No Liability for Banks Under New York’s EIPA

Business Litigation Update

Date: November 25, 2013

On November 21, 2013, the New York Court of Appeals held that a bank that fails to comply with New York’s Exempt Income Protection Act (EIPA) when freezing the account of a judgment debtor cannot be sued for damages under the EIPA by the judgment debtor. Thus, the remedies available to the judgment debtor against a bank are likely limited to equitable relief in a CPLR Article 52 special proceeding.

Although New York’s procedures for the enforcement of money judgments allow a judgment creditor to impose a restraining notice against a judgment debtor’s bank account, certain types of funds, such as Social Security benefits and unemployment insurance, are exempt from restraint. Nonetheless, prior to the passage of the EIPA, banks often inadvertently froze accounts containing such funds.

The EIPA, passed in 2008, sets a minimum baseline balance not subject to restraint. It also sets out a notification procedure aimed at facilitating exemption claims. Among other things, the EIPA requires that a judgment creditor restraining an account send exemption notice and claim forms to the bank, and that the bank forward these documents to the judgment debtor.

The case decided by the Court of Appeals, Cruz v. TD Bank, N.A. (No. 191, Nov. 21, 2013), arose from two federal lawsuits brought by judgment debtors against banks. The plaintiffs claimed that, when freezing their accounts, the banks had failed to follow the EIPA notification procedure, including forwarding the exemption notices and claim forms to the plaintiffs. The banks moved to dismiss, contending that the EIPA does not create a private right of action by a judgment debtor against a bank.

The Court of Appeals agreed that the EIPA does not create a private right of action against a bank, rejecting the plaintiffs’ argument that such a right was implied by the statute. However, the court confirmed that the enforcement mechanisms provided for in CPLR Article 52 may still be asserted against a bank, and that these mechanisms constitute the exclusive relief available to a judgment debtor when the EIPA has been violated.

Under CPLR 5239, prior to the application of property to the satisfaction of a judgment, a judgment debtor can commence a special proceeding to determine rights in the property. Under CPLR 5240, a court has broad authority to provide equitable relief modifying or denying any enforcement procedures, even after assets have been transferred to a judgment creditor.

“Thus, if a judgment debtor believes that a bank has restrained assets in violation of the EIPA … , he or she can obtain a civil remedy, such as the release of any money unlawfully restrained, an injunction barring transfer or exempt property to the sheriff or judgment creditor, or reimbursement of any bank fees improperly charged.” Cruz at 18. If the assets have been transferred to the judgment creditor, a court may reverse the transfer.

The court observed that, “[w]hen a judgment creditor has properly imposed a restraint on a bank account, the bank has no choice but to freeze the assets.” Under the EIPA, banks are a “conduit for information” regarding a judgment debtor’s exemption rights, but are not subject to a new type of liability. Id. at 20.

FOR MORE INFORMATION

For more information, please contact:

Barry M. Kazan
212.908.3921
Barry.Kazan@ThompsonHine.com

Emily J. Mathieu
212.908.3963
Emily.Mathieu@ThompsonHine.com

William W. Jacobs
216.566.5533
Bill.Jacobs@ThompsonHine.com

Alan R. Lepene
216.566.5520
Alan.Lepene@ThompsonHine.com

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