New York Law Review

Tag: Restraining Notice

  • Verizon New England, Inc. v. Transcom Enhanced Services, Inc., 21 N.Y.3d 67 (2013): Enforceability of Restraining Notice on At-Will Prepayment Agreements

    Verizon New England, Inc. v. Transcom Enhanced Services, Inc., 21 N.Y.3d 67 (2013)

    A restraining notice under CPLR 5222(b) is unenforceable against an at-will, prepayment service agreement that lacks a binding obligation for future services or dealings because such an agreement does not create a property interest or debt subject to restraint.

    Summary

    Verizon sought to enforce a judgment against Global NAPs, Inc. (GNAPs) by serving a restraining notice on Transcom, a company doing business with GNAPs. The notice aimed to prevent Transcom from transferring any property or debt owed to GNAPs. Transcom had an agreement with GNAPs for telephone switch services, but it prepaid for these services on a weekly basis and had no obligation to continue the arrangement. Verizon argued that the ongoing relationship created a property interest subject to the restraining notice. The Court of Appeals held that because the agreement was at-will and prepaid, with no guarantee of future services or payments, it did not create an attachable property interest or debt, rendering the restraining notice unenforceable.

    Facts

    Verizon obtained a $57 million judgment against GNAPs. In an effort to collect on the judgment, Verizon served a restraining notice and information subpoena on Transcom, a company that had a service agreement with GNAPs. The original agreement between Transcom and GNAPs, dated 2003, stipulated a monthly payment schedule. However, Transcom and GNAPs subsequently modified the agreement to a week-to-week arrangement where Transcom prepaid for services. Transcom could decide weekly whether to continue using GNAPs’ services, and GNAPs could also terminate the agreement at any time.

    Procedural History

    Verizon commenced a special proceeding seeking a turnover of property and debts from Transcom, alleging that Transcom violated the restraining notice by making payments to GNAPs. Supreme Court denied the turnover and dismissed the petition, finding no property or debt subject to the restraining order. The Appellate Division affirmed, holding that Transcom owed no debt to GNAPs and possessed no property of GNAPs. Verizon appealed to the Court of Appeals.

    Issue(s)

    Whether an at-will, prepayment service agreement, lacking any obligation for continued services or future dealings, constitutes a property interest or debt subject to a CPLR 5222 (b) restraining notice.

    Holding

    No, because the at-will, prepayment service agreement, which lacks any obligation to continue services or a commitment to engage in future dealings, does not create a property interest or debt subject to a CPLR 5222 (b) restraining notice.

    Court’s Reasoning

    The Court of Appeals distinguished this case from ABKCO Indus. v Apple Films, 39 NY2d 670 (1976), where a licensing agreement created an attachable property interest because it obligated the third party to pay the debtor a percentage of profits. In contrast, the agreement between Transcom and GNAPs was terminable at will by either party, and Transcom prepaid for services weekly with no obligation to continue the arrangement. The Court emphasized that “each week, Transcom had no obligation to pay GNAPs. Accordingly, there was no debt, and no obligation ‘certain to become due’” (citing Glassman v Hyder, 23 NY2d 354, 359 [1968]). The Court rejected Verizon’s argument that Transcom’s continued business relationship with GNAPs created an expectation of future revenue, stating that such an expectation was too contingent and speculative to create a property interest. The court affirmed the Appellate Division’s finding that Transcom neither owed any debt to nor possessed any property of GNAPs subject to a restraining notice. The voluntary payments in this case are distinguishable from ABKCO where the potential for future obligatory payments provided some real basis for a property interest. “Therefore, unlike ABKCO, there is no restrainable interest akin to the ‘collection of individual rights which, in certain combinations, constitute property’ (United States v Craft, 535 US 274, 278 [2002]).”

  • 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.

  • 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.