Dickstein v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 09 December 1996
• Parties: , 31 UCC Rep.Serv.2d 208 Robert S. DICKSTEIN and Janet Dickstein, Plaintiffs-Respondents-Cross-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., and Christine M. Bernius, Defendants-Appellants-Cross-Respondents.
• Court: New Jersey Superior Court — Appellate Division

Page 550

295 N.J.Super. 550

685 A.2d 943, 31 UCC Rep.Serv.2d 208

Robert S. DICKSTEIN and Janet Dickstein Plaintiffs-Respondents-Cross-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., and Christine M. Bernius, Defendants-Appellants-Cross-Respondents.

Superior Court of New Jersey Appellate Division.

Argued Nov. 12, 1996.

Decided Dec. 9, 1996.

Lawrence D. Ross, Florham Park, for defendants-appellants-cross-respondents (Bressler, Amery & Ross, attorneys; Lawrence D. Ross and Daniel T. Kopec, of counsel; Mr. Ross, on the brief).

Robert S. Dickstein, pro se, Hackensack, for plaintiffs-respondents-cross-appellants (Mr. Dickstein, attorney; Donna Russo, on the brief).

Before Judges PETRELLA, WALLACE and KIMMELMAN.

The opinion of the court was delivered by

PETRELLA, P.J.A.D.

Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) and Christine M. Bernius (defendants) appeal from summary judgment in favor of plaintiffs Robert S. Dickstein and Janet Dickstein (plaintiffs) ordering defendants to pay most of the funds withheld by Merrill Lynch to satisfy a tax levy on plaintiffs' account by the State of New York.

Defendants argue on appeal that the motion judge erred in granting summary judgment because: (1) New York Uniform Commercial Code § 8-317(4) authorized and required Merrill Lynch to comply with the tax levy; (2) New York law provided a complete defense to plaintiffs' claim; (3) plaintiffs suffered no legally cognizable damage as a result of Merrill Lynch's payment of the tax judgment against them; (4) there were fact issues as to damages and mitigation; and (5) the judgment against defendant Bernius was improper.

On cross-appeal plaintiffs argue that the judge erred in reducing damages.

I.

On February 23, 1994 plaintiffs filed a complaint in Bergen County, New Jersey, against Merrill Lynch and Bernius asserting that $8,975.63 was wrongfully withheld from plaintiffs' account. Defendants answered that the money was withheld in compliance with a valid New York tax levy. ¹

The Dicksteins, New Jersey residents, earned income in New York in 1981. Robert Dickstein, an attorney, applied for an extension of time to file his required New York non-resident income tax return until June 15, 1982. However, it was not until October 1982 that plaintiffs filed their New York tax return on income of $198,886, and paid taxes of $18,229 on New York taxable income of $108,218.

On November 30, 1982, the New York Tax Compliance Bureau sent plaintiffs a notice and demand for tax due of $4,807.78, consisting of a penalty of $3,615.75 and interest of $1,190.26 for late filing and payment of taxes. On December 6, 1982, Dickstein ² responded by tendering the interest due and requesting a waiver of the penalty. The Audit Division rejected his waiver request because "[r]easonable cause for late filing ha[d] not been established."

Dickstein neither paid the penalty nor sought any judicial remedy. Almost four years later, New York entered a tax warrant in the judgment docket in the County of Albany Clerk's Office on November 26, 1986 for $40.48 taxes due, $2,445.13 penalty and $2,873.16 interest. At no time thereafter did plaintiffs challenge the validity of that judgment in New York.

In 1991, plaintiffs opened a securities account with Merrill Lynch's Wayne, New Jersey office. Merrill Lynch is incorporated in Delaware with principal place of business in New York. In December of 1993, plaintiffs owned two mutual funds: Merrill Lynch Corporate Bond Fund Inc. and the Income Opportunities Fund 1999, Inc. Both funds were administered by Maryland corporations with principal offices in New Jersey. Merrill Lynch served as the financial intermediary in purchasing these shares and plaintiffs' ownership interest was recorded in book entry form on Merrill Lynch's books in New York. By December 29, 1993, at plaintiffs' request, their account had been liquidated, resulting in a cash balance of $43,192.71 which was held by Merrill Lynch in safekeeping at Chase Manhattan Bank in New York.

Between 1989 and 1993, New York sent plaintiffs numerous collection letters. On December 21, 1993, New York issued a tax compliance levy to Merrill Lynch at its principal office in New York demanding payment of $8,975.63 without further process pursuant to N.Y. CPLR 5232(a). Bernius, an employee of Merrill Lynch in its Compliance Department, wrote plaintiffs in response to a telephone conversation with Dickstein wherein he asserted that the Tax Department had no jurisdiction over his assets since the account was maintained in New Jersey. Bernius informed Dickstein that Merrill Lynch would honor the levy unless it received an appropriate court order or a release of the levy by New York.

