New York City Debt Collection Defense Attorney

New York Banks Freeze Double the Judgment Amount. Why?

Short answer: New York Banks may freeze (hold) double the judgment amount to cover accrued interest and collection expenses.[1] Securing twice the amount due upon the judgment ensures payment of costs and interest in addition to the balance outstanding on the judgment. Planned Consumer Marketing, Inc. v. Coats & Clark, Inc., 141 Misc. (Sup. 1988).

Capping the restraint to twice the judgment when originally entered is intended to free up excess money held by a third party while ensuring a sum available to the judgment creditor to cover the judgment, expenses, and accruing interest. Aspen Industries, Inc. v. Marine Midland Bank, 426 N.Y.S.2d 620, 28 U.C.C. Rep. Serv. 1456 (4th Dep't 1980), 

Understanding Why NY Banks Freeze Double the Judgment Amount

  1. Interest: Judgments in New York accrue interest at a statutory rate from the date they are entered until they are paid in full. Freezing double the judgment amount ensures that these accrued interest costs are covered.
  2. Fees and Costs: Additional costs related to enforcing the judgment, including attorneys' fees, court costs, and sheriff's fees, may be incurred. Since these additional amounts can be recovered from the debtor, the banks freeze an amount sufficient to cover them.
  3. Protection Against Errors: Freezing a larger amount provides a buffer in case of any miscalculations or unforeseen circumstances.

Doubling the judgment amount seems fair when viewed in the context of our consumer credit practice. Some judgments were entered in the 1990s, and statutory interest has accrued since.

The bank account becomes restrained ("frozen") through a document called a restraining notice, which the judgment creditor's attorney can sign. The restraining notice serves as a type of injunction prohibiting the transfer of the judgment debtor's property. When served on a bank, the bank is called a "garnishee." When served on that garnishee bank, the injunctive effect of the restraining notice continues for one year or until such time as the judgment is satisfied or vacated, whichever occurs first, and extends to property both "then in and thereafter coming into the possession or custody of the garnishee." CPLR §5222. A judgment creditor serving a restraining notice ordinarily is required to take further steps in enforcing its judgment, such as an execution or levy upon the judgment debtor's property, in order to prevent the intervening rights of third parties from taking precedence.

Also, the restraining notice does not confer priority upon the judgment creditor in the form of a lien on the judgment debtor's property. The restraining notice does not establish priority between competing claims for the funds.

Aspen Industries v. Marine Midland Bank: Bank's Obligation to Retain Twice the Judgment Amount Under CPLR 5222(b)

In Aspen Industries, Inc. v. Marine Midland Bank, the New York Court of Appeals interpreted CPLR 5222(b), which states that a restraining notice is not effective if the bank retains twice the amount due on the judgment. The court held that as long as the bank maintains a balance equal to twice the amount due on the judgment, the bank does not violate the restraining notice by keeping the account active and allowing transactions to occur.

This provision in CPLR 5222(b) strikes a balance between the judgment creditor's interest in preserving funds to satisfy the judgment and the practical reality that freezing an entire account could be overly burdensome when the judgment represents only a small portion of the account balance.

The court stated that this provision "is a practical recognition by the Legislature of the commercial reality that a large asset of a judgment debtor should not be frozen, even temporarily, for purposes of satisfying a judgment which represents but a small portion of the corpus of that asset."

Therefore, the case clarifies that a bank served with a restraining notice has the right to keep the debtor's account active and is only obligated to maintain twice the amount due on the judgment in the account. As long as the bank complies with this requirement, it does not violate the restraining notice.

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Shielding Your Money: Exemptions from Frozen Bank Accounts in New York

While judgment creditors may initially freeze double the judgment amount in your bank account, there's a silver lining: certain funds are exempt from this freeze. Understanding these exemptions empowers you to protect your hard-earned money and ensure access to essential resources.

Examples of Exempt Funds:

  • Public Benefits: Social Security benefits, Supplemental Security Income (SSI), and Temporary Assistance for Needy Families (TANF) payments are all exempt from bank account freezes in New York.
  • Veterans Benefits: Disability benefits and retirement payments received by veterans and their dependents are also protected.
  • Minimum Wage Earnings: A portion of your wages, based on the current minimum wage, cannot be frozen. This amount varies depending on your location within New York.
  • Retirement Accounts: Funds in qualified retirement accounts, such as IRAs and 401(k)s, are typically exempt.
  • Certain Workers' Compensation Benefits: Awards for permanent disability or death are generally not subject to freeze.

Claiming Your Exemptions:

To protect exempt funds, you need to act quickly. Once you receive a restraining notice, promptly contact the bank and provide them with documentation verifying the exempt nature of your funds. This documentation may include:

  • Award letters from the benefits programs
  • Pay stubs showing your minimum wage earnings
  • Account statements for your retirement accounts
  • Documentation of your workers' compensation award

Understanding and claiming exemptions can shield your essential funds from being frozen in a bank account freeze situation. Remember, taking proactive steps and seeking legal guidance can help you navigate this challenging situation effectively.

Bank's Right of Setoff Supersedes Creditor's Restraining Notice

In Aspen Industries, Inc. v. Marine Midland Bank, the New York Court of Appeals addressed whether a bank violates a restraining notice under CPLR 5222 by keeping a debtor's account open and setting off the debtor's funds against a preexisting debt owed to the bank. The court held:

  1. A restraining notice does not create a lien on the judgment debtor's property, and the creditor must take further enforcement steps to establish priority over intervening interests.
  2. A bank served with a restraining notice does not violate the notice by allowing the account to remain active, provided the bank maintains a balance equal to twice the amount due on the judgment.
  3. A bank's right of setoff under Debtor and Creditor Law § 151 is superior to a creditor's rights under a restraining notice, allowing the bank to apply the debtor's account funds to a preexisting debt owed to the bank.

In conclusion, the court found that Marine Midland Bank did not violate the restraining notice served by Aspen Industries because the bank's right to setoff the debtor's preexisting obligations took precedence over Aspen's rights as a judgment creditor under the restraining notice. This decision clarifies the interplay between a bank's setoff rights and a creditor's remedies under CPLR Article 52.

Aspen Industries, Inc. v. Marine Midland Bank, 421 N.E.2d 808 (N.Y. 1981).

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[1] Aspen Industries, Inc. v. Marine Midland Bank, 74 A.D.2d 59. The Court of Appeals, in Aspen Industries, Inc. v. Marine Midland Bank, 421 N.E.2d 808 (N.Y. 1981), held that (1) a restraining notice was not effective as to the remainder of the funds in the debtor's account and the bank did not violate the notice served upon it by keeping the account open, where the bank did not allow the balance in the debtor's account to drop below twice the amount then owing on the judgment to the creditor while the restraining notice was in effect, and (2) the bank at all times relevant had a superior right to offset the entire amount present in the debtor's account, leaving no funds available to satisfy the creditor's judgment, where the amount of the debtor's indebtedness to the bank at the time the restraining notice was served upon the bank greatly exceeded the total which would have been on deposit even if the bank had refused to honor checks presented on the judgment debtor's account on or after October 11, 1978.