WHEN SERVING A DEBTOR BY SERVING THE SECRETARY OF STATE IS NOT ENOUGH – WHAT’S A CREDITOR TO DO?

When starting an action against a debtor, the creditor’s attorney wants to make sure good service is made upon the debtor if it is a corporation, limited liability company or limited partnership. Good practice skills teaches that the easiest and best way to serve an entity that must register with New York’s Secretary of State is to serve the Secretary of State because under New York’s Business Corporation Law §§ 306 and 402, when such an entity registers with the Secretary of State, the organization document designates the Secretary of State as the authorized agent to receive service of process. In connection with that registration, the organization document requires that an address be set forth so that the Secretary of State can then mail by certified mail directly to the entity whatever document has been served on it. BCL §402. Indeed, New York courts have specifically held that an entity who registers with the Secretary of State has a duty to keep that mailing address current. FGB Realty Advisors, Inc. v. Norm-Rick Realty Corp., 227 A.D.2d 439 (2nd Dep’t. 1996) (“FGB Realty”). And see FedEx TechConnect, Inc. v. OTI, Inc., WL 5405699 (S.D.N.Y. 2013).

The alternative to serving the Secretary of State is to serve the entity directly, which depending on the entity is going to involve serving some person connected to the entity clothed with sufficient authority so as to meet minimum due process requirements. So, for example, if the entity to be served is a corporation, then New York’s Civil Practice Law and Rules (“CPLR”) §311, states the individual to be served must be an officer, director, managing or general agent, or cashier or assistant cashier. Unless there is sufficient advance information on exactly who is an officer, manager, cashier, etc., the seasoned practitioner knows that serving such an individual is a probable invitation to a challenge from the debtor that service was not made properly because, of course, Joe Smith is not a manager of the debtor, and moreover, there is no such person named Joe Smith who works for the debtor. The challenge works in the debtor’s favor because it slows down the litigation process, usually requiring a hearing on the service.

The savvy creditor’s attorney therefore foregoes the chance that she will not find an appropriate employee of the entity to serve, and, instead, pursuant BCL §306, effects service of the summons and complaint on the Secretary of State. Service on the Secretary of State is good service, so the creditor’s attorney diaries the date an answer is due and prepares for a possible default application and pursuant to CPLR 3215, serves an additional copy of the Summons on the debtor. Lo and behold, no answer is filed or received in the required time period, and the creditor’s attorney enters a default judgment and serves notice of entry of the judgment on the debtor at the address known to the creditor, which, for argument’s sake, is the same address listed by the debtor in its filing with the Secretary of State.

The creditor’s attorney goes about trying to enforce the judgment and a year goes by from notice of entry of the judgment. Sometime in the second year, the creditor’s attorney hits a bank account of the debtor and sends a Sheriff to execute. The creditor’s attorney feels pretty good. The pleadings were served upon the Secretary of State, so it is not likely the debtor can challenge service.

Much to the chagrin of the creditor’s attorney, the debtor moves to open the default judgment under CPLR §317, claiming it never got actual notice of the action because unbeknownst to the creditor’s attorney, the debtor moved. CPLR §317 states:

A person served with a summons other than by personal delivery to him or to his agent for service designated under rule 318, within or without the state, who does not appear may be allowed to defend the action within one year after he obtains knowledge of entry of the judgment, but in no event more than five years after such entry, upon a finding of the court that he did not personally receive notice of the summons in time to defend and has a meritorious defense.

The creditor’s attorney argues first, that none of the mailings it sent to the debtor’s address (known to the creditor) were ever returned as “undeliverable”, and therefore, the debtor must have had notice of the action; second, more than one year has transpired since the entry of the judgment, and therefore, the motion is time barred; and third, in any event, under FGB Realty, the debtor had a duty to keep its address current with the Secretary of State. Who wins?

If the debtor’s attorney has done the research, and can argue persuasively, under the decision of New York’s highest Court in Eugene Di Lorenzo, Inc. v. A.C. Dutton Lumber Co., Inc., 67 N.Y.2d 138 (1986) (“DiLorenzo”), the debtor may win. DiLorenzo established a number of important elements concerning service under BCL §306. First, service upon the Secretary of State is not personal service for the purpose of CPLR §317. DiLorenzo 67 N.Y.2d at 142. Second, DiLorenzo, opened the door for the debtor to argue that it changed its address, and therefore never got notice of the action. Id. And third, DiLorenzo held that even a debtor who failed to update its address with the Secretary of State could still argue that its failure to update is excusable. DiLorenzo 67 N.Y.2d at 143.

DiLorenzo is also significant for its holding that even where a debtor moves to dismiss solely under CPLR §5015 (a different vehicle to vacate a default which has a one year time limitation running from the date of notice of entry of the judgment — as opposed to the one year limitation in CPLR 317, which starts from the debtor’s actual knowledge of the judgment — and requires the debtor to demonstrate an excuse for the default and a meritorious defense), the Court can on its own consider CPLR §317. DiLorenzo 67 N.Y.2d at 142-143.

Nonetheless, under DiLorenzo, a debtor does not have carte blanche to make any argument. In DiLorenzo, New York’s highest court found that if a debtor’s failure to receive actual notice of the action was the result of the debtor’s deliberate attempt to avoid such notice, relief from the default judgment would not be granted to the debtor. DiLorenzo 67 N.Y.2d at 143.

The interplay of CPLR §§ 317 and 5015 are beyond the scope of this blog post, as is a discussion of why the Appellate Division in FGB Realty did not consider DiLorenzo or CPLR §317. In the example given above, if the debtor can show that there was no ulterior bad motive in the address change, the court has the discretion to vacate the default. Suffice it to say, the best a creditor’s attorney can do is research the debtor’s address at the time of service of the Summons and Complaint upon the Secretary of State, compare that address to the one listed in the Department of State’s corporate filing data base, serve the additional summons upon the debtor as required by CPLR §3215, and consider sending that additional summons by certified mail so as to obtain a signed certified mail receipt from the debtor. In addition, be sure to mail notice of entry of the judgment to the debtor and again consider mailing by certified mail in addition to regular mail.  All of these steps are designed to maximize the creditor’s argument that the debtor, in fact, had actual notice of the action as close as possible to the service date upon the Secretary of State.

Remember New York’s highest Court is not saying that service upon the Secretary of State can be defective for jurisdictional purposes. There is no question that service upon the Secretary of State is good service.  Rather, DiLorenzo stands for the proposition that a debtor entity who has filed with the Secretary of State may be excused from a default judgment where the debtor can show that it never received actual notice of the action, and then be allowed to defend, provided the application is made within a reasonable time and not beyond the five year period provided in CPLR 317 . It then becomes incumbent upon the creditor to limit that possibility by proving that, in fact, the debtor did receive that notice, not only once when the action was commenced, by one or two additional times after the judgment was entered.