In a recent opinion (Plymouth Venture Partners, II, L.P., et. al. v. GTR Source, LLC, et. al.), the United States Court of Appeals for the Second Circuit certified to the New York Court of Appeals two questions for which it could not find definitive answers in New York precedents:
(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.
(2) If so, whether the judgment debtor can, under such circumstances, bring a tort claim against either the judgment creditor or the enforcement officer without first seeking relief under CPLR 5240.
The facts of the two actions were relatively straightforward. The plaintiffs are the successors-in-interest of FutureNet Group, Inc. (FutureNet), a Michigan corporation that had entered into separate agreements with the defendants GTR Source, LLC (GTR) and Credit Merchant Services, LLC (CMS), two merchant cash advance businesses that offered companies immediate cash in exchange for a portion of the companies’ future accounts receivable. Each agreement was secured by an affidavit for judgment by confession made by FutureNet pursuant to the then-existing version of CPLR 3218.
FutureNet subsequently defaulted on its payment obligations to GTR and CMS and they each entered a money judgment against FutureNet in the New York Supreme Court pursuant to its confession of judgment. FutureNet banked with Comerica Bank (Comerica), a Texas-based entity with no branches in New York but which had purportedly designated an agent in New York for service of process (agent). Both GTR and CMS began enforcement proceedings under CPLR Article 52 by serving restraining notices on Comerica. GTR then issued an “execution with notice to garnishee” to the New York City Marshal (marshal), who purported to levy the execution against FutureNet’s accounts at Comerica by mailing the execution to the agent in Rockland County. CMS also issued an “execution with notice to garnishee,” but delivered it to the Rockland County Sheriff (sheriff), who purported to levy against the same accounts by serving the execution on the agent in Rockland County.
After a failed motion by FutureNet in the New York Supreme Court to vacate GTR’s judgment, and Comerica’s issuance of checks to the marshal for remittance to GTR and to the sheriff for remittance to CMS, FutureNet’s secured creditors commenced actions in Michigan and obtained appointment of a receiver of FutureNet’s assets (receiver).
The receiver initially brought an action in the New York Supreme Court seeking to vacate GTR’s judgment but it was dismissed on jurisdictional grounds. The receiver then commenced an action in the Southern District of New York seeking to hold GTR and the marshal liable for damages in tort (wrongful execution, conversion, and trespass to chattels) on the basis that the marshal’s levy of GTR’s execution in Rockland County was improper because his jurisdiction was limited to New York City by the applicable court act. The district court granted summary judgment to GTR and the marshal, ruling that regardless of whether GTR’s execution and levy procedures were defective, FutureNet had not been damaged because the money thereby obtained had been used to satisfy a valid judgment against it.
The receiver similarly sued CMS in the Southern District of New York on the basis that the sheriff’s levy of CMS’s execution on the agent was invalid because the agent was not a proper agent for service within the meaning of CPLR 318 and 5232(a). After the first district court’s ruling in favor of GTR and the marshal, CMS sought dismissal of the receiver’s action against it on the basis of issue preclusion. The second district court agreed, finding that the receiver’s claims against CMS hinged on the same question of law as in its action against GTR (i.e., whether a judgment debtor is damaged by an improper levy if the seized property is used to satisfy a valid money judgment against it). Since the first district court had answered in the negative, the second district court refused to permit the receiver to relitigate that issue. The court also stated that if it were to permit such relitigation, it would find as the first district court had—that FutureNet had suffered no damage because the allegedly improper enforcement proceedings resulted in satisfaction of CMS’s judgment against it.
FutureNet appealed both district court decisions to the Second Circuit, which combined the appeals since each presented the same core question: whether FutureNet had been damaged by the allegedly improper execution and levy procedures since the property obtained thereby was used to satisfy valid money judgments against it.
After a lengthy discussion, the Second Circuit determined that because (1) the New York Court of Appeals had not spoken clearly on the issue, and (2) it was unable to predict, based on decisions of other New York courts that had considered the issue (some of which had reached diametrically opposite conclusions), how the Court of Appeals would answer, it would certify the two questions at the beginning of this alert to the New York Court of Appeals and retain jurisdiction over the appeals while awaiting a response. Judgment creditors and enforcement officers will also anxiously await that response.
As a footnote, the New York legislature's skepticism about financing arrangements of the type FutureNet had entered into with GTR and CMS contributed to its amendment of CPLR 3218, effective August 30, 2019. That amendment limited the availability of confessions of judgment to in-state debtors based upon their residence at the time the affidavit was executed or filed (nonnatural persons being deemed to reside in the county of their principal place of business). The amendment was designed to prevent creditors from abusing confessions of judgment and using New York courts as a venue to profit from debtors having no connection to the state.
Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts on an ongoing basis to keep clients and friends up to date on important developments in the insolvency space.
If you have any questions regarding the content of this alert, please contact Janice Grubin or Jeff Dove, co-chairs of the Restructuring, Bankruptcy & Creditors’ Rights Practice Area, at jgrubin@barclaydamon.com and jdove@barclaydamon.com, respectively; Robert Wonneberger, partner, at rwonneberger@barclaydamon.com; or Frank Heller, partner, at fheller@barclaydamon.com.