Arias v. Gutman, Mintz, Baker & Sonnenfeldt LLP

• Decision Date: 14 November 2017
• Docket Number: August Term, 2016,Docket No. 16-2165-cv
• Citation: 875 F.3d 128
• Parties: Franklin ARIAS, Plaintiff–Appellant, v. GUTMAN, MINTZ, BAKER & SONNENFELDT LLP, 1700 Development Co., (1500), Inc., Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

875 F.3d 128

Franklin ARIAS, Plaintiff–Appellant,

v.GUTMAN, MINTZ, BAKER & SONNENFELDT LLP, 1700 Development Co., (1500), Inc., Defendants–Appellees.

Docket No. 16-2165-cv

August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: April 27, 2017

Decided: November 14, 2017

Claudia Wilner (Marc Cohan, National Center for Law and Economic Justice, New York, NY, Susan Shin, New Economy Project, New York, NY, Ahmad Keshavarz, Brooklyn, NY, on the brief), National Center for Law and Economic Justice, New York, NY, for Plaintiff–Appellant.

Kenneth A. Novikoff , Rivkin Radler LLP, Uniondale, NY, for Defendants–Appellees.

Before: CABRANES and LOHIER, Circuit Judges, and FORREST, District Judge.^*

LOHIER, Circuit Judge:

Franklin Arias claims that Gutman, Mintz, Baker & Sonnenfeldt LLP ("GMBS"), a law firm, violated the Fair Debt Collection Practices Act ("FDCPA") and New York State law when it garnished his bank account and then tried to block him from showing that all of the funds in his account were exempt from garnishment.¹ The United States District Court for the Southern District of New York (Daniels, J. ) dismissed Arias's FDCPA claim and declined to exercise supplemental jurisdiction over Arias's State law claims. As explained below, we VACATE the judgment of the District Court and REMAND for further proceedings consistent with this opinion.

BACKGROUND

As this case involves the alleged garnishment of Social Security retirement income ("SSRI") in a New York-based bank account and the interplay between the FDCPA and New York law relating to freezing and garnishing consumer bank accounts, we first provide an overview of the relevant State legal framework.

1. New York Exempt Income Protection Act

Under federal law, SSRI is exempt from garnishment, with certain exceptions not relevant to this appeal. See 42 U.S.C. § 407(a). In 2008 New York enacted the Exempt Income Protection Act ("EIPA") to better protect "exempt funds from forcible collection—a problem that had reached epidemic proportions in New York State." Cruz v. TD Bank, N.A., 711 F.3d 261, 270 (2d Cir. 2013) (quotation marks omitted). The EIPA "remedied an imbalance in the prior law which unfairly placed the burden on debtors to show that their funds were exempt, at a time when they were being deprived access to those funds." Distressed Holdings, LLC v. Ehrler, 113 A.D.3d 111, 976 N.Y.S.2d 517, 521 (2d Dep't 2013).

To begin the garnishment process, a creditor can serve a restraining notice on the debtor's bank, along with a copy of the notice to be sent to the debtor, an exemption notice, and two exemption claim forms. N.Y. C.P.L.R. §§ 5222(a), 5222–a(b)(1). "[T]he restraining notice serves as an injunction prohibiting the transfer of the judgment debtor's property." Ehrler, 976 N.Y.S.2d at 521 ; see also N.Y. C.P.L.R. § 5222(b). But the debtor's bank is required to leave certain funds unrestrained. The bank must leave unrestrained a minimum amount for the debtor's basic needs, calculated based on the federal and New York minimum wage laws. See N.Y. C.P.L.R. § 5222(i). And if within the 45 days preceding the restraining notice an account received a direct deposit of funds "reasonably identifiable as statutorily exempt," the bank must leave $2,500 unrestrained. Id. § 5222(h).

Within two business days of receiving a restraining notice, the bank must serve the debtor with the restraint documents, including the exemption notice. Id. § 5222–a(b)(3). "The exemption notice advises the judgment debtor that his or her bank account is being restrained or frozen" and that "certain funds, which may be on deposit in the restrained bank account, are exempt from restraint and cannot be taken by the judgment creditor to satisfy the judgment." Ehrler, 976 N.Y.S.2d at 522.

If the debtor believes that any of the restrained funds are exempt from garnishment, he may complete an exemption claim form—signed under penalty of perjury—and send it to the bank and the creditor's attorney. N.Y. C.P.L.R. § 5222–a(c)(1). The debtor may also send information establishing that the restrained funds are exempt, including, inter alia, "originals or copies of benefit award letters, checks, check stubs or any other document that discloses the source of the judgment debtor's income, and bank records showing the last two months of account activity." Id. § 5222–a(c)(4). Upon receiving an exemption claim form, the creditor generally must instruct the bank to release the restrained funds if the exemption claim form "is accompanied by information demonstrating that all funds in the account are exempt." Id. If the supporting documentation shows that "the account contains some funds from exempt sources, and other funds from unknown sources, the judgment creditor shall apply the lowest intermediate balance principle of accounting"² and instruct the bank to release the exempt portion of the account. Id.

