Articles Posted in Post Judgment Collections

Consider the following facts. For many years a company provides services to a corporation. The corporation is a small business, owned and controlled by one individual. A substantial balance is incurred by the corporation which the corporation refuses to pay. A familiar scenario is then played out. The owner opens a new corporation in a similar business and dissolves the first corporation. The service provider creditor commences an action against the first corporation. The law suit is ignored by the first corporation. Thereafter, the creditor obtains a default judgment against the first corporation, but is unsuccessful in finding any assets.

The creditor then deposes the owner and requests bank and financial records. These records reveal that after the commencement of the action against the first corporation, the owner caused the first corporation to transfer a significant amount of cash to the new corporation. The owner cannot establish a credible explanation for the transfers. Thereafter, further discovery reveals that the owner has been using funds in the new corporation to pay directly for personal expenses.

Unbeknownst to the creditor, shortly prior to the deposition of the owner, the owner was granted a discharge in bankruptcy. The creditor was not aware of the owner’s bankruptcy filing and the bankruptcy petition reveals that the owner did not list the creditor as having a claim against either the first corporation or against the owner. Continue reading

It would be a mistake for a creditor to believe only that which can be seen, touched or smelled is property which is subject to a Sheriff’s levy. There are a host of other kinds of property which the creditor’s attorney should not ignore, and these are in the category of what is generally referred to as intangibles. Section 9-102 (42) of the Uniform Commercial Code defines “General intangibles” as “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.” In the strict context of post-judgment collections in New York, Section 5201 (b) of New York’s Civil Practice Law and Rules (“CPLR”) provides that “[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.”

What if all that a debtor has left is literally its good name and that name has been legally registered with the United States Patent and Trademark Office? Though there are not many cases dealing with the subject, two cases in New York say yes, provided the trademark will be used by someone in the same business as the debtor. The first case involved a debtor who published a magazine called Chocolate Singles and had obtained trademark registration for the name. Victoria Graphics, Inc. v. Priorities Publications, Inc., 167 Misc.2d 607 (Civ. Ct. Queens Co. 1996) (“Victoria Graphics”). Unable to find any other assets of the debtor, who was for all intents and purposes defunct, the creditor commenced an Article 52 turnover proceeding to force the debtor to assign the trademark to the creditor. Analyzing the issue by analogy to the power of a bankruptcy trustee to assign a trademark, the Court in Victoria Graphics stated that often trademarks are assigned where the assignment is made in conjunction with all of the good will associated with the trademark and other tangible assets are being assigned as well. However, the Victoria Graphics Court when on to state that some assignments of tradenames are made separate from the underlying business, particularly where “the assignee is producing a product … substantially similar to that of the assignor [such that] consumers would not be deceived or harmed” or when there is “continuity of management, and “[t]hus, a trademark may be validly transferred without the simultaneous transfer of any tangible assets, as long as the recipient continues to produce goods of the same quality and nature previously associated with the mark.” Based upon this holding, the Court in Victoria Graphics set the matter down for a hearing to detemine, among other things, whether the creditor or another person, as assignee, would be utilizing the trademark in a substantially similar business.

The second case, Application of GE Commercial Finance Business Property v. Hakakian, 13 Misc.3d 413 (Nassau Co. 2006) (“Hakakian”) involved a creditor, GE Commercial Finance (“GE”), who commenced a turnover proceeding to have the debtor’s trademark assigned in partial satisfaction of the subject judgment. Citing Victoria Graphics, the Court in Hakakian held that a trademark could not be assigned “in gross” apart from the business or good will associated with the trademark, but that a person in a similar business could be such an assignee. Based upon this restriction, the Court determined that GE could not force a turnover to itself as GE was not in the same business as the debtor, a retail clothing operator. Neither would the Hakakian Court allow the trademark to be subject to a Sheriff’s sale for fear that insiders would diminish the value of the trademark. Perhaps as a consolation, the Court in Hakakian did allow GE to file a judgment lien on the trademark in the United States Patent and Trademark Office, thereby encumbering the intangible property of the debtor for the protection of the creditor. Continue reading

In a recent decision out of the federal district court for the Eastern District of New York, the district court, in the context of a post-judgment proceeding, was faced with the issue of whether the 100% owner of an insolvent debtor could enter into a consulting agreement with a competitor of the debtor, whereby the debtor’s owner agreed to move the debtor’s “book of business” to the competitor in return for a payment of some $300,000.00. In a very reasoned decision, the district court held that the “book of business” was property of the debtor, and not the debtor’s owner; and therefore subject to New York’s fraudulent conveyance act (Article 10 of the Debtor and Creditor Law). Mitchell v. Lyons Professional Services, Inc., 09 Civ. 1587 (EDNY, Decided June 8, 2015).

