

In PMA, a judgment creditor served a restraining notice on BNY. (662) Under Article 4A of the Uniform Commercial Code ("UCC"), BNY could have ignored this restraining notice. (663) According to UCC section 4A-503:
   For proper cause and in compliance with applicable law, a
   court may restrain (i) a person from issuing a payment order
   to initiate a funds transfer, (ii) an originator's bank from
   executing the payment of the originator, or (iii) the
   beneficiary's bank from releasing funds to the beneficiary or
   the beneficiary from withdrawing the funds. A court may not
   otherwise restrain a person from issuing a payment order,
   paying or receiving payment of a payment order, or otherwise
   acting with respect to a funds transfer. (664)

Applying this section to our hypothetical wire transfer, a restraining notice might be issued to PMA under clause (i) or PIB under clause (ii) or X Bank or X under clause (iii). BNY, however, falls entirely under the last sentence of section 4A-503. Accordingly, the restraining notice is not effective.

Nevertheless, BNY volunteered to receive PIB funds pursuant to the payment order and, instead of sending them on to X Bank, simply restrained those funds (as if they were PMA funds) for the benefit of the judgment creditor. (665)
   [I]n this case, it was the BNY who chose to obey the court order
   and froze funds, all of which happened to be wire-fund transfers.
   The BNY sought no relief with regard to the injunctions.
   Consequently, we do not find that the order by which BNY restrained
   the funds was improper or a violation of UCC [section] 4A-503.

Moreover, we find persuasive the [judgment creditor's] argument that nothing in UCC [section] 4A-502 prohibits the bank from honoring creditor process to turn over the funds. The [judgment creditor] point[s] to UCC 4A-502(4) which provides as follows:

"Creditor process with respect to a payment by the originator to the beneficiary pursuant to a funds transfer may be served only on the beneficiary's bank with respect to the debt owed by that bank to the beneficiary. Any other bank served with the creditor process is not obliged to act with respect to the process."

... [T]he plain meaning of the provision is that it allows a bank to honor the process if it so chooses but it does not always have to honor that process. (666)

The court, however, did not go so far as to order a turnover of funds to the judgment creditor. The funds might not belong to PMA but rather to PIB. On the other hand, perhaps PIB was the alter ego or agent of PMA. In the latter case, the frozen funds would be available to satisfy the judgment. Nevertheless, the funds were successfully frozen because BNY chose to be bound.

There is clearly a contradiction in the case. On the one hand, the court order did not bind BNY. But BNY chose to be bound. Since choice was involved, it cannot really be said that BNY was bound. But because it acted under color of law, it apparently had no Article 4A liability for failing to execute the payment orders.

Meanwhile, if a garnishee chooses to ignore a restraining notice and then later wishes it hadn't, it cannot retroactively choose to be bound and seek restitution. In Chemical Bank New York Trust Co. v. Brown, (667) a restraining notice had designated the bank account of the debtor's ex-spouse. (668) There seemed no evidence that the ex-spouse was holding any funds for the debtor. (669) The bank nevertheless honored the debtor's check. (670) Retroactively, the bank tried to claim that the honor was an overdraft in light of the restraining notice (and subsequent levy). (671) It therefore sought to recover the mistaken payment from its customer. (672) The court dismissed the complaint on the basis that the restraining notice was ineffective when it was served. (673) According to the court:
   The bank by its action assumed to contract a liability for the
   defendant without her knowledge or authority and without
   inquiry as to the validity of the claim. Their red-carpet
   treatment of the judgment creditor sets a dangerous
   precedent which could lead to great abuses, putting in
   jeopardy the bank accounts of all relatives of judgment
   debtors. (674)

Although these comments generally condemn "red-carpet" treatment for creditors, these remarks should probably be limited to the facts: a garnishee who chooses not to be bound cannot change its mind.

N. Effectiveness and Reason to Believe

A restraining notice is effective if the garnishee isn't certain but nevertheless has reason to believe the judgment debtor has an interest. The phrase "reason to believe" could imply (1) the judgment debtor does have an interest in a thing, and a reasonable garnishee should know of that interest (but doesn't in fact know). It could also imply that (2) the judgment debtor has no property interest in the thing but the garnishee reasonably believes (incorrectly) that the debtor does have an interest.