Dickstein again objected in writing on the same grounds the following day. He did not seek any court order and he made no effort to negotiate with New York in the apparent belief that his efforts would have been fruitless because New York knew it would be paid in full by Merrill Lynch.

On May 5, 1994, Merrill Lynch paid the full amount of New York's tax compliance levy.

Plaintiffs moved for summary judgment and defendants cross-moved for summary judgment. The motion judge considered the central issue as whether under New York U.C.C. 8-317(4) Merrill Lynch had the right to satisfy the levy at their New York offices. In concluding that Merrill Lynch did not have the right to so satisfy the levy, the judge found U.C.C. 8-317(4) inapplicable because the two mutual funds previously held by plaintiffs were Merrill Lynch funds issued in New Jersey making them New Jersey assets. ³ The judge considered the cash balance held in the account to be an intangible asset not within N.J.S.A. 12A:8-317 or New York U.C.C. 8-317 and only capable of being levied upon at the place where the underlying transactions occurred, i.e., Merrill Lynch's Wayne, New Jersey office.

After the liability judgment was entered, the parties cross-moved for summary judgment as to damages. Judgment for $8,975.63 was entered in plaintiffs' favor. The parties then submitted certifications and briefs on the calculation of accrued interest and costs. After reviewing reports of certified public accountants submitted by each of the parties, the judge reduced the judgment to $5,704.14. The judge reasoned that even if New York had sued in New Jersey, plaintiffs would still have been responsible for paying the $3,600 penalty, but amounts in excess thereof would have been abated because of "confusion in communications between Dickstein and the Department of New York State Income Taxation."

II.

We reject defendants' initial argument that Merrill Lynch was authorized to satisfy the tax levy under Uniform Commercial Code 8-317(4). ⁴ While 8-317 pertains to investment securities, the Uniform Commercial Code does not apply to money. See N.J.S.A. 12A:8-102(1)(c); N.Y. U.C.C. 8-102(1)(c). Because plaintiffs liquidated their mutual fund shares in December 1993 and the levy was satisfied in May 1994 from the cash balance, defendants' reliance on the cited section is misplaced. The judge correctly determined that issue.

Defendants next argue that the levy was valid and properly satisfied. Under the New York Tax Law § 692, the tax commission must give notice and make demand for payment by "mail to such person's last known address." N.Y. Tax Law § 692(b). When a taxpayer is a non-resident, the tax commission has six years from the date of the tax assessment to issue a warrant. N.Y. Tax Law § 692(c). A copy of the warrant must be sent to the taxpayer by certified or registered mail and such warrant must be filed with the County Clerk in Albany County. N.Y. Tax Law § 692(g). Upon such filing, the tax commission is "deemed to have obtained judgment against the taxpayer." N.Y. Tax Law § 692(e). Thereafter, the tax commissioner may proceed to enforce the judgment. N.Y. Tax Law § 692(g).

Pursuant to § 692, a tax warrant was filed and entered in the judgment docket for judgment debtors against plaintiffs. In New York, money judgments are enforced by levy. See N.Y. CPLR 5232. The issue is whether under the circumstances New York had jurisdiction over the monies held by Merrill Lynch in plaintiffs' account.

In deciding the issue, the motion judge relied on plaintiffs' interpretation of Prudential-Bache v. Commissioner of Revenue, 412 Mass. 243, 588 N.E.2d 639 (1992), where the Massachusetts Commission of Revenue (Commission) tried to levy upon a non-resident's brokerage account in Massachusetts to satisfy a tax judgment. The non-resident judgment debtor, a resident of Illinois, maintained a brokerage account with Prudential-Bache in Illinois. Prudential, a Delaware corporation with principal offices in New York, does business in Massachusetts. The Commission served a levy on Prudential in Massachusetts. After being served with the levy, Prudential brought an interpleader action under Massachusetts law for a declaration of the relative rights of its customer, the judgment debtor, and the Commission. The Commission asserted that it was levying upon the judgment debtor's right to call upon a Massachusetts office of Prudential to execute a transaction. The court noted that while the debtor might have a contractual right to conduct this type of transaction, it was not a property right capable of being levied upon in Massachusetts. Id., at 246, 588 N.E.2d at 641. The court reasoned that the non-resident's property did not have sufficient contacts with Massachusetts to justify a levy in that forum under "traditional notions of fair play and substantial justice." Id. 588 N.E.2d at 642 (citing International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L. Ed. 95, 102 (1945)). The non-resident judgment debtor transacted all of his business with Prudential in Illinois and those transactions were effectuated electronically in New York. Id., at 245, 588 N.E.2d at 640. Therefore, the non-resident never...