Originally commenced as a post-judgment proceeding in the district court based upon Article 52 of New York’s Civil Practice Law and Rules (“CPLR”), the following facts were presented. The debtor, a company providing security guard services, had a certain number of customer accounts. While these customer accounts were not represented by written agreements, they did represent on-going business of the debtor. Shortly after entry of the judgment, Christopher Lyons (“Lyons”), the debtor’s owner, entered into a consultant agreement with a competitor of the debtor, whereby Lyons represented that he was terminating his employment with the debtor; that he had the right to solicit the debtor’s customers; that the debtor’s customers were developed through his efforts and that after payment of the consultant fee, the competitor would become the owner of the accounts.

Based upon these facts, the district court ruled that the customer accounts were the property of the debtor for the purposes of CPLR Section 5201 and that the customer accounts had been fraudulently transferred. However, on appeal, the Second Circuit remanded the case to the district court with instructions for the district court to consider whether the customer accounts or what the Court referred to as the “book of business” was property for the purposes of CPLR Section 5201, and specifically, whether the “book of business” was assignable or transferable. Continue reading

We always tell our clients that getting the judgment is easy; it’s collecting on it that is the hard part. For the creditor that has pursued a collection matter in federal court where there has to be complete diversity of citizenship and a monetary claim of at least $75,000.00, exclusive of interest, the hard part of collecting has been made a little easier by the decisional law in the Second Circuit and its lower federal district courts (where New York is located) which state that a federal district court has the power to enforce its own judgments, using the post-judgment enforcement tools of state practice. The concept is known as ancillary jurisdiction, which together with Rule 69 of the Federal Rules of Civil Procedure allows creditors to bring post-judgment enforcement proceedings in federal district court.

In Peacock v. Thomas, 516 U.S. 349 (1996), the Supreme Court described the breadth of the federal court’s inherent power to enforce its own judgments through the exercise of ancillary jurisdiction over third parties, provided, however, that the district courts could not impose liability for a money judgment on a person not otherwise liable for the judgment in the context of a post-judgment enforcement proceeding.  The Supreme Court reasoned that without such authority, “the judicial power would be incomplete and entirely inadequate for the purposes for which it was conferred by the Constitution”.

Applying the teaching of Peacock, the Second Circuit held in Epperson v. Entertainment Express, Inc., 242 F.3d 100, 104 (2d Cir. 2001) that such ancillary jurisdiction extends to “the assets of the judgment debtor [,] even though the assets are found in the hands of a third party”.  Therefore, a creditor seeking to enforce a judgment obtained in federal court can bring a turnover proceeding under Article 52 of the CPLR in federal court and seek not only garnishment, but also any of the other remedies available under Article 52, including a claim for fraudulent conveyance. In particular, post-judgment enforcement proceedings based upon fraudulent conveyance claims are to be distinguished from claims involving alter ego liability and veil-piercing that raise an independent theory of recovery in which liability is shifted to a third party. A fraudulent conveyance claim on the contrary, does not seek to shift liability to a third party; it is simply a means to disgorge the judgment debtor’s assets that are wrongfully in the hands of another. Continue reading

Creditors are often frustrated when they discover that the debtor has a substantial amount of money on deposit in a retirement or other similar trust account and these accounts cannot be reached. Retirement accounts are clearly exempt from judgment execution under Section 5205 (c) of New York’s Civil Practice Law and Rules (“CPLR”) which states that except for other provisions set forth in the subsection, “all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of a money judgment.” The subsection goes on to state that “all [accounts]…qualified as an individual retirement account…or other plan..qualified under section 401 of the United States Internal Revenue Code…shall be considered a trust…

One of the exceptions provided by the subsection concerns additions to the trust and provides that “Additions to an asset described in paragraph two of the subdivision [i.e. qualified trusts] shall not be exempt from application to the satisfaction of a money judgment if (i) made after the date that is ninety days before the interposition of the claim on which such judgment was entered, or (ii) deemed to be fraudulent conveyances under article ten of the debtor and creditor law.”

So, for example, an action on a monetary debt is commenced on May 1, 2015 and subsequently a money judgment is entered against the debtor. The creditor undertakes post-judgment discovery and finds that the debtor has a traditional IRA account with a value of $120,000.00. Further examination reveals that on April 1, 2015, the debtor deposited $20,000.00 in the IRA account which came from a salary check earned by the debtor.

The creditor commences a turnover proceeding against the institution where the IRA is maintained, claiming that the $20,000.00 deposited by the debtor one month prior to the commencement of the action is not exempt by reason of the exception in CPLR Section 5205 (c) which provides that any such addition to the trust made ninety days before the interposition of a claim on such judgment is not exempt property. The debtor, however, argues that since the money deposited is income of the debtor it is subject to the 90 percent income exemption under CPLR 5205 (d) and that the exemption applies and take precedence over the addition exemptions under CPLR 5205 (c). Continue reading

Not often used as a means to collect on a judgment, Section 5228 of New York’s Civil Practice Law and Rules (“CPLR”) provides that a judgment creditor can make an application to the court for the appointment of a receiver “who may be authorized to administer, collect, improve, lease, repair or sell any real or personal property in which the judgment debtor has an interest or to do any other acts designed to satisfy the judgment.” The application requires that notice be given to the judgment debtor and as far as practicable; notice must also be given to other judgment creditors of the judgment debtor. The order appointing the receiver must specify the property to be received and the duties of the receiver. The order will also provide for the duration of the receivership, which may be extended upon further application to the court. The judgment creditor applying for the appointment of a receiver may be appointed receiver but will not be entitled to any compensation for exercising the duties of the receiver.

