When Is an Attachment Levy Effective?
Trying times call for creative, aggressive lawyering by real estate litigators. Racing to find and attach and garnish a judgment debtor’s assets before they literally disappear is an old sport played, most recently, at a higher level due to the stressful economic real estate times.
This article reflects our war wounds and successes with the most important topical issues using the most relevant and authoritative case law and statutes.
Attachment is one of the provisional remedies provided by CPLR §6001 that is available to temporarily protect a creditor against the loss, dissipation, or diversion of the property of a debtor that might otherwise be used to satisfy a money judgment in the creditor’s favor.
The Attachment Process
As provided in CPLR §6201, An order of attachment may be granted in any action, except a matrimonial action, where the plaintiff has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more defendants. (Emphasis added).
Attachment is appropriate, among other things, when the defendant is: (a) a non-domiciliary residing out of the state , or is a foreign corporation not qualified to do business in the state [CPLR §6201(a)], (b) a defendant residing or domiciled in the state who cannot be personally served despite diligent efforts to do so [CPLR §6201 (b)], or (3) a defendant who with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts” [CPLR §6201(3)].
Further, pursuant to CPLR §6202, in addition to attachments that may be made directly against property of the judgment debtor, money judgments are also enforceable, under CPLR §5201, against third-party garnishees, for debts of the debtor to said third parties or against a debtor’s interest in any property that can be assigned or transferred.
Pursuant to CPLR §5201(a):
A money judgment may be enforced against any debt, which is past due or which is yet to become due, certainly or upon demand of the judgment debtor, whether it was incurred within or without the state, to or from a resident or non-resident, unless it is exempt from application to the satisfaction of the judgment. A debt may consist of a cause of action which could be assigned or transferred accruing within or without the state. (Emphasis added).
Pursuant to CPLR §5201(b):
A money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested, unless it is exempt from application to the satisfaction of the judgment. (Emphasis added).
Following entry of a money judgment against a debtor or obligor, the creditor usually acts to enforce the judgment by serving restraining notices, under CPLR §5222(a) upon the judgment debtor and/or upon any other person, if, under CPLR §5222(b),
at the time of service, [the other person] owes a debt to the judgment debtor or obligor or [the other person] is in the possession or custody of property in which he or she knows or has reason to believe the judgment debtor or obligor has an interest * * *. (Emphasis added).
As noted in the Practice Commentaries to CPLR §5222 (at C5222:1), the restraining notice is “in effect an injunction that restrains the person served with it from making any transfer of the judgment debtor’s property except to the sheriff,” and, when it is issued by the judgment creditor’s attorney, acting as an officer of the court, “the restraint results without a court order or any other preliminary judicial authorization [and] is a rare example of an injunction, complete with contempt punishment as its sanction, not embodied in a court order or judgment.”
Determining the Proper Use of Attachment
As noted above, CPLR §5201(a) and CPLR §5201(b), respectively, require that a money judgment be enforceable only against a debt that is “past due or which is yet to become due, certainly or upon demand,” and only against “any property which could be assigned or transferred.”
It is clear, therefore, that a judgment cannot be enforced against “a general category of contingent debts and property rights based on contractual contingencies.” Verizon New England Inc. v. Transcom Enhanced Services, Inc., 98 AD3d 203, 207, 948 NYS2d 245 (1st Dept. 2012).
The following cases provide some examples of how courts decide the difference between (a) debts past due or which are yet to become due, certainly or upon demand, (b) property which could be assigned or transferred, and (c) contingent debts and property rights based on contractual contingencies.
(a) Debts Past Due or Yet To Become Due, Certainly or Upon Demand. The leading case distinguishing the application of CPLR §5201(a) and CPLR §5201(b) to “debts past due” or to “property which could be assigned or transferred” is ABKCO v. Apple Films, Ltd., 39 NY2d 670 (1976).
In ABKCO, the plaintiff sought repayment of a loan made to Apple Films Ltd. (“Apple”), the English debtor-corporation over which it was unable to obtain personal jurisdiction.
To enforce its claim for repayment of the loan, ABKCO sued Apple Films, Inc., a New York corporation (“Apple NY”), by way of attachment against Apple’s rights in a license agreement Apple had granted to Apple NY in which the latter agreed to pay Apple 80% of the net profits received by Apple NY from promotion of the Beetles’ film “Let It Be.”
Apple NY, in turn, had transferred its rights and control to distribute the film to United Artists which agreed to pay Apple NY 50% of the adjusted gross receipts from distribution of the film.
