Relevant case law pertaining to the Exempt Income Protection Act (EIPA)

Holding: A Judgment Creditor who seeks a turn-over of moneys restrained in a judgment debtor’s account must plead and prove compliance with the requirements of CPLR 5222-a, including proof that the bank actually served the exemption notice and claim forms on the debtor. [This matter involved a levy by execution from the Sheriff]. LR CREDIT 21, LLC v. BURNETT, 40 Misc.3d 854, 967 N.Y.S.2d 916, 2013 N.Y. Slip Op. 23209 [District Court, Nassau County, June 24, 2013]. Relevant language from the decision: Moreover, reading CPLR 5222–a in conjunction with provisions of CPLR 5232(g) governing execution and levy, the law clearly provides that ‘all procedures stated [in CPLR 5222–a(b) and CPLR 5232(g) ] must be followed.’ CPLR 5232(g)(emphasis added). Consistent with this mandatory statutory directive, this Court now holds that a judgment creditor seeking a turnover order in a matter involving a claimed levy by execution must plead and prove compliance with CPLR 5222–a(b)(2) and 5222–a(b)(3) in order to make a prima facie case for a turnover order. Furthermore, in the absence of proof that the bank actually served an exemption notice and two exemption claim forms upon the judgment debtor within two business days of receipt of the execution, see CPLR 5222–a(b)(3), the Court has no way of determining whether the judgment debtor’s time to claim an exemption has expired. The law, as written, gives the judgment debtor twenty days “from the date postmarked on the correspondence containing the notice and forms” to claim an exemption. See CPLR 5222–a(c)(1). As Judge Hirsh explained in North Shore Univ. Hosp. v. Citibank, supra, “the only way a court can determine whether the time for a judgment debtor to exercise its right pursuant to CPLR 5222–a has expired is to require the judgment creditor to plead and prove in the turnover proceeding compliance with the provisions of CPLR 5222–a …” Id. Since “a judgment creditor cannot commence a turnover proceeding until the time for a judgment debtor to exercise its claim of exemption pursuant to CPLR 5222–a has expired,” the judgment creditor must necessarily plead and prove that this time limit has expired in order to make out a prima facie case for a turnover. Id. Holding: A Judgment Creditor has the burden of proving that the debtor’s claimed exemption to restrained funds is inapplicable. The only requirement imposed by the statute on the debtor is to complete and return the Exemption Claim Form. [The debtor may but is not required to supply supporting documentation with the completed exemption claim form]. MIDLAND FUNDING LLC v. ROBERTS, 37 Misc.3d 617, 950 N.Y.S.2d 867, 2012 N.Y. Slip Op. 22241 [Supreme Court, Sullivan County, July 30, 2012]. Relevant language from the decision: Consistent with EIPA’s goal of protecting judgment debtors from the seizure of exempt assets, CPLR Section 5222–a(d) provides that the Exemption Claim Form by itself is prima facie evidence that the funds in a debtor’s account are exempt funds. Thus, once Defendant filed the Exemption Claim Form, Plaintiff had the burden to demonstrate that the claimed exemptions are inapplicable. Plaintiff’s counsel also attempted to dissuade Defendant from opposing the motion by incorrectly asserting that Defendant failed to comply with CPLR Section 5222–a by failing to provide “Information demonstrating that the funds are exempt [including], but not limited to, originals or copies of benefit award letters, checks, check stubs or any other documents that discloses the source of the judgment debtor’s income, and bank records showing the last two months of activity” in addition to the Exemption Claim Form. While judgment debtors are encouraged to provide documentation supporting their exemption claim in order to speed up the process of unfreezing their money, CPLR Section 5222–a does not require judgment debtors to supply any supporting documents with their Exemption Claim Form. Thus, a judgment debtor’s failure to submit any documents with