New York Law Review

Tag: Garnishee

  • Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009): Enforceability of Turnover Orders for Out-of-State Assets

    Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009)

    A New York court with personal jurisdiction over a garnishee can order the garnishee to produce assets located outside of New York to satisfy a judgment, regardless of whether the judgment debtor is subject to the court’s jurisdiction.

    Summary

    Koehler, a judgment creditor, sought to enforce a Maryland judgment against Dodwell, a judgment debtor, by compelling the Bank of Bermuda (BBL) to turn over Dodwell’s stock certificates held as collateral in Bermuda. The New York Court of Appeals addressed whether a New York court, with personal jurisdiction over BBL, could order the turnover of assets located outside New York. The Court held that personal jurisdiction over the garnishee (BBL) allows the court to order the turnover of out-of-state assets, even if the judgment debtor (Dodwell) is not subject to the court’s jurisdiction. This decision clarifies the reach of CPLR Article 52, facilitating judgment enforcement against entities with a presence in New York, regardless of the asset’s location.

    Facts

    Koehler obtained a judgment against Dodwell in Maryland and registered it in the Southern District of New York. Dodwell owned stock certificates in a Bermuda corporation, held by BBL in Bermuda as collateral for a loan. Koehler initiated a proceeding in the Southern District of New York, seeking a turnover order against BBL to compel delivery of the stock certificates or their equivalent value. BBL initially contested personal jurisdiction but later consented to it.

    Procedural History

    The U.S. District Court for the Southern District of New York initially dismissed Koehler’s petition, citing a lack of in rem jurisdiction over the shares. The Second Circuit Court of Appeals certified a question to the New York Court of Appeals: whether a New York court, with personal jurisdiction over a defendant other than the judgment debtor, can order the delivery of assets located outside New York. The New York Court of Appeals accepted the certified question.

    Issue(s)

    Whether a court sitting in New York may order a bank over which it has personal jurisdiction to deliver stock certificates owned by a judgment debtor (or cash equal to their value) to a judgment creditor, pursuant to CPLR article 52, when those stock certificates are located outside New York?

    Holding

    Yes, because CPLR Article 52 contains no express territorial limitation, and having personal jurisdiction over the garnishee allows the court to compel observance of its decrees via proceedings in personam.

    Court’s Reasoning

    The Court reasoned that CPLR Article 52 governs post-judgment enforcement, requiring personal jurisdiction over the person against whom the order is issued, unlike pre-judgment attachment under Article 62, which requires jurisdiction over the property. The Court emphasized that no express territorial limitation exists within Article 52 barring a turnover order requiring a garnishee to transfer assets into New York. The Court cited the First Department’s holding in Gryphon Dom. VI, LLC v APP Intl. Fin. Co., 41 AD3d 25 (1st Dept 2007), affirming that New York courts can order judgment debtors to turn over out-of-state assets under CPLR article 52 because the court had personal jurisdiction over the defendant. The court stated, “[H]aving acquired jurisdiction of the person, the court[ ] can compel observance of its decrees by proceedings in personam against the owner within the jurisdiction”. The court further stated that “As long as the debtor is subject to the court’s personal jurisdiction, a delivery order can be effective even when the property sought is outside the state”. The Court distinguished this situation from attachment proceedings, where jurisdiction is based on the property’s location within New York. The dissent argued that the majority’s holding creates an expansive garnishment remedy, unsupported by precedent, and raises concerns about forum shopping and potential constitutional issues under Shaffer v. Heitner, 433 U.S. 186 (1977). The dissent argued that the judgment creditor should not be permitted to do what the judgment debtor could not do, citing United States v First Natl. City Bank, 321 F2d 14 (1963). Nonetheless, the majority held that personal jurisdiction over a defendant, be it a judgment debtor or garnishee, allows a New York court to order the turnover of out-of-state property.

