Distressed Holdings, LLC v. Ehrler

• Decision Date: 04 December 2013
• Citation: 2013 N.Y. Slip Op. 08044,976 N.Y.S.2d 517,113 A.D.3d 111
• Parties: DISTRESSED HOLDINGS, LLC, respondent, v. Rhonda EHRLER, appellant.
• Court: New York Supreme Court — Appellate Division

113 A.D.3d 111

976 N.Y.S.2d 517

2013 N.Y. Slip Op. 08044

DISTRESSED HOLDINGS, LLC, respondent,

v.Rhonda EHRLER, appellant.

Supreme Court, Appellate Division, Second Department, New York.

Dec. 4, 2013.

Adam E. Mikolay, P.C., East Meadow, N.Y., for appellant.

Joel S. Stuttman, P.C., White Plains, N.Y. (Dennis Murphy of counsel), for respondent.

DANIEL D. ANGIOLILLO, J.P., THOMAS A. DICKERSON, L. PRISCILLA HALL, and JEFFREY A. COHEN, JJ.

HALL, J.

The Exempt Income Protection Act (L. 2008, ch. 575), was enacted in 2008 for the purpose of protecting judgment debtors from the restraint or execution of certain income which is exempt from debt collection by federal and state law. A major component of the Exempt Income Protection Act was the enactment of CPLR 5222–a, which includes strict procedural rules requiring service of exemption notices and exemption claim forms. Insofar as relevant here, the statutory mechanism requires the attorney for the judgment creditor to serve a judgment debtor's banking institution with a copy of the restraining notice, an exemption notice, and two exemption claim forms ( seeCPLR 5222–a[b][1] ). The statute then requires the banking institution, within two business days after receipt of such documents, to serve upon the judgment debtor a copy of the restraining notice, the exemption notice, and the two exemption claim forms ( seeCPLR 5222–a[b][3] ). In this action, the attorney for the judgment creditor properly sent the required documents to the judgment debtor's bank, but the bank did not timely send the documents to the judgment debtor. As a result, the judgment debtor's bank account was restrained without any notice to her or any opportunity to claim that certain funds in the account were exempt from debt collection. We conclude that this constituted a violation of the judgment debtor's due process rights, and, as a remedy, afford the judgment debtor the opportunity to claim exemptions before any funds in her account are turned over.

Factual and Procedural Background

In July 2008, nonparty First Florida Bank obtained a Final Judgment of Mortgage Foreclosure against the defendant, among others, issued by a Florida court in connection with a mortgage foreclosure action commenced in Florida. A foreclosure sale was held in August 2008, and the plaintiff in this action, an entity named Distressed Holdings, LLC, purchased the subject property. On August 30, 2010, the plaintiff obtained an Amended Final Deficiency Judgment (hereinafter the Florida judgment) against, among others, the defendant, in the principal sum of $188,867.83. Then, on November 30, 2010, the plaintiff commenced this action by filing the Florida judgment with the Nassau County Clerk.

On January 4, 2011, an Information Subpoena with Restraining Notice was served on the defendant's banking institution, Bank of America, in accordance with CPLR 5222. In addition, on January 26, 2011, an Execution with Notice to Garnishee was issued to a New York City marshal directing the marshal to levy the defendant's Bank of America account.

On January 18, 2011, while attempting to complete a banking transaction, the defendant was advised by Bank of America that her checking account had been restrained.

The defendant moved, inter alia, to vacate the restraining notice and terminate the restraint on her Bank of America account. In support of the motion, the defendant averred that she did not receive a copy of the restraining notice that was served on Bank of America and did not learn that a restraint had been placed on her account until she attempted to complete a banking transaction.

In opposition, the plaintiff argued that the restraining notice should not be vacated. In the event that the restraining notice was found to have been improperly served, the plaintiff requested that any order vacating the restraining notice expressly indicate that Bank of America would still be subject to the levy executed by the marshal, which, according to the plaintiff, was a method of enforcing the Florida judgment that was separate and distinct from the restraining notice.

In reply, the defendant reiterated that Bank of America did not send her a copy of the restraining notice within two days after its alleged receipt, as required by CPLR 5222–a(b)(3). She also continued to assert that her bank account was restrained without notice to her.