These possibilities have their attractive and unattractive sides. With regard to the first possibility, suppose a warehouse, in possession of debtor property, is served with a restraining notice. The agents of the warehouse haven't memorized who every client is, but they have goods records that could easily be consulted. These records show that the debtor has stored property with the warehouse. The debtor then shows up at the warehouse and demands the property; the warehouse complies. Hailed before the court for contempt, the court need not listen to the claim that the garnishee was subjectively confused, because objectively it should not have been confused. Consultation of the records gives the warehouse reason to know that it is in possession of debtor property. (675)

The second possibility, however, is that the debtor does not have an interest in property; the garnishee mistakenly thinks otherwise. For example, a broker maintains an account for a debtor and the debtor's corporation is the judgment debtor. The garnishee, without any prompting from the judgment creditor, assumes that the corporation is simply the alter ego of its customer. Has the broker committed a wrong against its customer?

We have just seen that a garnishee served with an ineffective restraining notice can choose to be bound. So it must be the case that where the creditor, under a mistaken belief that the restraining notice is binding, operates under color of law when it obeys the restraining notice based on its erroneous belief. Therefore, reasonable belief in an ineffective restraining notice does not give rise to garnishee liability.

O. Specified in the Notice

A notice is effective if the garnishee knows or should know that the debtor owns property in the possession of the garnishee. (676) But knowledge of any sort becomes irrelevant if the judgment creditor specifies the property that is to be restrained. (677) As redacted, the second sentence in section 5222(b) provides:
   A restraining notice served upon a [garnishee] ... is effective
   ... if ... the judgment creditor ... has stated in the notice
   that ... the judgment debtor ... has an interest in specified
   property in the possession or custody of the person served. (678)

If indeed the judgment debtor obviously has a property interest in the specified thing, this sentence is not problematic. But often, whether a debtor does have property in a thing is a deep matter requiring complex adjudication. A garnishee can always find out by moving to vacate the restraining notice. If the judgment creditor has insufficient evidence to prove the debtor has a property interest, the court will vacate the restraint. (679)

We have already opined that the literal meaning of the CPLR must be supplemented. An allegation of property ownership makes a restraining notice effective only if the allegation is true. Otherwise, creditors have an incentive to tell lies in order to trigger the after-acquired property clause contained in the third sentence of CPLR section 5222(b).

Suppose a lie is told and the garnishee, out of caution, does nothing, as the restraining notice commands. The true owner of the property designated in the restraining notice, whether it be the garnishee or someone else, has a remedy against the judgment creditor. According to the fifth sentence of section 5222(b): "A judgment creditor ... which has specified personal property or debt in a restraining notice shall be liable to the owner of the property ... if other than the judgment debtor ... for any damages sustained by reason of the restraint." (680) Because the judgment creditor (681) has this absolute liability in case a mistake is made, (682) it follows, according to the court in Sumitomo Shoji New York, Inc. v. Chemical Bank New York Trust Co., that the garnishee receiving the restraining notice has no liability at all if it honors the restraining notice on the strength of an incorrect designation of property in the restraining notice. (683)

Special emphasis is made by the Sumitomo court on the fact that the restraining notice designates a specific item of property as belonging to the judgment debtor. (684) What if the restraining notice does not designate a specific account? What if, instead, the restraining notice in general requires debtor property to be restrained, but, insofar as the bank knows, the corporate account is genuine? In such a case, it is doubtful that the restraining notice is effective. (685) What made the restraining notice binding on the garnishee in Sumitomo was the "judgment creditor's specification of debt ... in a restraining notice." (686)

Sumitomo makes it dangerous for a garnishee to ignore a restraining notice that designates specific property as belonging to the debtor (even though facially that does not appear to be the case). In Sumitomo, no levy had occurred--only service of the restraining notice. (687) A levy would have been an adverse claim, authorizing the bank to ignore the levy, as it created an "adverse claim" to the checking account, thereby triggering Banking Law section 134(5). Oddly, the bank was vulnerable to the weaker restraining notice, when it would have been immune from the stronger levy pursuant to an execution. (688)

Courts say broadly that "[i]f third parties 'do not have property or debts in which the judgment debtor has an interest, the restraining notices are not effective."' (689) But this assessment is not accurate. Reasonable but erroneous belief makes the restraining notice effective on the plain meaning of the statute.