The Court of Appeals explained that an attachment could not be effective unless “there is within the jurisdiction of our courts a debt or property of the debtor, here [Apple], within the meanings of subdivisions (a) or (b) of CPLR §5201.”
Apple and Apple NY argued that Apple’s right could only be classified as a debt within the meaning of CPLR 5201(a), and was therefore not attachable because the debt was then neither “past due” nor yet “to become due” because: (a) Apple NY “had not yet received any substantial sums from United Artists,” and (b) “it could not be known, or even reliably predicted, when if ever gross receipts from the film would reach the point of black balances in favor or [Apple against Apple NY].”
Contrary to such arguments, the court held “we conclude that the interest of [Apple] in the Licensing Agreement was property; it was assignable and hence attachable,” because Apple’s interests under the licensing agreement:
constituted property, composed of the bundle or all its rights under the agreement, of which, of course, the obligation of [Apple NY] to pay under the 80% clause was the principal feature of economic significance. That property was attachable because concededly it was assignable by [Apple NY].
The court further explained that ABKCO’s claim was not against “tangible personal property,” such as real estate, which “can only be attached where it is,” but was instead against the rights contained in the licensing agreement, which was “intangible property,” the situs of which, for purposes of attachment, is “the location of the party of whom performance is required by the terms of the contract.” Therefore, seeking to attach the licensing agreement by suing Apple NY in New York was entirely appropriate.
Finally, regarding whether or not Apple NY had already received “substantial sums” from United Artists, the court also noted that there was “no threshold requirement that the attaching creditor show the value of the attached property or indeed that it has any value,” or that “the garnishee is entitled to a vacatur of the attachment if it can be established that the property in question is valueless.”
(b) Property Which Could Be Assigned or Transferred. The Court of Appeals again addressed the distinction between a judgment debtor’s “debt” or “property” in Verizon New England, Inc. v. Transcom Enhanced Services, Inc., 21 NY3d 66 (2013).
In Transcom, plaintiff Verizon, judgment creditor of a money judgment awarded against judgment debtor Global Naps, Inc. (“GNAPs”), served a restraining notice, on April 2, 2009, upon garnishee Transcom.
In response to Verizon’s information subpoena, Transcom indicated it had a telephone switch service agreement with GNAPs, under which Transcom agreed to pay GNAPs $281,000 per month, on a week-to-week basis that allowed Transcom to decide weekly whether to engage GNAPs services.
Transcom also indicated that all payments “are made in advance or contemporaneously with service,” and testimony had established that GNAPs monthly invoices were sent for proposed services to be rendered the following month. On the day prior to receiving Verizon’s restraining notice, Transcom had received a $246,000 bill from GNAPs which was paid by four Transcom checks, each $61,500 in amount, issued on four dates in April 2009. Verizon sought a turnover of property and debts of GNAPs held by Transcom, equal to the amount paid by Transcom “in violation of the restraining notice” and a finding of civil contempt.
Transcom defended on the ground that it did not violate the restraining notice because GNAPs invoices were predated services and Transcom was under no obligation to accept any GNAPs services. Therefore, Transcom claimed it did not owe any debt to GNAPs and did not hold any property in which GNAPs had any interest at the time when the payments were made.
The court agreed that Transcom’s agreement was “wholly distinguishable from the agreement in ABKCO, and, thus, [could not] be deemed an attachable or assignable property interest.” It held that the Transcom-GNAPs agreement “was terminable at will, at any time, without prior notice, meaning that Transcom had no obligation after receiving one week’s worth of services.”
Moreover, the court noted (a) “not only could Transcom unilaterally eliminate any possibility of future revenue from the contract, but so could GNAPs,” (b) “the parties had no continuing contractual obligation to each other,” and (c) “there was no debt, and no obligation ‘certain to become due.’”
Therefore, “Transcom neither owed any debt to, nor possessed any property of GNAPs that could be subject to a restraining notice.
Similarly, because Transcom’s payments to GNAPs constitute neither a debt nor a present or future property interest, CPLR 5201(a) and (b) [were] not applicable.”
(c) Debts And Property Rights Based on Contractual Contingencies. The issue of contingency debt and property rights was addressed by In re Thelen, 24 NY3d 16 (2014). The question in Thelen was: who was entitled to the attorney fees generated by the “unfinished business” of a Chapter 7 dissolved law firm or of a law firm in Chapter 11 reorganization—the Chapter 7 trustee of the law firm’s bankruptcy estate, for the benefit of the estate’s creditors, or the Chapter 11 administrator of a law firm filing for protection from its creditors—or the law firm to which attorneys of either the dissolved firm or of the reorganizing firm had moved to finish those firms’ “unfinished business”?