In an order dated March 18, 2011, the Supreme Court denied the defendant's motion. After the defendant filed her notice of appeal, this Court granted her motion to stay the execution, turnover, distribution, release, transfer, payment, or any other disposition of her funds held by Bank of America pending the hearing and determination of this appeal.

Statutory Background

In 1982, the Federal District Court for the Southern District of New York (hereinafter the Southern District) determined that New York's former statutory provisions for the enforcement of money judgments violated due process because they did not provide the judgment debtor with notice of the restraint or execution on that individual's bank account, the type of income which may be exempt from restraint or execution, or the procedures for asserting exemptions ( see Deary v. Guardian Loan Co., Inc., 534 F.Supp. 1178 [S.D.N.Y.1982] ). In response, the New York State Legislature amended CPLR 5222 and 5232 to provide notice to a judgment debtor of a partial list of exemptions and of the availability of procedures for asserting exemptions ( see L. 1982, ch. 882, §§ 1, 2; Warren v. Delaney, 98 A.D.2d 799, 800, 469 N.Y.S.2d 975).

In 2008, 26 years after the 1982 amendments, the Legislature made a number of additional amendments to article 52 of the CPLR, as part of the Exempt Income Protection Act. One purpose of the bill was to close a loophole in the prior law, which allowed debt collectors to use restraining notices to freeze bank accounts of New Yorkers even when money in the account was exempt from collection ( see N.Y.C. Bar Mem in Support, Bill Jacket, L. 2008, ch. 575). Under the pre–2008 version of CPLR 5222, an attorney for a judgment creditor could send a restraining notice to a bank where a judgment debtor held an account, and the restraining notice would have the effect of immediately freezing the debtor's funds, including those funds which were exempt from restraint. The judgment debtor would receive no notice until his or her account had been frozen, and the judgment debtor could potentially be put in the position of having no funds to pay for rent, utilities, food, and basic everyday living expenses ( see id.).

As explained by Robert Martin of the Consumer Affairs Committee, writing in support of the Exempt Income Protection Act:

“Under current law [i.e., prior to 2008], there [was] no clear, established or effective procedure for a debtor to assert a claim that a restrained bank account contains exempt funds and to have the restraint removed. Practitioners who represent consumers report that debtors have significant difficulty in having restraints lifted. A debtor can approach the creditor's attorney seeking the voluntary lifting of the restraint. If the creditor's attorney declines, then the debtor's only recourse is to bring an order to show cause seeking a court order to lift the restraint on exempt funds. Even with the aid of a lawyer, a debtor in this situation may find that it takes weeks if not longer to regain access to funds. For the bulk of consumers who do not have the resources to hire a lawyer or the knowledge or wherewithal to pursue the matter on their own, having a restraint lifted may become an impossible task” ( id.).

The Exempt Income Protection Act 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 ( see id.). Consequently, a major component of the Exempt Income Protection Act was the addition of CPLR 5222–a, which outlines the procedures for notifying judgment debtors of available exemptions and, essentially, makes it easier for judgment debtors to claim exemptions.

As explained by Assemblywoman Helene Weinstein, writing in support of the bill:

“In particular, within two business days after receiving a restraining notice or execution, an exemption notice and exemption claim forms related to a levy against a person's account, the bank would be required to mail a copy of the restraining notice, exemption notice and two exemption claim forms to the debtor. The judgment debtor would have 20 days to serve one copy of a completed claim form to the bank and one copy to the attorney for the judgment creditor. The debtor would be required to sign the claim form, indicating the type of exempt income contained in the account and certifying that, under penalty of perjury, the statement is true to the best of the debtor's knowledge and belief. The bank then would be required to release all funds in the judgment debtor's account eight days after the postmark date unless the judgment creditor imposes an objection to the exemption within that time. Within eight days of the postmark date, the judgment creditor may object to the exemption claim and request a hearing, with the burden of proof on the creditor's part to establish the amount of funds that are not exempt. The judge then has five days from the hearing to issue an order stating whether or not funds in the account are exempt and to order the appropriate relief” (Div. of the Budget Bill Mem, Bill Jacket, L. 2008, ch. 575).

Against this backdrop, the relevant statutory framework is as follows. CPLR 5222 permits, among others, “the attorney for the judgment creditor” to issue a restraining notice. The restraining notice may be served on either the judgment debtor or a third-party “garnishee,” which is defined in the CPLR as a “person who owes a debt to a judgment debtor, or a person other than the judgment debtor who has property in his...