In Karaha Bodas Co., LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, (690) a bank received a restraining notice with regard to bank accounts that, at the time, might have been fiduciary accounts for the benefit of a third party, or might have been wholly the property of the judgment debtor, where the third party was simply an unsecured creditor of the judgment debtor. (691) In the midst of this uncertainty, the bank kept a restraint on the entire account. (692) Later, the accounts were found to be mostly (i.e., 60/65) fiduciary. (693) The balance constituted a commission to which the judgment debtor was entitled in its own right. (694) Nevertheless, in this period of uncertainty, the bank kept up the restraint and apparently had no liability to the third party, who was deprived of the funds for years. (695) Such a result reflects the view that a garnishee served with a restraining notice has a duty to freeze assets of non-judgment debtors if the restraining notice states (however falsely) that designated property belongs to the judgment debtor. (696)

Once again, CPLR section 5222(b) provides that a judgment creditor "which has specified personal property or debt in a restraining notice shall be liable to the owner of the property." (697) It might seem that the negative pregnant of this sentence is that an attorney who does not specify specific debtor property bears no liability to a wronged garnishee. But this is not the case. (698) For example, negligent service of a restraining notice when the attorney should have known that he entered a default judgment against the wrong defendant might sustain a finding of the creditor's liability. (699)

P. Duration

Restraining notices served on judgment debtors are effective as long as the judgment is. (700) Restraining notices served on garnishees, however, are effective (701) for "one year after the notice is served upon him or her, or until the judgment or order is satisfied or vacated, whichever event first occurs." (702) Pursuant to CPLR section (5240), however, a court may extend the effective period on motion of the creditor. (703)

It has been held that a court order staying a restraining notice is not the same as an order vacating a notice, and so the restraining notice is still effective upon being stayed. (704) "Staying" the restraining notice seems to make no difference at all--a meaningless event.

A restraining notice is automatically canceled if the creditor's default judgment is vacated. (705) Failure of an attorney to remove a restraining notice in light of an order vacating a default judgment is sanctionable. (706)

Q. Court Permission for a Second Restraining Notice

What if the judgment creditor fails to levy property in the possession of the garnishee during the year in which a restraining notice is valid? May a second restraining notice be served in the second year?

The answer is yes, but "[l]eave of court is required to serve more than one restraining notice upon the same person with respect to the same judgment or order." (707) A second restraining notice served without the required court permission is invalid. (708) Second restraining notices, however, are utterly prohibited within the original one year with regard to "a natural person's banking institution account." (709) But, as the original restraining notice lasts for a year, there are little grounds for a creditor to seek permission within that year. Beyond the one-year period (or within the one-year period for unnatural persons), the failure of the restraining notice to be effective against a bank in the first place is grounds for a court to approve a second notice. (710)

Can a debtor sue a judgment creditor for serving a second restraining notice on a garnishee? One court held no. (711) The rule against second restraining notices is for the benefit of garnishees to prevent their being harassed. (712) Judgment debtors are not harmed by wrongful service of the second restraining notice. (713)

We have seen that garnishees served with ineffective restraining notices can choose to be bound. (714) If this is so, then certainly a garnishee who receives a second restraining notice without court permission may choose to view it as binding and therefore enjoy the color of law in refusing to surrender property or to pay a debt that is due. This possibility, however, is apparently not enough to justify the debtor receiving damages from the judgment creditor.

A "second restraining notice" must be distinguished from a "corrected restraining notice." A second notice that does not extend the one-year effective period and that merely corrects mistakes does not require a court order. (715)

R. Twice the Amount of the Judgment

A garnishee served with a restraining notice may rely upon that order and refuse to pay debts, but there is a quantitative limit to this privilege. According to CPLR section 5222(b):
   If a garnishee served with a restraining notice withholds the
   payment of money belonging or owed to the judgment debtor
   or obligor in an amount equal to twice the amount due on the
   judgment or order, the restraining notice is not effective as to
   other property or money. (716)

This rule applies only to money, not to illiquid property generally. (717) "The purpose of securing twice the amount due upon the judgment is to ensure payment of costs and interest in addition to the balance outstanding on the judgment." (718) It is no violation of the restraining notice if a bank honors checks out of that part of the bank account that is more than twice the amount of the judgment. (719) This excess of restraint has been found constitutionally permissible. (720)

