Manufacturers Hanover Trust Co. v. Industrial Commissioner, 44 N.Y.2d 66 (1978)
A bank’s statutory right of setoff against a depositor’s account pursuant to Section 151 of the Debtor and Creditor Law is not extinguished by service of a tax compliance agent’s levy under CPLR 5232(a), even if the setoff is exercised after the levy.
Summary
This case addresses the conflict between a bank’s right of setoff and a judgment creditor’s levy. Manufacturers Hanover Trust Co. (Manufacturers) loaned money to Five Corners Tavern, Inc. (Five Corners), securing the loan with a lien and right of setoff on Five Corners’ deposits. When the Industrial Commissioner filed a warrant against Five Corners for unpaid unemployment insurance, a tax compliance agent levied on Five Corners’ account at Manufacturers. Manufacturers exercised its right of setoff. The Industrial Commissioner sought a court order to compel Manufacturers to remit the funds. The Court of Appeals held that Manufacturers’ right of setoff under Debtor and Creditor Law § 151 prevailed, reversing the lower courts. The legislative intent was to preserve the setoff defense for garnishee-creditors.
Facts
In February 1976, Manufacturers loaned Five Corners approximately $1,800 for a liquor license, secured by a lien and right of setoff on Five Corners’ deposits. The loan agreement stipulated that Manufacturers could exercise its right of setoff if a tax assessment was made against Five Corners. On April 8, 1976, the Industrial Commissioner filed a warrant against Five Corners for $522.54 in unpaid unemployment insurance contributions. On May 13, 1976, a tax compliance agent levied on Five Corners’ account at Manufacturers, which then had a balance of $263.69. Manufacturers notified the Industrial Commissioner that it had exercised its right of setoff against the funds.
Procedural History
The Industrial Commissioner commenced a proceeding under CPLR 5225 and 5227 to compel Manufacturers to remit the funds. Special Term granted the Commissioner’s request. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.
Issue(s)
Whether a depository bank’s statutory right of setoff (Debtor and Creditor Law, § 151) is extinguished by service of a tax compliance agent’s levy pursuant to CPLR 5232 (subd [a]).
Holding
No, because the legislative history of CPLR 5232(a) and Section 151 of the Debtor and Creditor Law indicates an intention to preserve the set-off defense for use by a garnishee-creditor against a levying judgment creditor any time after issuance of execution.
Court’s Reasoning
The court addressed the apparent conflict between CPLR 5232(a), which requires a garnishee to transfer property to the sheriff, and Debtor and Creditor Law § 151, which grants a debtor the right to set off debts even after the issuance of execution. The court emphasized the legislative history behind the statutes. When the Legislature authorized levy by execution upon intangibles in 1952, it simultaneously amended Debtor and Creditor Law § 151 to preserve the garnishee’s right to setoff. The New York Law Revision Commission stated the intent was to ensure the garnishee could utilize all defenses and setoffs against the judgment creditor. The court noted the practical reality that a bank’s first notice of execution often occurs upon service. To terminate the right of setoff upon levy would nullify the benefit § 151 bestows. The court explicitly rejected the reasoning in Matter of Industrial Comr. of State of N. Y. v South Shore Amusements, which held that the right of setoff terminated upon levy. The court distinguished United States v Sterling Nat. Bank & Trust Co. of N. Y., which involved a federal tax levy and was based on the Supremacy Clause. The court concluded that permitting the setoff even after levy aligns with legislative intent and statutory language. The court quoted Lederer v Wise Shoe Co., stating that a court will not read into a statute a limitation that would render it futile.