Regardless of the documents accompanying the debtor's exemption claim form, the bank must release the restrained funds eight days after receiving an exemption claim form, unless the creditor files an objection in court within that time. Id. § 5222–a(c)(3). The creditor may do so by making a motion under section 5240 of the New York Civil Practice Law and Rules and serving copies of its moving papers on the bank and the debtor. Id. § 5222–a(d). The creditor's motion must be accompanied by an affirmation demonstrating "a reasonable belief that [the] judgment debtor's account contains funds that are not exempt from execution." Id."The affirmation ... shall not be conclusory, but is required to show the factual basis upon which the reasonable belief is based." Id. If the creditor objects to an exemption claim in bad faith, it will be liable for the debtor's costs, reasonable attorneys' fees, actual damages, and an amount not to exceed $1,000. Id. § 5222–a(g). The court will hold a hearing to determine whether the funds are exempt, and shall issue its decision within five days of the hearing. Id. § 5222–a(d).

2. Factual Background ³

In 2006 Arias rented an apartment in the Bronx owned by 1700 Inc. At some point that year, Arias moved out of the apartment and allowed his daughter to move in, expecting that she would pay the rent to 1700 Inc. After his daughter missed two months of rent payments, 1700 Inc. retained GMBS and sued Arias for breach of the lease in Bronx County Civil Court (the "State court"). When Arias failed to file an answer, 1700 Inc. obtained a default judgment.

Around December 2014, 1700 Inc., through GMBS, tried to collect on its default judgment by issuing a restraining notice on Bank of America, where Arias had a checking account. In response to the restraining notice, Bank of America notified Arias that upon "receiv[ing] an order to remove funds" from his account, it had "researched [his] account[ ]" and identified $2,625 that constituted protected Social Security "benefits payments," leaving $1,294.62 subject to restraint and removal from his account under the order.

That same month, Arias tried to persuade GMBS that "[a]ll of the money" in his account was SSRI, which is exempt from restraint and garnishment under federal law, 42 U.S.C. § 407(a). At Arias's request, Bank of America sent GMBS Arias's bank statements for the period February through December 2014, showing only deposits of SSRI. Arias also personally informed GMBS that all of the funds in his account were exempt from restraint or garnishment. GMBS replied that it would release Arias's funds only if he made a payment. When Arias said he could not afford to do so, GMBS answered that his only recourse would be to go to court to have the restraint removed.

Arias persisted. He mailed GMBS a completed exemption claim form indicating that all of the funds in his checking account were SSRI, and he re-sent the bank statements from February through December 2014 that Bank of America had previously sent. GMBS nevertheless filed an objection to Arias's claim of exemption, asking the State court to find that the funds in Arias's account were not exempt from garnishment and, in the alternative, for a hearing and a protective order to prevent the release of the funds. In support of the motion, a GMBS attorney filed an affirmation representing that "[t]he commingling of personal funds with exempt funds transforms the opening balance into personal and non-exempt monies," and that Arias had "not provide[d] the proper documentation in support of his Exemption Claim Form" because he "failed to provide any bank records starting from a zero balance." App'x 43–44. In his complaint, Arias alleges that these representations were false and misleading and that GMBS had no good faith basis to object to his exemption claim because it knew, based on the bank statements he provided, that all of the funds in his account were exempt from garnishment.

In January 2015 the State court held a hearing on GMBS's objection. Arias, appearing pro se, claimed that all of the funds in his account were SSRI. During the hearing a GMBS attorney reviewed the bank statements that Arias had with him—the same documents Arias had twice transmitted to GMBS. After reviewing the statements, the GMBS attorney promptly withdrew the objection and agreed to release the funds in Arias's account.

3. Procedural Background

In this action, Arias, now counseled, claims that GMBS violated the FDCPA as well as New York's General Business Law and Judiciary Law, and also brings a common law claim for conversion. The District Court considered and granted GMBS's motion for judgment on the pleadings, see Fed. R. Civ. P. 12(c), holding that (1) GMBS had not misrepresented Arias's burden of proof because a debtor must "provide documentary proof to sufficiently demonstrate the exempt status of restrained funds," Arias v. Gutman, Mintz, Baker & Sonnenfeldt, P.C., No. 15-CV-09388 (GBD), 2016 WL 3443600, at *6 (S.D.N.Y. June 8, 2016) ; (2) GMBS's alleged misrepresentation about Arias's failure to...