New York High Court Shields Banks from Certain Direct Actions by Debtors

On November 21, 2013, the New York Court of Appeals, in response to a certified question from the U.S. Circuit Court of Appeals for the Second Circuit, ended the long-running debate over whether a separate, private plenary right of action could be implied under New York Civil Practice Law and Rules (CPLR) Article 52, including §5222-a. In its decision in Cruz v. TD Bank, N.A., 2013, NY Slip Op 07762 (N.Y. Nov. 21, 2013), the Court ruled that such a private plenary right of action could not be implied under the statute – a decision that should also operate to deflect any class action suit attempts by enterprising attorneys or consumer and other public advocacy groups. The Court’s conclusions were based on the language and legislative intent of Article 52, especially when viewed in light of the variety of designated special proceedings available under Article 52 that could be used by a judgment debtor seeking redress.

As part of the overall judgment enforcement provisions in CPLR Article 52, CPLR §5222-a was enacted by the New York State Legislature in 2008 as part of the Exempt Income Protection Act (EIPA). The EIPA was passed for the laudable purpose of protecting judgment debtors, who are generally unrepresented, from the loss of their exempt income to creditors seeking to enforce judgments by proceeding against the debtors’ bank accounts. In furtherance of this objective, the EIPA amended certain existing statutes, restricting the scope of restraints that can be implemented against a bank account, and created a new procedure aimed at ensuring that judgment debtors are able to continue having access to their exempt funds.

In addition to limiting the scope of a restraint, CPLR §5222-a places an affirmative duty on banks to do two things upon receipt of a restraining notice:

  • First, the bank must determine whether the judgment creditor has served the proper forms, consisting of two copies of the restraining notice, an exemption notice and two exemption claims forms. 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,” nor can the bank charge fees associated with the restraint. 
  • Second, if the judgment creditor has served the bank with the proper forms, the bank must then serve the restraining notice, the exemption notice and two exemption claim forms on its judgment debtor depositor within two business days of receipt. The statute states, however, that “the inadvertent failure by a depository institution to provide the notice required … shall not give rise to liability on the part of the depository institution.” Plaintiffs had seized upon this provision in particular to argue that it therefore allowed by negative inference that a private, separate plenary action would be allowed for all other violations of Article 52 and especially §5222-a. 

The two certified questions before the Court were whether:

  • The garnishee bank could be sued in a private separate plenary action by the aggrieved judgment debtor by reason of the bank’s failure to comply with the provisions of CPLR Article 52, including the EIPA
  • Damages and injunctive relief could only be sought exclusively through the various special proceedings set forth in CPLR Article 52, rather than through a separate plenary action.

In Cruz, the putative class action was filed in the U.S. District Court by judgment debtors whose bank accounts were restrained pursuant to CPLR Article 52. The judgment debtor plaintiffs alleged that the restraints were invalid because the bank failed to comply with CPLR §5222-a by, among other things, failing to provide the plaintiffs with copies of the judgment creditor’s restraining notices and the requisite exemption claim forms. The judgment debtors sought monetary damages from the bank as well as injunctive relief for the alleged violations.

Although the District Court ultimately agreed with the judgment debtors that the bank had indeed violated the EIPA, it nevertheless dismissed the suit by ruling that the statute could not be interpreted so as to allow for a private plenary right of action for monetary damages against a bank for violations of the EIPA. [The Court also correctly determined that the EIPA did not contain any express provisions granting a private right of action for monetary damages against a bank for violations of the statute. This issue was not appealed.] The District Court’s decision was promptly appealed to the U.S. Second Circuit Court of Appeals, which certified the question to the Court of Appeals for determination.

In Cruz, the New York Court of Appeals answered the question definitely by holding that a private right of action against banks cannot be implied from the EIPA. The Court’s well-reasoned decision was premised on its finding that the creation of such an implied private right of action would be wholly inconsistent with the legislative scheme, which it took great pains to analyze in its opinion. The Court further held that the statutory mechanisms for relief already in place under Article 52 were exclusive, and none sanctioned private causes of action, especially since other provisions of CPLR Article 52, such as CPLR 5239 and CPLR 5240, provide adequate relief to aggrieved judgment debtors for wrongful restraints and recovery of funds already transferred to the judgment creditor.