Distrеssed Holdings, LLC, Respondent, v Rhonda Ehrler, Appellant.
Appellate Division of the Supreme Court of New York, Second Department
December 4, 2013
976 N.Y.S.2d 517
Distressed Holdings, LLC, Respondent, v Rhonda Ehrler, Appellant.
Second Department, December 4, 2013
Adam E. Mikolay, P.C., East Meadow, for appellant.
Joel S. Stuttman, P.C., White Plains (Dennis Murphy of counsel), for respondent.
OPINION OF THE COURT
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
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
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 cоpy 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 thе 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 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 Federаl 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 [SD NY 1982]). In response, the New York State Legislature amended
In 2008, 26 years after the 1982 amendments, the legislature made a number of additional amendments to
“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 attornеy 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 impоssible task” (id. at 39).
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
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 notiсe 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 knоwledge 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 exemрt. 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 Budget Bill Mem, Bill Jacket, L 2008, ch 575 at 9).
Against this backdrop, the relevant statutory framework is as follows.
“A judgment debtor or obligor served with a restraining notice is forbidden to make or suffer any sale, assignment, transfer or interference with any property in which he or she has an interest . . . except upon direction of the sheriff or pursuant to an order of the court, until the judgment or order is satisfied or vacated” (
CPLR 5222 [b] ).
Stated differently, the restraining notice serves as an injunction prohibiting the transfer of the judgment debtor‘s property (see Aspen Indus. v Marine Midland Bank, 52 NY2d at 579).
Subdivision (b) (2) of
Significantly, subdivision (b) (3) of
The exemption notice advises the judgment debtor that his or her bank account is being restrained or frozen (see
“advises the judgment debtor that to claim the exemption, the judgment debtor should cоmplete the exemption claim form and deliver or mail it to the bank in which the restrained account is maintained and the judgment creditor or the judgment creditor‘s attorney within 20 days of the postmark date on the envelope holding the exemption notice”
Analysis
The defendant contends that the restraint on her bank account should be terminated because the plaintiff failed to demonstrate compliance with
The plaintiff counters that it properly served the required documents on Bank of America. With respect to the alleged failure of Bank of America to serve the defendant with the required documents, the plaintiff argues that compliance with
We begin our analysis by finding that the plaintiff demonstrated that on January 4, 2011, it served an information subpoena with restraining notice on Bank of America, which included the exemption notice and at least one exemption claim form.1 However, the defendant stated in her affidavit that Bank of America did not send a copy of the restraining notice, exemption notice, and exemption claim form to the defendant, as required by
Under these circumstances, we find that Bank of America did not comply with its obligation under
As noted above, the purpose of
Thus, the defendant was deprived of due process when her Bank of America account was restrained without her having been afforded notice and an opportunity to claim that any or all of the funds in her account were exempt (see generally Cordius Trust v Kummerfeld Assoc., Inc., 658 F Supp 2d 512, 520-521 [SD NY 2009]). This essentially mirrors the situation that the Southern District found to be unconstitutional in Deary. Indeed, without notice of the restraint on her account and the procedures for asserting possible exemptions, the defendant was, as a practical matter, unable to assert her rights before her property was taken (see Deary v Guardian Loan Co., Inc., 534 F Supp at 1183). The taking of the defendant‘s property without notice and an opportunity to claim exemptions amounted to a fundamental due process violation (see Friedman v Mayerhoff, 156 Misc 2d 295, 298 [Civ Ct, Kings County 1992]).
The plaintiffs argument that this issue is academic because the marshal executed a levy against the defendant‘s account pursuant to
Therefore, as evidenced by the plain text of
We now turn to the remedy that should be afforded to the defendant. ”
Therefore, we grant that branch of the defendant‘s motion which was to vacate the restraining notice and terminate the restraint on her Bank of America account only to the extent indicated above.
The defendant‘s remaining contentions are without merit.
Accordingly, the order is modified, on the law, by deleting the provision thereof denying that branch of the defendant‘s motion which was to vacate a restraining notice issued pursuant to
Angiolillo, J.P, Dickerson and Cohen, JJ., concur.
Ordered that the order is modified, on the law, by deleting the provision thereof denying that branch of the defendant‘s motion which was to vacate a restraining notice issued pursuant to