S. Foreign Entities Present in New York

New York has recently expanded the power of courts to force garnishees to bring property outside New York into the state. (721) Koehler v. Bank of Bermuda, Ltd. involved a turnover proceeding against a bank that was holding collateral from a judgment debtor in Bermuda. (722) Answering a question certified from the Second Circuit Court of Appeals, the New York Court of Appeals affirmed that, where the garnishee is jurisdictionally present in New York, such an injunction is appropriate. (723)

These holdings fully apply to restraining notices, which are a form of injunctive relief only slightly different from turnover orders. The turnover order commands that the garnishee do something. The restraining notice commands that the garnishee do nothing. They are both personal obligations that can be imposed on entities jurisdictionally in New York.

Thus, a restraining notice served on a bank in New York restrains a bank account in Florida. However, McCarthy u. Wachovia Bank, N.A. adds a constitutional wrinkle. (724) The debtors claimed that the default judgment against them in New York was unconstitutionally obtained for want of personal jurisdiction. (725) The court, however, swept this objection aside, suggesting that, if the allegation was true, the debtors should have traveled to New York and had the default judgment set aside pursuant to CPLR section 5239. (726)

Nevertheless, the restraining notice had what real estate lawyers might call "color of title." The McCarthy court held that the bank could rely on the facial validity of the restraining notice to freeze the account, noting that "there is no requirement that a garnishee bank be required to investigate the validity of a restraining notice served upon it." (727) The court cited CPLR section (5209) as a safe harbor. (728) According to this provision:
   A person who, pursuant to an execution or order, pays or
   delivers, to the judgment creditor or a sheriff or receiver,
   money or other personal property in which a judgment
   debtor has or will have an interest, or so pays a debt he owes
   the judgment debtor, is discharged from his obligation to the
   judgment debtor to the extent of the payment or delivery. (729)

One can see that CPLR section 5209 does not literally apply, as a bank that has received a restraining notice has not paid either the sheriff or the judgment creditor. Still, one can imagine that section 5209 embodies the policy that a garnishee should be protected when it follows a court order (even if that order is unconstitutional).

At the sub-constitutional level, a relevant rule for executions naturally carries over to restraining notices. This is the fiction that every branch of a bank is a different entity than every other branch of a bank. The reason for this is as follows:
   Unless each branch of a bank is treated as a separate entity
   for attachment purposes, no branch could safely pay a check
   drawn by its depositor without checking with all other
   branches and the main office to make sure that no warrant
   of attachment had been served upon any of them. Each time
   a warrant of attachment is served upon one branch, every
   other branch and the main office would have to be notified.
   This would place an intolerable burden upon banking and
   commerce.... (730)

Under this rule, (731) if it still exists, (732) McCarthy was wrongly decided. McCarthy was correctly decided if the branch rule no longer exists.

The separate branch rule was recently upheld in Global Technology, Inc. v. Royal Bank of Canada, where an American company had a New York judgment against a Mexican company. (733) The Mexican company had a sizable bank account at a Canadian branch of a Canadian bank. (734) The Canadian bank, however, was jurisdictionally present in New York. (735) The judgment creditor served a restraining notice on the bank in New York, but the bank permitted its client to empty the account at the Canadian branch. (736) The Global Technology court refused to hold the bank liable for damages. (737)

The rule now seems to be that if a bank has computerized its records and if the branches are all within the United States, the branch rule serves no purpose; service "on the bank's main office" (738) is service on all the branches. (739) But where a bank is not computerized, (740) or where the branch to be restrained is located outside the United States, (741) the branch rule still breathes and reigns. (742) Such holdings with regard to foreign banks are based on a fear that, in the foreign country, New York's restraining notice will be given no "full faith and credit," resulting in the bank's double liability. At least one federal court, however, reads Koehler to mean that the separate branch rule is dead even in the case of bank accounts at branches outside the United States. (743) Some lower state courts disagree and insist that the rule has merit, at least where the branch is outside the United States. (744) It has been suggested that application of the rule requires "a case-by-case determination based on practicality and fairness, i.e., reasonableness, under the circumstances." (745) The entire matter has recently been certified to the New York Court of Appeals in the context of a restraining notice served on a branch of an international bank. (746)

T. The Effect of a Bankruptcy Petition

Suppose a judgment debtor responds to a restraining notice by filing for bankruptcy. Technically, bankruptcy is a transfer from the judgment debtor to a bankruptcy estate. (747) As such, a debtor violates the restraining notice when he files for bankruptcy. But this may be swept aside, as federal preemption doctrine surely privileges the bankruptcy petition over the restraining notice. (748)

What if a garnishee has been served with a prepetition restraining notice? Does the restraining notice continue in effect after the debtor files a bankruptcy petition?

