New York Law Review

Tag: creditor’s rights

  • Arjan Ribbons, Inc. v. Sturtz, 36 N.Y.2d 121 (1975): Priority of Judgment Creditor Over Assignee for Benefit of Creditors After Restraining Notice

    Arjan Ribbons, Inc. v. Sturtz, 36 N.Y.2d 121 (1975)

    A judgment creditor who serves a restraining notice on a judgment debtor obtains a superior interest in the debtor’s assets compared to a subsequent assignee for the benefit of creditors; furthermore, a judgment creditor gains priority by issuing a property execution to a Sheriff, provided no return has been made on the execution before the assignment.

    Summary

    Arjan Ribbons, Inc., a judgment creditor, sought to recover funds from Sturtz, an assignee for the benefit of creditors of International Ribbon Mills, the judgment debtor. Arjan Ribbons had served a restraining notice on International Ribbon Mills and issued a property execution to the Sheriff before the assignment. The New York Court of Appeals held that Arjan Ribbons, by serving the restraining notice, obtained rights to the debtor’s property superior to those of the subsequent assignee. The Court reasoned that an assignee never stands in a better position than the assignor and is subject to all equities and burdens attached to the property.

    Facts

    Arjan Ribbons, Inc. obtained a judgment against International Ribbon Mills on April 21, 1972.

    Within eight days of obtaining the judgment, Arjan Ribbons served a restraining notice on International Ribbon Mills and issued a property execution to the Sheriff of the City of New York.

    Approximately three weeks after the judgment, on or about May 13, 1972, International Ribbon Mills executed a general assignment for the benefit of creditors to Sturtz.

    The accounts receivable in question were collected by the debtor’s lawyer and subsequently held by the assignee, Sturtz.

    Procedural History

    Arjan Ribbons initiated a turnover proceeding to seek payment of its judgment from the accounts receivable held by Sturtz.

    Special Term ordered the turnover in favor of Arjan Ribbons.

    The Appellate Division reversed the Special Term’s order and dismissed the petition, holding that Arjan Ribbons had not obtained a priority interest in the debtor’s assets.

    The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a judgment creditor obtains a superior interest in assets as against a subsequent assignee for the benefit of creditors by serving a restraining notice on the judgment debtor.

    Whether a judgment creditor obtains a priority by issuing a property execution to a Sheriff.

    Holding

    Yes, because a judgment creditor obtains greater rights to the debtor’s property by virtue of the restraining notice than does a later assignee for the benefit of creditors.

    Yes, because a judgment creditor also obtains a priority by issuance to the Sheriff of a property execution upon which no return has yet been made.

    Court’s Reasoning

    The Court reasoned that serving a restraining notice prohibits a judgment debtor from transferring property until the judgment is satisfied or vacated. Although CPLR 5222 does not explicitly state that a restraining notice renders subsequent transfers ineffective, the Court emphasized that an assignee never stands in a better position than the assignor.

    The Court stated, “It is elementary ancient law that an assignee never stands in any better position than his assignor. He is subject to all the equities and burdens which attach to the property assigned because he receives no more and can do no more than his assignor.”

    The Court distinguished the rights obtained by issuing an execution to the Sheriff, noting that such rights do not survive a return without satisfaction. However, because the record was unclear whether the execution was returned unsatisfied before the assignment, the Court based its decision primarily on the restraining notice.

    The Court acknowledged that the original draft of CPLR 5222 included language explicitly preventing transfers while a restraining notice was in effect, but that language was later deleted. Despite this deletion, the Court found it would be against sound public policy to allow an assignee without consideration priority over a judgment creditor when the assignment was made in violation of a restraining notice.

    The Court emphasized the diligence of the creditor in acting promptly to effect payment of its judgment and the lack of appealing equity in the assignee’s favor, as the assignment was made without consideration.

  • Adams v. Davidson, 10 N.Y. 309 (1851): Establishing Fraudulent Conveyance Through Lack of Possession

    Adams v. Davidson, 10 N.Y. 309 (1851)

    A transfer of property is deemed fraudulent against creditors when the assignor fails to relinquish actual possession and control of the property to the assignee, and the assignor continues to operate the business as before the assignment for their own benefit.

    Summary

    This case addresses the validity of a property assignment challenged as fraudulent by creditors. Brown assigned his assets to Davidson. Adams, acting on behalf of creditor Rathbone, levied on the assigned goods, arguing the assignment was fraudulent. The court held the assignment fraudulent because Brown retained control over the property, continuing to operate his business as usual even after the assignment to Davidson, indicating an intent to defraud creditors. This retention of control invalidated the assignment, allowing the creditor’s levy to stand.

    Facts

    Brown made an assignment to Davidson. Davidson told a clerk to observe the transaction. Brown told his clerk, Griffin, about the assignment. Brown retained the store keys and allowed Brown and Griffin to continue selling goods as usual. Brown told his brother-in-law the assignment was to induce Townsend & Wendell to provide bail and would be voided if successful. When the sheriff arrived to levy, Griffin did not disclose the assignment and promised the sheriff the proceeds of sales. Davidson did not make an inventory until after the levy.

    Procedural History

    Adams (representing Rathbone, a creditor) brought suit against Davidson, challenging the assignment. The lower court found in favor of Adams, deeming the assignment fraudulent. Davidson appealed to the Supreme Court, which affirmed the lower court’s decision in part and reversed in part. The case then went to the Court of Appeals.

    Issue(s)

    Whether the assignment from Brown to Davidson was fraudulent against creditors, specifically, whether Brown retained sufficient control over the property after the assignment to render it invalid.

    Holding

    Yes, because Brown did not relinquish control of the assigned property, continuing to operate his business and sell goods as before, indicating an intent to defraud creditors.

    Court’s Reasoning

    The court focused on the lack of actual and continued change of possession. The court emphasized that simply taking the keys symbolically was insufficient when Brown continued to operate the business as usual. The court highlighted the failure of Griffin to disclose the assignment to the sheriff as evidence of Brown’s continued control. The court noted that if Davidson was acting in good faith, he would have ensured a clear change in possession and control. The court also noted the significance of Davidson not calling Griffin as a witness to rebut the inference of fraud. The court stated the evidence showed that “there was not an actual, and much less a continued, change of possession of the assigned property.” The Court also notes, “The case, therefore, stands burdened, not only with the legal fraud resulting from the omission to take and continue the assigned property in the actual possession of the assignee, but with positive fraud in permitting Brown to sell for his own use and benefit as before.” Finally, the court states the assignment was at least in part created to coerce a third party to provide security for Brown, with the intention to void the assignment if successful.