Although Thelen did not require the Court of Appeals to decide a question of attachment, its opinion on what constitutes “property” under New York’s Partnership Law is illustrative of the kind of contractual contingency situations that can arise where the attachment remedy would be precluded.
The court noted that New York’s Partnership Law does not define property and “has nothing to say about whether a law firm’s ‘client matters’ are partnership property.”
It further noted that “clients have always enjoyed the ‘unqualified right to terminate the attorney-client relationship at any time’ without any obligation other than to compensate the attorney for ‘the fair and reasonable value of the completed services,” and, citing Verizon New England, supra, explained that “no law firm has a property interest in future legal fees because they are too ‘too contingent in nature and speculative to create a present or future property interest,’ given the client’s unfettered right to hire and fire counsel.”
Accordingly, the court held that “pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law” and that “[a] law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”
Other Issues Involving the Attachment Remedy
(d) Letters of Credit. A “letter of credit ‘is an executory contract that conditions performance of the issuer’s obligation (payment) upon performance by the beneficiary (delivery of specified documents).’” Supreme Merchandise Co., Inc. v. Chemical Bank, 70 NY2d 344, 350 (1987). (Citation omitted).
In Supreme Merchandise, the Court of Appeals reconfirmed that an order of attachment, issued under CPLR §6214, was ineffective against the proceeds of a letter of credit (“LOC”), where the draft on the LOC is “accepted” by the issuing bank prior to service of the attachment order. See First Commercial Bank v. Gotham Originals, 64 NY2d 287 (1985) (held: an issuing bank’s obligation to pay in a commercial letter of credit transaction “is fixed upon presentation of drafts and documents specified in the [LOC]. It is not required to resolve disputes or questions of fact concerning the underlying transaction”). Following “acceptance” of the draft, there is “nothing to attach at the time of service of the attachment order.”
However, the court also explained that where the attachment order is served prior to negotiation of the draft for value and “acceptance” of the draft against the LOC, “the LOC was therefore executory at the time the attachment order was served upon Chemical.”
As an “executory” LOC, if the judgment debtor’s interest was a “debt” (under CPLR §5201(a)), it “was plainly contingent and would not be subject to attachment,” but neither was the judgment debtor’s interest “property” (under CPLR §5201(b)). The Court noted that “property” is not defined in CPLR §5201(b), and the fact that the LOC was assignable did not make the judgment debtor’s interest less contingent than that of the judgment debtor in ABKCO, supra, but the contingency was “in a relevant sense even greater…than in ABKCO.”
The judgment debtor’s interest in the LOC is “dependent upon its own future performance,” and because “a beneficiary of a letter of credit retains the option to defeat the interest and render it worthless,” the court was “mindful that allowing attachment in this could serve as a disincentive to a beneficiary’s performance of the underlying contract as well as the terms of the letter of credit.”
In addition, “for policy reasons,” the Court said that the ABKCO rationale did not extend this far, and that the judgment debtor’s interest “for present purposes must be considered a contingent, non-attachable “debt” under CPLR §5201(a) rather than attachable “property” under CPLR §5201(b).”
Resting its decision “on the nature of [the Judgment debtor’s interest coupled with the policy considerations involved in negotiable letters of credit concerned with international sales transactions,” the court concluded “for the purposes of attachment, this interest is not “property” within the meaning of §5201(b).” Under the court’s analysis, finding the judgment debtor’s interest neither a “debt” nor “property,” it is not clear whether letters of credit are ever attachable.
(e) Fraud on Creditors. In Arzu v. Arzu, 1909 AD2d 87, 597 NYS2d 322 (1st Dept. 1993), the plaintiff was permanently paralyzed in an operation performed when he was 14 years old. Through his legal representative, he sued for malpractice and entered into a structured settlement. When he was 18 years old, his guardian turned over and deposited the remaining balance of the settlement ($161,718.33) into an account specified in the settlement. He then gave the funds to his father and stepmother. They represented that they would deposit the total amount and all future payments into an account for his sole use and benefit.
Ultimately, in 1984, a total of $618,891.33 was deposited in a joint account in the names of plaintiff and his father. In 1989, plaintiff learned that his father had withdrawn all but $45,000 from the account. Plaintiff sued his father and stepmother, alleging misrepresentation and fraud, seeking $573,891.33 in damages. At the same time, he obtained an ex parte order of attachment against the father’s personal property and three parcels of real property in the Bronx.