A bankruptcy petition typically invokes the automatic stay, which prevents creditors from taking any action to collect a debt (save through the procedures afforded by the Bankruptcy Code). (749) Accordingly, after the bankruptcy petition, a creditor may not serve a new restraining notice, as Bankruptcy Code section 362(a)(1) prohibits "issuance or employment of process." (750)

Does the automatic stay cancel a restraining notice lawfully issued before the bankruptcy petition? Before answering, it should be noted that there is a school of thought that any garnishee who owes a debt or holds property of the bankruptcy estate must follow instructions from the bankruptcy trustee and voluntarily hand over property of the estate to the bankruptcy trustee. (751) Independently, it has been suggested that Bankruptcy Code section 542(b) imposes this duty. (752) This duty, if it exists, means that a bankruptcy trustee may require the garnishee or the debtor to violate the restraining notice. Therefore, it is certainly convenient to think that the automatic stay preempts any preexisting restraining notice, as they are in conflict (at least on the above-stated interpretation of the automatic stay).

This was the result reached in In re Adomah, (133) on federal preemption grounds. Because the debtor's bank had received a prepetition restraining notice, the bank refused to honor the debtor's checks for the three weeks following the chapter 7 bankruptcy petition. (754) The failure of the bank to honor checks (under color of the restraining notice) was held to be a violation of the automatic stay. (755)

There are some curious aspects to In re Adomah. Chapter 7 implies that the checking account belongs to the bankruptcy trustee, not to the debtor. (756) So any checks the debtor wrote in the first three weeks should not have been honored in any case. (757) The debtor did claim that the funds were exempt under New York's bankruptcy-only exemption under New York Debtor & Creditor Law section 283. (758) But an exempt bank account is initially property of the bankruptcy estate. (759) The debtor must fetch exempt property out of the bankruptcy estate by filing Schedule C. (760) Once the debtor does so, the trustee and creditors have thirty days after the conclusion of the creditors' meeting to file objections to any exemption. (761) If no one objects, the claimed exemption is expelled from the bankruptcy estate. (762) Until then, any claimed exemption is estate property. (763) Accordingly, the debtor had no right to insist that the bank honor checks until at least 30 days after the first creditors' meeting (at least when money in the account is prepetition money). (764)

Furthermore, the Supreme Court, in Citizens Bank of Maryland v. Strumpf, (765) has held that a bank's refusal to honor checks never violates the automatic stay because the bank's dishonor of checks constitutes a breach of contract, and Bankruptcy Code section 362(a) does not prohibit breaches of contract. (766) The Adomah court held that Strumpf only condoned a temporary freeze of the checking account. (767) If true, it may be observed that the bank in Adomah did rather temporarily freeze the account because it was unsure of the effect of the restraining notice. But temporariness has to do with whether the freeze was the manifestation of a setoff, which is prohibited under section 362(a)(7). (768) Temporariness has nothing to do whether breaches of contract with the debtor violate the automatic stay. The alternative holding in Strumpf that breach of contract does not constitute "control over property of the estate" is categorical, not temporal. (769) Therefore, it would seem the bank acted properly because its actions were temporary and in any case its breach of contract is no violation of the automatic stay. (770) On top of that, recall that a garnishee can choose to be bound by a restraining notice that is not ultimately effective. (771) Under this principle, it is hard to see how the bank should have been liable for restraining funds. Be that as it may, Adomah suggests, plausibly, that the automatic stay cancels the restraining notice.