their Exemption Claim Form does not render the Exemption Claim Form invalid or even suspect. Consistent with EIPA’s goal of offering special protection to judgment debtor’s exempt assets, CPLR Section 5222–a(d) specifically refers to holding a “hearing” and does not provide for generally resolving these proceedings on the papers. Holding: While the debtor may simply return the exemption claim form as prima facie evidence of an exemption, the judgment creditor is entitled to question the source(s) of funds in order to meaningfully contest the debtor’s claim. MIDLAND FUNDING LLC v. SINGLETON, 34 Misc.3d 798, 935 N.Y.S.2d 844, 2011 N.Y. Slip Op. 21430 [District Court, Nassau County, Dec. 1, 2011] Relevant language from the decision: While CPLR 5222–a(d) makes the Exemption Claim Form prima facie evidence of an exemption and places the burden of proving the funds are not exempt upon the judgment creditor, the judgment creditor is entitled to the opportunity to question the judgment debtor as to source of the funds claimed to be exempt. Fundamental fairness and basic due process require the judgment creditor be provided with some method for meaningfully contesting the judgment debtor’s claim the funds on deposit in an account are exempt from execution. Holding: A Judgment Creditor cannot commence its turn-over special proceeding prior to the time that the debtor’s time to complete the exemption claim form and claim his exemption has expired. NORTH SHORE UNIVERSITY HOSPITAL AT PLAINVIEW v. CITIBANK LEGAL SERVICE INTAKE UNIT, 25 Misc.3d 655, 883 N.Y.S.2d 898, 2009 N.Y. Slip Op. 29333 [District Court, Nassau County, Aug. 4, 2009] Relevant language from the decision: CPLR 5222–a creates new statutory procedures for advising a judgment creditor certain funds on deposit in a bank account are exempt from restraint and execution and creates an expeditious and possibly non-judicial resolution of a judgment debtor’s claim of exemption. Permitting a judgment creditor to commence a turnover proceeding before the judgment debtor’s time to exercise his or her rights under CPLR 5222–a has expired would provide a judgment creditor with the ability to circumvent the safeguards and rights provided to a judgment debtor pursuant to this section. Thus, this court finds a judgment creditor cannot commence a turnover proceeding until the time for a judgment debtor to exercise its claim of exemption pursuant to CPLR 5222–a has expired. The only way a court can determine whether the time for a judgment debtor to exercise its rights pursuant to CPLR 5222–a has expired is to require the judgment creditor to plead and prove in the turnover proceedings compliance with the provisions of CPLR 5222–a that require a judgment creditor to serve an Exemption Notice and Exemption Claim Form with the restraining notice and to plead the judgment debtor’s time to serve an Exemption Claim Form has expired and none has been received. Such a requirement will give the judgment debtor the opportunity to claim an exemption and have the claim of exemption determined without having to defend a turnover proceeding. If the exemption is claimed, then the judgment creditor can proceed to either release the funds [CPLR 5222–a(c)(4) ] or object to the claimed exemption. Id.; and CPLR 5222–a(d). If the funds on deposit are exempt, the judgment creditor should release the funds without judicial intervention. CPLR 5222–a(c)(4). If the judgment creditor challenges to the claimed exemption, then the judgment creditor must move within 8 days of the date postmarked on the envelope containing the Exemption Claim Form to challenge the claimed exemption. CPLR 5222–a(d). The motion to contest an exemption can be brought on by motion in the action in which the judgment was entered and will be resolved within a maximum of 20 days from the date the Exemption Claim Form is served.(FN2) If the court finds the funds on deposit in the account are exempt from restraint and execution, the court will issue an order releasing the funds. A turnover proceeding will never be commenced.