The defendants contended that they had spent $461,507.30 of the funds on plaintiff’s behalf and with his consent, allegedly for food, clothing, local transportation, credit cards, and other expenses. However, the Court noted “defendants’ claim that the money was used for plaintiff is entirely unpersuasive.”
Except for certain American Express checks, totaling approximately $10,000, “there [was] no documentation to substantiate any of these claimed expenditures or any credible explanation for the absence of such documentation,” even though “the father was able to set forth certain expenses in precise amounts.”
There was also evidence that the father had opened a cable television business in Belize, his native country, and admitted to using approximately $50,000 to $60,000 for that purpose.
On these facts, The First Department determined (a) that “as soon as the father withdrew funds from the account he held with plaintiff for an unauthorized purpose, the latter became his creditor within the meaning of CPLR §6201(3),” (b) it was “reasonable to infer that the defendants, in breach of their fiduciary duty, “disposed of or secreted at least some of plaintiff’s property,” and (c) defendants’ “failure to provide plaintiff with a contemporaneous record of the disposition of plaintiff’s funds entitle[d] [the court] to conclude that [defendants] acted with an intent to defraud plaintiff, their creditor.” (Emphasis added).
The court further concluded that “the inference that defendants are ‘about to do’ one of the acts specified in CPLR §6201(3) is warranted and that an attachment can therefore be justified on that ground as well.”
In Eaton Factors Co., Inc. v. Double Eagle Corp., 17 AD2d 135, 232 NYS2d 901 (1st Dept. 1962), it was alleged that individual sole stockholders and officers of the corporate defendant “caused or participated in the secreting, removal or disposal of corporate assets and its trucking business, including certain trucks and trailers or other assets owned by it and mortgaged to plaintiff,” and “that it was accomplished with the intent to defraud plaintiff.”
The First Department determined that an order denying a motion to vacate an attachment should be reversed. The court explained that “the property removed or secreted must be property of the defendant, and plaintiff’s allegations here of a disposal of corporate assets [and not personal assets of the individual named defendants] will not sustain a warrant of attachment.”
In addition, the court further explained that “[t]he mere removal or assignment or other disposition of property is not ground for attachment. There must coexist an intent of the debtor to defraud his creditors,” and “[f]rom disposition of the property no presumption of intent to defraud arises.” Moreover, “that the affidavits in support of attachment contain allegations raising a suspicion of an intent to defraud is not enough; it must appear ‘that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Finally, “fraud is never presumed by a mere showing of the liquidation or disposal by a debtor of its business assets.”
(f) The Situs of Bank Accounts. In National Union Fire Insurance Company of Pittsburgh v. Advanced Employment Concepts, Inc., 269 AD2d 101, 703 NYS2d 3 (1st Dept. 2000), the issue concerned the proper bank branch upon which an attachment order may be served. A restraining order had been issued in New York against two bank accounts maintained by respondent (“AEC”) in the State of Florida. AEC had moved to vacate the order of attachment on the ground that the New York court was without authority to attach bank accounts outside of New York.
The First Department noted, to be subject to attachment, the property must be within the court’s jurisdiction (citing ABKCO, supra). “The mere fact that a bank may have a branch within New York is insufficient to render accounts outside of New York subject to attachment merely by serving a New York branch.”
The court noted “the long-standing general rule in New York that each bank is a separate entity and that in order to reach a particular bank account, the branch of the bank where the account is maintained must be served.” Although, “due to the advent of high-speed computers and sophisticated communications equipment, service of a restraining order upon a bank’s main branch is adequate,” but “only where the restraining notice is served on the bank’s main office; the main office and the branches where the accounts in question are maintained are within the same jurisdiction; and the back branches are connected to the main office by high-speed computers and are under its centralized control.” (Italics in original).
Attachment is a useful tool to enforce a monetary judgment, but, as shown in this article, attorneys need to be very careful in alleging the “debt” and/or “property” interest of the judgment debtor in drafting restraining orders or motions seeking orders of attachment.
It is important to consider whether the circumstances in any given situation will support attachment under both CPLR 5201(a) and CPLR 5201(b), because as shown above, courts may disagree with the choice selected by the attorney and reject either, or even both, of the statutory options, leaving the client without the means of securing the benefit of its monetary judgment.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., and John M. Desiderio is a partner and Chair of the firm’s Real Estate Litigation Group. Mikaela Mahaney, a New York Law School summer extern, assisted in the preparation of this article.