The appointment of a receiver is desirable in situations where the debtor’s property is small or there are some special considerations where the normal execution and sale will not produce significant value. One situation that makes sense is where the debtor has an interest in jointly held property. Sometimes parsing out ownership can get difficult, but with the appointment of a receiver this process can be made easier. Another situation is where the debtor’s property may not actually have an attractive market value, but the property is income producing. A receiver can manage the property with instructions to allocate a specific percentage to be applied against the judgment. While the is kind of receivership is not always favored by the courts because it involves extended management by the receiver and the court, in a special situation where the amount of the judgment warrants the management and expense of the receiver, the court will allow such an appointment. An alternative approach would be to allow the judgment debtor to continue operating the asset with the proviso that an agreed percentage periodically be applied to the judgment.

Yet another type of asset owned by the debtor which is suitable for management by a receiver is a cause of action that the debtor may have against another person (garnishee). This kind of asset is expressly made subject to enforcement by a judgment creditor under New York law. See CPLR 5201 (a). Not surprisingly, a judgment debtor may well have no incentive to pursue such a claim if the proceeds of the lawsuit are going to be handed over to the judgment creditor. The remedy is to have a receiver appointed who will sue in the name of the judgment debtor and then turn over to the judgment debtor whatever the law suit generates. Continue reading

New York’s post-judgment enforcement laws as set forth in Article 52 of the Civil Practice Law and Rules (“CPLR”) and a seminal decision of the New York Court of Appeals, New York’s highest court, in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009) (“Koehler”) allow a New York judgment creditor to, in effect, levy upon the bank deposits of a judgment debtor located in a bank account of a different state provided the bank in question is subject to personal jurisdiction in New York. Given the current state of electronic and internet money transfers, New York’s approach to this extra-territorial reach of enforcement remedies makes economic and practical sense in the modern world of banking.

The place to start is CPLR Section 5225 (b), New York’s enforcement statute which allows a judgment creditor to commence a proceeding to force any one holding property of the judgment debtor, and subject to personal jurisdiction in New York, to “turn-over” the property to the judgment creditor or a designated Sheriff. Section 5225 (b) specifically provides that: “where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor’s rights to the property are superior to those of the transferee, the court shall require such person to pay the money, or so much of it as is sufficient to satisfy the judgment”.

In Koehler, New York’s highest court interpreted Article 52 and stated clearly that a New York court has the authority to issue a turnover order pertaining to extraterritorial property, if it has personal jurisdiction over the person in possession of the property. While the facts in Koehler involved stock of a judgment debtor being held by the foreign parent of the bank served in New York, subsequent cases, relying on Koehler, have had no problem applying the extra-territorial reach of Article 52 to deposits of debtors technically held by out of state branches of the bank served in New York. See for example, McCarthy v. Wachovia Bank, N.A., 759 F.Supp.2d 265, 275 (E.D.N.Y. 2011), where the court explained that “because Wachovia has branches within New York—and therefore conducts business in New York—it is subject to the jurisdiction of the New York courts. Accordingly, under the Court of Appeals’ holding in Koehler, it was permissible for defendants to issue and honor the restraining notice served pursuant to New York CPLR Section 5222.4.” Continue reading

You did the easy part, you obtained a judgment against an individual. Now comes the hard part – collecting. You then do all of the usual things after you get a judgment – issue restraining notices, information subpoenas and maybe even a live examination of the judgment debtor. Unfortunately, you find the debtor has little in his own name, but he is the owner of a company. Your judgment is not against the company, however, and unless you get the stock or other equity ownership interest of the debtor in the company (a difficult task) are you going to be able to get to the assets of the company? In New York you have a shot provided your case against the debtor’s company meets the requirements of what is known as reverse veil piercing.

Traditional veil piercing in New York involves a situation where you have obtained a judgment against a corporation and you are trying to get behind the company on the belief that the debtor is using the assets of the company interchangeably with his own assets and otherwise dominates and controls the company. Standard veil piercing is an equitable concept that allows a creditor to disregard a corporation and hold the debtor as a controlling shareholder personally liable for the corporate debt. Sweeney, Cohn, Stahl & Vaccaro v. Kane, 6 A.D.3d 72, 75 (2d Dept. 2004). Generally, in order to state a claim for traditional veil piercing, two elements are required: first, that the owner exercised complete control concerning the transaction attacked; and second, that such control was used to commit a fraud or wrong against the creditor which resulted in injury to the creditor. Morris v. New York State Department of Taxation and Finance, 82 N.Y.2d 135, 141, 623 N.E.2d 1157, 603 N.Y.S.2d 807 (1993). Similarly, a claim for piercing the corporate veil exists where a corporation is shown to be a mere shell dominated and controlled by a debtor for his or her own purpose.

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