(FN2) The motion to challenge the exemption must be made within 8 [sic] of postmarked date on the envelope containing the executed Exemption Claim Form. The motion must be made returnable 7 days after the service of the motion papers. The court must decided [sic] the motion within 5 days of the hearing date. CPLR 5222–a(d).

If a judgment creditor commences a turnover proceeding before the judgment debtor has the time to claim an exemption pursuant to CPLR 5222–a has run, the possibility exists for the turnover proceeding to be heard by one court and the CPLR 5222–a application to be heard by another court. This could result in one court issuing a turnover order while the other court finding the funds are exempt from execution. The court must do everything possible to avoid to such irreconcilably inconsistent results. In order to insure a judgment debtor is given the opportunity to assert a claim that the funds on deposit in the restrained bank account are exempt from restraint and execution, a judgment creditor who serves a restraining notice on a bank must plead and prove proceeding compliance with CPLR 5222–a as part of its prima facie case in a turnover proceeding. Since a judgment creditor must plead and prove compliance with CPLR 5222–a in the petition filed in a turnover proceeding, a judgment creditor cannot commence a turnover proceeding before the time for a judgment debtor to claim an exemption pursuant to CPLR 5222–a has expired. Holding: There is no private cause of action in favor of a judgment debtor against a bank for failure to comply with the requirements of the Exempt Income Protection Act. CRUZ v. TD BANK, N.A., 22 N.Y.3d 61, 2 N.E.3d 221, 979 N.Y.S.2d 257, 2013 N.Y. Slip Op. 07762 [Court of Appeals of New York, Nov. 21, 2013] Relevant language from the decision: CPLR article 52 sets forth procedures for the enforcement of money judgments in New York, which may include the imposition of a restraining notice against a judgment debtor’s bank account to secure funds for later transfer to the judgment creditor through a sheriff’s execution or turnover proceeding. Under both federal and state law, certain types of funds are exempt from restraint or execution, including Social Security benefits, public assistance, unemployment insurance, pension payments and the like (see generally CPLR 5205). Although the clear legislative intent is that funds of this nature are not to be subject to debt collection (and therefore excluded from any pre-execution restraint), prior to 2008 banks served with restraining notices often inadvertently froze accounts containing income from these sources, leaving judgment debtors without access to much-needed exempt monies. The EIPA was intended to ameliorate this problem, amending certain existing statutes in CPLR article 52 and adding a new CPLR 5222–a (L. 2008, ch. 575). The amendments restricted the scope of the restraint that can be implemented against the bank account of a natural person and created a new procedure aimed at ensuring that this class of judgment debtors is able to retain access to exempt funds. In substance, subject to limited exceptions consistent with federal law, the EIPA precludes a bank from restraining baseline minimum balances in a “natural person’s” account absent a court order. Specifically, $2,500 is free from restraint “if direct deposit or electronic payments reasonably identifiable as statutorily exempt payments … were made to the judgment debtor’s account during the forty-five day period preceding” the restraint (CPLR 5222[h] ). Otherwise, the statute excludes from restraint an amount that corresponds to 90% of 60–days wages under the federal or state minimum wage laws, whichever is greater, to be periodically adjusted—$1,740 as of July 2009 (CPLR 5222[i] ). In addition to limiting the scope of a restraint, the EIPA added new notification and claim procedures in CPLR 5222–a intended to educate judgment debtors concerning the types of funds that are exempt from restraint or execution in order to facilitate the filing of exemption claims. A judgment creditor restraining a bank account (in anticipation of a sheriff’s execution by levy or court-ordered transfer of assets) must serve the bank with specific forms: two copies of the restraining notice, an exemption notice and two exemption claim forms (CPLR 5222–a [b][11] ). The restraint is void if the judgment creditor fails to provide these documents to the bank; in that event, the bank “shall not restrain the account” (CPLR 5222–a [b][1] ), nor can the bank charge fees associated with a restraint (CPLR 5222[j] ). CPLR 5222–a also imposes a new obligation on financial institutions because it compels banks to mail to judgment debtors (the account holders) copies of the exemption notices and exemption claim forms received from judgment creditors (CPLR 5222–a [b][3] ). The statute states, however, that “[t]he inadvertent failure by a depository institution to provide the notice required … shall not give rise to liability on the part of the depository institution” (CPLR 5222–a [b][3] ). The notice advises the judgment debtor that the bank account is being restrained, describes the categories of funds that are exempt from restraint, and provides information concerning how to seek vacatur of the money judgment to avoid a subsequent transfer of the funds to the judgment creditor (CPLR 5222–a [b][4][a] ). The exemption claim form lists specific income sources that are not subject to restraint or execution (such as Social Security benefits, unemployment insurance, child support, veteran’s benefits, etc.) and directs the debtor to check the box next to any applicable exempt funds that have been deposited in the account (CPLR 5222–a [b][4][b] ). The debtor is then advised to return one copy of the claim form to the bank and the other to the creditor (or its representative) within 20 days (CPLR 5222–a [b][4][b] ). If 25 days have elapsed and the bank has not received an exemption claim form from the judgment debtor, all funds in the account in excess of the applicable statutory minimum remain subject to the restraining notice (CPLR 5222–a [c][5] ). However, a failure to return the claim form may not be interpreted as a waiver of any exemption the judgment debtor may possess (see CPLR 5222–a [h] ). Upon receipt of an exemption claim form from the account holder, the bank must notify the judgment creditor “forthwith” of the exemption claim and the creditor then has eight days to object (CPLR 5222–a [c][2], [3] ). If no objection is lodged, the restraint is lifted with respect to the disputed funds and the monies are released to the judgment debtor (CPLR 5222–a [c][3] ). To object to an exemption claim, the creditor must timely commence a special proceeding under CPLR 5240, serving papers on both the debtor and the bank before the expiration of the eight-day objection period (CPLR 5222–a [d] ). Within seven days of commencement of the proceeding, a hearing is to be held before a court, resulting in issuance of a judicial decision no later than five days after the hearing (CPLR 5222–a [d] ). In the meantime, the bank is required to hold the disputed funds for 21 days unless a court order directs otherwise; if 21 days pass and no judicial resolution of the exemption issue is forthcoming, the bank must release the disputed funds to the judgment debtor (CPLR 5222–a [e] ). Another subdivision imposes special liability upon judgment creditors that object to exemption claims in bad faith (CPLR 5222–a [g] ). The EIPA did not alter the preexisting provisions in CPLR article 52 permitting the commencement of special proceedings whereby creditors, debtors and “any interested person” can adjudicate disputes over the ownership of income or property (CPLR 5239, 5221), nor did it restrict the power of the court to “make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure” (CPLR 5240). Plaintiffs appealed to the United States Court of Appeals for the Second Circuit, which consolidated their cases for the purpose of appeal only. After reviewing CPLR article 52, including the EIPA, the court concluded that the cases presented novel issues of New York law that should be resolved by this Court, certifying the following questions:

