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Answering Certified Questions From the Second Circuit, NY Court Of Appeals Holds That A Judgment Debtor’s Sole Remedies Against A Judgment Creditor Whose Collection Efforts Violate Article 52 of the CPLR Are Found Within Article 52 – Tort Remedies Are Unavailable

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  • Posted on: Jan 21 2022

By Jonathan H. Freiberger

Article 52 of the CPLR addresses the enforcement of money judgments.  In the most simplistic terms, Article 52 addresses the property of a judgment debtor that is subject to enforcement and the various tools available to a judgment creditor to enforce a money judgment.

On December 16, 2021, the New York Court of Appeals decided Plymouth Venture Partners, II, L.P. v. GTR Sources, LLC, in which the Court answered the following two questions certified to it by the Second Circuit Court of Appeals addressing the extent to which tort damages are available to a judgment debtor for violations of the enforcement procedures of Article 52 by two judgment creditors (“Judgment Creditor 1” and “Judgment Creditor 2”, respectively, and, collectively, the “Judgment Creditors”):

1. whether a judgment debtor suffers cognizable damages in tort when its property is seized pursuant to a levy by service of execution that does not comply with the procedural requirements of CPLR 5232(a), even though the seized property is applied to a valid money judgment; and, if so 

2. whether the judgment debtor can, under these circumstances, bring a tort claim against either the judgment creditor or the marshal without first seeking relief under CPLR 5240.”  

The Court of Appeals, in answering the questions held that tort remedies were unavailable to a judgment creditor and that “an article 52 proceeding is the correct vehicle for resolving claims based on collection efforts that are alleged to violate article 52….”  (Citations omitted.)

Background (with a recitation of edited and simplified facts)

Judgment debtor borrowed money from Judgment Creditors, two merchant cash advance businesses, for the purpose of buying and selling future receivables.  Future receivables were to be direct deposited into an account at Comerica Bank in Michigan from which Judgment Creditors were to debit the respective loan payments due to them.  When judgment debtor blocked Judgment Creditors from the Comerica account, confessions of judgment executed by judgment debtor in conjunction with the underlying loan transactions were entered in “New York courts”.  

Judgment Creditor 1 served a restraining notice on Comerica Bank in Michigan.  Upon learning of the restraining notice, judgment debtor “objected in an email to [Judgment Creditor 1], stating that Comerica had no presence in New York, that the restraining notice was ‘tortiously interfering with the superior UCC liens of [judgment debtor’s] senior lenders’ and threatening to file a temporary restraining order.”  Ignoring the email, Judgment Creditor 1 then “issued an Execution with Notice to Garnishee and directed a New York City marshal… [the “Marshal”] to serve Comerica with a Notice and Levy and Demand on Corporate Creations Network, Inc. [(“CCN”)], Comerica’s purported agent for service of process, in Nyack, New York, which in turn directed Comerica to turn over any of [judgment debtor’s] property in its control.”  Shortly after judgment debtor’s motion to vacate Judgment Creditor 1’s judgment on procedural and jurisdictional grounds was denied, the Marshal faxed a levy to Comerica, in Michigan.  Comerica complied with the levy and paid the Marshal from judgment debtor’s account. Thereafter, judgment debtor “filed a complaint against [Judgment Creditor 1] in Supreme Court… again seeking vacatur of the judgment and now also seeking restitution under CPLR 5015, breach of contract, wrongful execution, and fraud.”  A receiver was also appointed for judgment debtor after its other creditors brought an action for such relief in Michigan.  The receiver withdrew the supreme court action and its subsequent motion to vacate Judgment Creditor 1’s judgment was again denied.

Thereafter, the receiver filed a tort action in the Southern District of New York alleging “wrongful restraint and execution against [Judgment Creditor 1], wrongful execution against [the] Marshal … individually, conversion, and trespass to chattels.”  As characterized by the Court of Appeals, the S.D.N.Y. granted Judgment Creditor 1’s motion for summary judgment:

holding that the Receiver had suffered no harm and so could not recover in tort.  Specifically, [the S.D.N.Y.] held, as to the wrongful execution claim, that “there is no dispute that the funds recovered by the Marshal were used to extinguish the debtor’s valid debt owed under a valid court judgment [and] [t]herefore, the Receiver, who stood in the shoes of the [judgment] debtor, suffered no damages”. For the same reason, the court held that the Receiver’s claims for conversion and trespass to chattels could not survive “because the Receiver has failed to establish that the Receiver sustained any damages.”

(Citations omitted.)

The collection efforts by Judgment Creditor 2, and judgment debtor’s response thereto, followed a similar, but not identical, course as with Judgment Creditor 1.  Judgment debtor’s action commenced in the S.D.N.Y. was dismissed by a different judge based on the “logic” set forth in the order dismissing the federal action commenced with respect to Judgment Creditor 1.

Appeals from both S.D.N.Y. orders were consolidated, and certified questions were presented to the Court of Appeals because “‘neither party identifies a New York Court of Appeals opinion addressing [the] issue [of whether the Receiver’s tort claims failed to establish the necessary element of damages],’ and that, with respect to the issue of cognizable damages, ‘two recent New York Supreme Court decisions have reached differing results on the topic’ (citing Bam Bam Entertainment LLC v Pagnotta, 59 Misc 3d 906 [Sup Ct, Kings County 2018] and Silver Cup Funding LLC v Horizon Health Ctr., Inc., 70 Misc 3d 1201[A], 2020 NY Slip Op 51529[U] [Sup Ct, Ontario County 2020]….”  (Some citations omitted.)

In summarizing the parties’ arguments and supporting its holding, the Court of Appeals stated:

[Judgment debtor] argues that “the executions and levies in these cases did not comply with the requirements of Article 52 of the CPLR, specifically CPLR 5232(a),” resulting in “‘void or irregular process'” that reduced the executions and levies to “legal nullities” and thereby exposed the defendants to tort liability. [Judgment debtor] seeks to recover the amount taken from the Comerica accounts that was used to satisfy the relevant judgments and “consequential” damages. [Judgment Creditors 1 and 2] counter that [Judgment debtor] suffered no damages from the alleged violation of the statute and that, in any event, under these circumstances [judgment debtor’s] sole remedy was to seek relief under article 52. We agree with the final point. There is no need to contort traditional tort claims to accommodate a novel theory by a judgment debtor seeking to recover funds used to satisfy a valid judgment based on alleged violations of our civil procedure law. Instead, CPLR article 52, which provides a mechanism for addressing the innumerable situations that can arise that manifest abuse of the enforcement devices authorized in that statute, is the exclusive avenue for a judgment debtor seeking relief from the use of an enforcement mechanism that does not comply with article 52’s requirements. 

(Some citations, internal quotation marks, brackets and a footnote omitted.)  The Court of Appeals went on to discuss, inter alia, the history and provisions of Article 52 as well as the policy considerations behind its conclusion that the enforcement provisions of Article 52 were the sole remedies for the violation of the enforcement provisions of Article 52.

[Eds. Note:  two Justices filed lengthy dissenting opinions.

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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