Aspen Industries, Inc. v. Marine Midland Bank

• Decision Date: 08 April 1980
• Citation: 426 N.Y.S.2d 620,74 A.D.2d 59
• Parties: , 28 UCC Rep.Serv. 1456 ASPEN INDUSTRIES, INC., Appellant, v. MARINE MIDLAND BANK, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 620

426 N.Y.S.2d 620

74 A.D.2d 59, 28 UCC Rep.Serv. 1456

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

Supreme Court, Appellate Division, Fourth Department.

April 8, 1980.

Costello, Cooney & Fearon, Syracuse, for appellant (Vincent A. O'Neil, Syracuse, of counsel).

Harter, Secrest & Emery, Rochester, for respondent (Donald S. Mazzullo, Rochester, of counsel).

Before CARDAMONE, J. P., and SIMONS, CALLAHAN, DOERR and MOULE, JJ.

CALLAHAN, Justice.

Appellant-petitioner Aspen Industries, Inc. (Aspen) instituted this proceeding against Marine Midland Bank (Bank) pursuant to the provisions of CPLR 5227, seeking to collect on funds of a judgment debtor on deposit with the Bank. On October 11, 1978, Aspen had served upon the Bank a restraining notice to garnishee pursuant to CPLR 5222. Notwithstanding receipt of the restraining notice, the Bank allowed the account to remain active. Thereafter several deposits were made and the Bank permitted a large number of withdrawals, including the sum of $10,000.00 which was paid over to the debtor's payroll account. On October 16, 1978 the Bank exercised its right of setoff under section 151 of the Debtor and Creditor Law paying over to itself the balance in the account at that time in the amount of $27,622.32 in partial satisfaction of $124,597.64 due the bank on a matured note. It apparently satisfied the remainder of the debt from other collateral security of the debtor which it held. In its proceeding against the Bank, Aspen sought a judgment in the amount of $4,846.51 plus interest and costs for alleged violation of the restraining notice. Special Term granted the Bank's motion to dismiss on the grounds that Aspen had suffered no actual injury from the Bank actions inasmuch as at all relevant times the Bank had a superior right to a setoff in excess of the amounts on deposit in the account. It is from this order that Aspen appeals.

CPLR 5222 (subd. (b)) Effect of restraint, provides that "(a) restraining notice served upon a person other than the judgment debtor is effective . . . if, at the time of service, . . . the judgment debtor has an interest in specified property in the possession or custody of the person served. All property in which the judgment debtor is known or believed to have an interest then in and thereafter coming into the possession or custody of such a person, . . . shall be subject to the notice. Such a person is forbidden to make or suffer any sale, assignment or transfer of, or any interference with, any such property, or pay over or otherwise dispose of any such debt, to any person other than the sheriff, except upon direction of the sheriff or pursuant to an order of the court, . . . or until the judgment is satisfied or vacated . . .". It further provides the "(i)f 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." This provision was intended to free up excess money held by a garnishee while ensuring that there is a sum available to the judgment creditor to cover not only the judgment but also the expenses of collection and the continually accruing interest (see Vol. 1 Leg.Doc. (1959) No. 17, 3rd Preliminary Report of the Advisory Committee on Practice and Procedure p. 254; Siegel, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR 5222:4, p. 188).

The bank account, which the judgment debtor had, established it as the creditor of the Bank to the extent of the moneys deposited by it in the account (Brigham v. McCabe, 20 N.Y.2d 525, 530-531, 285 N.Y.S.2d 294, 232 N.E.2d 327). Section 151 of the Debtor and Creditor Law provides in pertinent part that, "(e)very debtor (in this instance, the Bank) shall have the right upon * * * the issuance of any execution against any of the property of * * * a creditor (In this instance, depositor), to set off and apply against any indebtedness, whether matured or unmatured, of such creditor to such debtor, any amount owing from such debtor to such creditor, at or at any time after, the happening of any of the above mentioned events, and the aforesaid right of setoff may be exercised by such debtor against such creditor * * * notwithstanding the fact that such right of set off shall not have been exercised by such debtor prior to the making, filing or issuance, or service upon such debtor of, or of notice of * * * issuance of execution." The language of this statute clearly allows for a setoff by the Bank any time even after issuance of the restraining order (Matter of Industrial Comr. of State of N. Y. v. Five Corners Tavern, 47 N.Y.2d 639, 419 N.Y.S.2d 931, 393 N.E.2d 1005).

The Bank contends that it never violated the restraining notice, since, prior to exercising its right of setoff under Debtor and Creditor Law § 151, it withheld payment of funds in the account in an amount in excess of twice the amount due on Aspen's judgment as mandated by CPLR 5222, subd. (b)). Such an interpretation of the two statutes would mean that a bank could initially withhold funds sufficient to pay twice the amount of the creditor's judgment specified in the restraining notice, keep the account active for an extended period of time during which the debits against the account exceed the bank's right of setoff, and then exercise its right of setoff thereby depleting funds which otherwise would be available to the judgment creditor. Such a construction of the statute as would circumvent the law was never intended. CPLR § 5222 (subd. (b)) should not be read in conjunction with section 151 of the Debtor and Creditor Law as conferring a power on the garnishee to ignore the restraining order and to pay out funds on the judgment debtor's account to third parties where the garnishee decides to exercise a right of setoff unless after exercising that right there would still be available to the judgment creditor the funds required by CPLR 5222, subd. (b)).

The purpose of the statute is "to preserve the right of a garnishee to interpose against executing judgment creditors, even subsequent to the 'issuance of execution', any right to setoff the garnishee may have possessed against the judgment debtor" (Matter of Industrial Comr. of State of N. Y. v. Five Corners Tavern, supra, p. 645, 419 N.Y.S.2d p. 934, 393 N.E.2d p. 1008). Although the statute allows an offset to be made at any time subsequent to the issuance of a restraining order as was done here, it does not as the Bank asserts confer on a garnishee-creditor (the Bank in this case) the right to ignore a restraining order insofar as it restricts the transfer of property to other parties (Nardone v. Long Is. Trust Co., 40 A.D.2d 697, 336 N.Y.S.2d 325). Such transfers are prohibited...