“first, whether judgment debtors have a private right of action for money damages and injunctive relief against banks that violate EIPA’s procedural requirements; and

“second, whether judgment debtors can seek money damages and injunctive relief against banks that violate EIPA in special proceedings prescribed by CPLR Article 52 and, if so, whether those special proceedings are the exclusive mechanism for such relief or whether judgment debtors may also seek relief in a plenary action” ( 711 F.3d 261, 271 [2d Cir.2013]).

We agree with the District Courts that a private right to bring a plenary action for injunctive relief and money damages cannot be implied from the EIPA—and we therefore answer the first certified question in the negative. As for the second certified question, a judgment debtor can secure relief from a bank arising from a violation of the EIPA in a CPLR article 52 special proceeding as we have explained. And our determination that the legislation created no private right of action compels the conclusion that the statutory mechanisms for relief are exclusive. Banks had no obligation under the common law to forward notices of exemption and exemption claim forms to judgment debtors. It therefore follows that any right debtors have to enforce that obligation, among others imposed under CPLR 5222–a, arises from the statute and, since the EIPA does not give rise to a private right of action, the only relief available is that provided in CPLR article 52 (see generally Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236, 879 N.Y.S.2d 17, 906 N.E.2d 1049 [2009] ). ———– copyr. 2014 Richard A. Klass, Esq. The firm’s website: www.CourtStreetLaw.com Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York. He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions. Prior results do not guarantee a similar outcome.

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