Aspen Industries, Inc. v. Marine Midland Bank

• Citation: 421 N.E.2d 808,439 N.Y.S.2d 316,52 N.Y.2d 575
• Parties: , 421 N.E.2d 808 ASPEN INDUSTRIES, INC., Respondent, v. MARINE MIDLAND BANK, Appellant.
• Decision Date: 05 May 1981
• Court: New York Court of Appeals

Page 316

439 N.Y.S.2d 316

52 N.Y.2d 575, 421 N.E.2d 808

ASPEN INDUSTRIES, INC., Respondent, v. MARINE MIDLAND BANK, Appellant.

Court of Appeals of New York.

May 5, 1981.

Fred G. Aten, Jr., and Donald S. Mazzullo, Rochester, for appellant

Vincent A. O'Neil, Syracuse, for respondent.

OPINION OF THE COURT

JASEN, Judge.

This appeal concerns the effect of a restraining notice served upon a bank pursuant to CPLR 5222. At issue is whether a garnishee bank violates a restraining notice served upon it by disbursing funds from the account of a judgment debtor notwithstanding the fact that the bank maintains a balance in the account which is in excess of twice the amount owed on the judgment. Also involved is the interplay between the garnishee bank's right of setoff under section 151 of the Debtor and Creditor Law and the judgment creditor's rights under CPLR 5222.

The facts which give rise to the present controversy are not in dispute. On July 20, 1978, Aspen Industries, Inc. (Aspen), obtained a judgment against J. D. Whiting, Inc. (Whiting), in the amount of $6,838.80. Thereafter, Whiting paid $2,000 to Aspen on this judgment, leaving a balance of $4,838.80 still owing. At the time, Whiting had an account at Marine Midland Bank (Marine) and, on October 11, 1978, Aspen caused a restraining notice to garnishee to be served on Marine pursuant to CPLR 5222. The restraining notice directed Marine not to transfer or otherwise dispose of any of the moneys "contained in a checking and/or savings account in the name of J. D. Whiting, Inc." As of the date the restraining notice was served, the Whiting account at Marine had a balance of $838.51.

Notwithstanding receipt of the restraining notice, Marine allowed the Whiting account to remain active. On October 12, 1978, a deposit of $18,456.81 was made to the account. On October 13, 1978, approximately $8,000 in checks on the Whiting account payable to parties other than Aspen were honored by Marine and additional deposits aggregating in excess of $13,000 were accepted. Finally, on October 16, 1978, five days after the restraining notice was served, $10,000 was placed in the Whiting payroll account a check for $1,000 was paid to one "M. Bednarcyk" and a check for $163.69 was paid to Marine itself. At this point, Marine exercised its right of setoff under section 151 of the Debtor and Creditor Law, paying over to itself the remaining balance in the Whiting account in the amount of $27,622.32. This setoff was in partial satisfaction of $124,597.64 owed by Whiting to Marine on a note which Whiting had defaulted on prior to service of the restraining notice by Aspen.

The present proceeding was then instituted by Aspen pursuant to CPLR 5227 seeking judgment in the amount of $4,846.51, plus interest and costs, for Marine's alleged violation of the restraining notice. Special Term granted Marine's motion to dismiss the petition, stating that, inasmuch as Marine had a superior right of setoff under section 151 of the Debtor and Creditor Law in an amount greatly in excess of Aspen's judgment at all times during which the restraining notice was in effect, Aspen had failed to establish that it was damaged by Marine's activities in allowing the Whiting account to remain active after service of the notice upon it.

On appeal, a divided Appellate Division reversed and granted the petition. The majority held that Marine, by keeping the Whiting account open after service of the restraining notice, was liable to Aspen for damages. According to the majority, the "belated exercise by the Bank of its right of setoff created a superior right in Aspen to the funds set aside in compliance with CPLR 5222." (74 A.D.2d 59, at p. 63, 426 N.Y.S.2d 620.) The dissenting Justices, while agreeing that Marine had violated the restraining notice, were of the view that Aspen had failed to establish that it was damaged by this violation since the funds in the Whiting account were at all times relevant subject to Marine's superior right of setoff. There should be a reversal.

Among the various enforcement devices available to a judgment creditor under CPLR article 52 is the restraining notice. A party served with such a notice "is forbidden to make or suffer any sale, assignment, transfer or interference with any property * * * to any person other than the sheriff, except upon direction of the sheriff or pursuant to an order of the court". (CPLR 5222, subd. Thus, the restraining notice serves as a type of injunction prohibiting the transfer of the judgment debtor's property. This notice may be served on either the judgment debtor himself or, as in the present case, upon a third-party "garnishee"--a person who owes a debt to the judgment debtor or who is in possession of property in which the judgment debtor has an interest. (CPLR 105, subd. When served upon a garnishee, the injunctive effect of the restraining notice continues for one year or until such time as the judgment is satisfied or vacated, whichever occurs first, and extends to property both "then in and thereafter coming into the possession or custody" of the garnishee. (CPLR 5222, subd. see, generally, Siegel, New York Practice, § 508.)

In contrast with prior law (see Civ. Prac. Act, §§ 799-a, 808; Matter of Wickwire Spencer Steel Co. v. Kemkit Scientific Corp., 292 N.Y. 139, 142, 54 N.E.2d 336; see, generally, Distler & Schubin, Enforcement Priorities and Liens: The New York Judgment Creditor's Rights in Personal Property, 60 Col.L.Rev. 458, 476-478, 499-506), service of a CPLR 5222 restraining notice confers no priority upon the judgment creditor in the form of a lien on the judgment debtor's property. (See Matter of International Ribbon Mills 36 N.Y.2d 121, 365 N.Y.S.2d 808, 325 N.E.2d 137; City of New York v. Panzirer, 23 A.D.2d 158, 259 N.Y.S.2d 284; Matter of H & H Poultry Co. v. Lafayette Nat. Bank, 45 Misc.2d 480, 257 N.Y.S.2d 182; see, generally, 6 Weinstein-Korn-Miller, N.Y. Civ. Prac., par. 5222.21.) Therefore a judgment creditor serving a restraining notice ordinarily is required to take further steps in enforcing his judgment, such as an execution or levy upon the judgment debtor's property, in order to prevent the intervening rights of third parties from taking precedence over his claim against the judgment debtor. (See Siegel, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR 5222, C 5222:8; but cf. Matter of International Ribbon Mills supra.) However, violation of the restraining notice by the party served is punishable by contempt (CPLR 5222, subd. 5251) and subjects the garnishee to personal liability in a separate plenary action or a special proceeding under CPLR article 52 brought by the aggrieved judgment creditor. (See, e. g., Nardone v. Long Is. Trust Co., 40 A.D.2d 697, 336 N.Y.S.2d 325; Mazzuka v. Bank of North Amer., 53 Misc.2d 1053, 280 N.Y.S.2d 495; Matter of Sumitomo Shoji N.Y. v. Chemical Bank N.Y. Trust Co., 47 Misc.2d 741, 263 N.Y.S.2d 354, affd 25 A.D.2d 499, 267 N.Y.S.2d 477.) It is this type of liability which Aspen seeks to impose upon Marine in the present proceeding. This, however, Aspen may not do.

The last sentence of CPLR 5222 provides that "a garnishee served with a restraining notice withholds the payment of money belonging or owed to the judgment debtor in an amount equal to twice the amount due on the judgment, the restraining notice is not effective as to other property or money." (CPLR 5222, subd. Thus, as did its predecessor under the Civil Practice Act (Civ.Prac. Act, § 781), CPLR 5222 requires...