Some old cases suggest that the restraining notice survives the automatic stay. In Tompkins County Trust Co. v. Sullivan, (712) the bankruptcy court suggested that a debtor who wished access to a fund that was exempt would have to receive a bankruptcy court order to negate the restraining notice. (773) The restraining notice was not per se void as violating the stay, as the Adomah court claimed. (774)

While we are on the subject of bankruptcy, it may be pointed out that judicial liens created within ninety days of bankruptcy are voidable preferences, whenever the debtor is insolvent at the time of lien creation. (775) Therefore, if a garnishee violates a restraining notice within ninety days of bankruptcy, damages are zero, because any judicial lien that the creditor could obtain would have been invalid in the ensuing bankruptcy. Nevertheless, the garnishee's actions can be punished by contempt because the restraining notice was in fact violated. In Vinos Argentinos Imports USA, Inc. u. Los Andes Imports, Inc., a judgment creditor served a restraining notice on the judgment debtor. (776) Thereafter, the president of the corporate debtor caused the debtor to make preferential payments to other creditors. (777) The debtor could have, but did not, file for bankruptcy. (778) The court refused to order these funds transferred to the judgment creditor, because, hypothetically, the debtor could have deprived the judgment creditor of these funds by filing for bankruptcy. (779) But, separately, the corporate debtor was penalized $25,000 and the president was penalized $10,000 for these payments. (780)


A. In General

In 2008, the New York legislature amended section 5222 to address a particular abuse of the elderly. (781) Today, New York, along with Pennsylvania, Connecticut, and California, are considered the jurisdictions most protective of the exemption rights of senior citizens, insofar as their bank accounts are concerned. (782)

Social security income is exempt property, (783) and the government typically wires these payments directly into the checking accounts of the recipients of this federal largesse. (784) Once the federal wire hits the recipient's checking account, the proceeds of the recipient's social security entitlement remain exempt. (785) According to (42) U.S.C. [section] 407(a), "none of the moneys paid ... shall be subject to execution, levy, attachment, garnishment, or other legal process." (786)

Prior to 2008, if social security recipients had suffered a money judgment against them, plaintiffs would serve restraining notices on banks, followed by a sheriffs levy pursuant to an execution. (787) Banks often took no action to protect their customers. If the bank honored the restraining notice (even though the bank account was entirely exempt), it was "the responsibility of the judgment debtor to arrange to release a restrained account." (788) If the bank paid the sheriff pursuant to the levy, the bank was protected from liability by CPLR section 5209, which provides:
   A person who, pursuant to an execution or order, pays or
   delivers, to the judgment creditor or a sheriff or receiver,
   money or other personal property in which a judgment
   debtor has or will have an interest, or so pays a debt he owes
   the judgment debtor, is discharged from his obligation to the
   judgment debtor to the extent of the payment or delivery. (789)

B. A New Exemption

New CPLR section 5222(h) now provides that, under certain circumstances, the restraining notice does not affect $2,500 in the checking account. (790) These same limitations now also apply to executions. (791)

According to new section 5205(l), an exemption arises if a restraining notice is served on a "banking institution" or if the banking institution is levied pursuant to an execution. (792) If either of these events has occurred, the bank must determine: "[i]f direct deposit or electronic payments reasonably identifiable as statutorily exempt payments were made to the judgment debtor's account ... during the forty-five day period preceding the date a restraining notice was served on the banking institution." (793)

If all these conditions accrue, then the debtor's bank account is automatically exempt for $2,500. This is so whether or not the money in the account can be traced to an exempt income stream. (794)

To be noted is that the exemption is tied to the choice of a debtor to receive exempt electronic funds transfers. Debtors who receive checks in the mail the old-fashioned way lose out on this new exemption.

New CPLR section 5205(l) gives a non-exclusive definition of what "statutorily exempt payments" may mean:
   any personal property exempt from application to the
   satisfaction of a money judgment under any provision of
   state or federal law. Such term shall include, but not be
   limited to, payments from any of the following sources: social
   security, including retirement, survivors' and disability
   benefits, supplemental security income or child support
   payments; veterans administration benefits; public
   assistance; workers' compensation; unemployment
   insurance; public or private pensions; railroad retirement;
   and black lung benefits. (795)

Not listed are ordinary wages. In terms of wages, CPLR section 5205(d) makes
   ninety percent of the earnings of the judgment debtor for his
   personal services rendered within sixty days before, and at
   any time after, an income execution is delivered to the sheriff
   or a motion is made to secure the application of the judgment
   debtor's earnings to the satisfaction of the judgment .... (796)

What if no income execution or requisite motion has ever been served? If the CPLR is read literally, the new exemption does not apply if wages are wired into a checking account, provided that no income execution has already been served.