  • Aspen Industries, Inc. v. Marine Midland Bank, 52 N.Y.2d 575 (1981): Garnishee’s Liability and Right of Setoff After Restraining Notice

    Aspen Industries, Inc. v. Marine Midland Bank, 52 N.Y.2d 575 (1981)

    A garnishee bank that honors transactions on a judgment debtor’s account after receiving a restraining notice is not liable to the judgment creditor if the account balance remained at least twice the judgment amount, or if the bank had a superior right of setoff that exceeded the account balance.

    Summary

    Aspen Industries, a judgment creditor, sought to hold Marine Midland Bank liable for violating a restraining notice served on the bank regarding the account of judgment debtor J.D. Whiting, Inc. Marine allowed transactions on the account after receiving the notice, but the account balance always exceeded twice the judgment amount. Subsequently, Marine exercised its right of setoff against the account due to Whiting’s pre-existing debt to the bank. The New York Court of Appeals held that Marine was not liable because the account balance never fell below twice the judgment amount, and because Marine’s superior right of setoff meant no funds were available to satisfy Aspen’s judgment.

    Facts

    Aspen Industries obtained a judgment against J.D. Whiting, Inc. for $6,838.80, later reduced to $4,838.80. Aspen served a restraining notice on Marine Midland Bank, where Whiting had an account. At that time, the account balance was $838.51. After receiving the notice, Marine allowed deposits and withdrawals on the account. The balance always remained above twice the outstanding judgment amount. Marine then exercised its right of setoff for $27,622.32, applying the remaining balance toward Whiting’s $124,597.64 debt to the bank from a defaulted note.

    Procedural History

    Aspen initiated a proceeding against Marine Midland Bank for violating the restraining notice. Special Term dismissed Aspen’s petition, holding that Marine’s right of setoff was superior and Aspen was not damaged. The Appellate Division reversed, finding Marine liable. The New York Court of Appeals reversed the Appellate Division and reinstated the Special Term’s order, dismissing Aspen’s claim.

    Issue(s)

    1. Whether a garnishee bank violates a restraining notice by disbursing funds from a judgment debtor’s account when the account balance remains above twice the judgment amount.
    2. Whether a garnishee bank is liable to a judgment creditor for violating a restraining notice when the bank has a superior right of setoff that exceeds the account balance.

    Holding

    1. No, because CPLR 5222 stipulates that a restraining notice is not effective as to other property or money if the garnishee withholds twice the amount due on the judgment.
    2. No, because under Section 151 of the Debtor and Creditor Law, a bank’s right of setoff is superior to the rights of a judgment creditor under a restraining notice; therefore, the judgment creditor cannot demonstrate damages resulting from the bank’s actions.

    Court’s Reasoning

    The Court of Appeals reasoned that CPLR 5222 requires a garnishee to retain only twice the judgment amount, recognizing the commercial reality that a debtor’s large assets should not be frozen for a small judgment. Since the balance in Whiting’s account always exceeded twice the judgment amount, Marine did not violate the restraining notice by allowing account activity.

    Even if Marine had violated the restraining notice, Aspen could not recover because it could not prove damages. Section 151 of the Debtor and Creditor Law gives a garnishee bank the right to set off any debt owed to it by the judgment debtor. This right is superior to that of an intervening judgment creditor, even after the creditor begins enforcement efforts. The court noted, “[E]very debtor shall have the right upon … the issuance of any execution against any of the property of; the issuance of a subpoena or order, in supplementary proceedings, against or with respect to any of the property of; or the issuance of a warrant of attachment against any of the property of; a creditor … to set off and apply against any indebtedness…” Because Whiting’s debt to Marine exceeded the account balance, Marine’s setoff extinguished any funds available to satisfy Aspen’s judgment. The court effectively gives priority to the bank’s setoff rights over the restraining notice. As the court stated, the rights conferred under a restraining notice are subject to the superior right of setoff under section 151 of the Debtor and Creditor Law.

  • Manufacturers Hanover Trust Co. v. Industrial Commissioner, 44 N.Y.2d 66 (1978): Bank’s Right of Setoff Against Depositor Prevails Over Tax Levy

    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.