Since the exemption presupposes an income execution or motion to secure earnings, a restraining notice absent such preconditions is apparently fully effective, as none of the wages are exempt. (797) Nevertheless, courts often overlook the absence of an income execution and just assume that wages are exempt. (798) On the text of the CPLR, this is not justified. In any case, this judicial innovation as to the wage exemption at least means that New York is in compliance with federal legislation, which commands that state legislation permit the garnishment of no more than 25 percent of income. (799) If this instinct is followed, a wage earner who receives wire transfers from his employer is entitled to the $2,500. A wage earner who deposits ordinary checks is not so entitled. It is hard to make sense of this distinction based on wire transfers, except that the legislature was thinking of social security recipients, who almost always receive wire transfers.

Returning then to the new limitation on restraining notices, the bank is expressly ordered not to restrain $2,500. (800) If the account has less than $2,500 in it, the restraining notice is "deemed void." (801) It is not clear what happens if the debtor maintains more than one account with the bank. Should the bank aggregate all the accounts together, or does the debtor get $2,500 from each of her several accounts? At least one court requires all the accounts to be aggregated together. (802)

The new rules lead to peculiarities. Suppose a judgment debtor wins the lottery and his account had $2,501 in it at the time the bank received the restraining notice. The lottery winnings are successfully restrained. Suppose, however, the account had only $2,499. The account is not restrained, and the debtor may draw upon the lottery winnings at will. Furthermore, had the garnishee been a nonbank, the judgment creditor would need a court order to permit a second restraining notice to be served on the garnishee. (803) Where the garnishee is a bank, the court may not order that a new restraining notice be served. According to CPLR section 5222(c), "[a] judgment creditor shall not serve more than two restraining notices per year upon a natural person's banking institution account." (804) There is, however, an oddly contradictory third sentence in section 5222(h): "Nothing in this subdivision shall be construed to limit a banking institution's ... obligation to restrain ... such funds from the judgment debtor's account if required ... by a court order." (805) It therefore appears to be the case that a second restraining notice against a bank might be issued, but perhaps not within the span of a single year. (806) At moments like these, it is also wise to remember that, according to CPLR section 5240, "[t]he court may at any time, on its own initiative or the motion of any interested person, and upon such notice as it may require, make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure." (807) Undoubtedly, it is in the discretion of a court to ignore any relevant provision in Article 52 of the CPLR. (808)

Whether or not exempt income streams are wired into a bank account, a restraining notice issued to a bank is ineffective for amounts below $1,740 as of July 24, 2009. (809) This amount is declared to be 240 times the hourly minimum wage. (810) After that time, the minimal exemption must be calculated afresh according to the current minimum wage. (811) As of May 2013, the minimum wage was $7.25. (812) So the $1,740 minimum still holds. (813)

The minimum can be lowered by court order by the amount "a court determines to be unnecessary for the reasonable requirements of the judgment debtor and his or her dependents." (814) Presumably a judgment creditor may obtain this relief in advance of serving the restraining notice on the bank, and presumably the debtor is entitled to notice with regard to the motion. By the time the hearing occurs, the debtor will have had plenty of time to empty out the exempt part of the bank account. So this opportunity is unlikely to provide much solace to creditors. (815)

The bank may charge a fee for receiving a restraining notice. (816) If the restraining notice has no bite (as where the checking account have less than $ (1,740) in it), the bank may not charge a fee. (817) This is a change from former law, where banks could charge fees even though a bank account was entirely exempt. (818)

None of these limitations on bank restraints applies when the creditor is the state or a municipality of New York, or if the debt is
   for child support, spousal support, maintenance or alimony,
   provided that the restraining notice contains a legend at the
   top thereof, above the caption, in sixteen point bold type with
   the following language: "The judgment creditor is the state of
   New York, or any of its agencies or municipal corporations,
   AND/OR the debt enforced is for child support, spousal
   support, maintenance or alimony.". (819)

It may be noted that CPLR section 5222(h) and (i) are not restricted to individuals with bank accounts. But these subsections do require that a bank receive direct deposits of exempt income streams. So corporate entities, indirectly, are not entitled to the minimal exemptions described therein.
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Title Annotation: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
Author:Carlson, David Gray
Publication:Albany Law Review
Date:Jun 22, 2014
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