Can a Bank Restrain (freeze) the Bank Account of a Judgment Debtor's LLC Based on an Individual Debt?

A bank's ability to restrain an LLC's account for a judgment debtor's personal debts is complex. LLCs are separate entities, shielding owners' assets, but exceptions exist. Direct judgments against the LLC allow account restraints, while judgments against individual members face obstacles. Creditors may attempt to "pierce the corporate veil" by proving fraud or alter ego status, particularly for single-member LLCs. State laws like New York's CPLR § 5222 govern these processes. Factors such as fraudulent transfers, commingled funds, and charging orders can influence creditors' access to LLC accounts. Each case depends on specific circumstances and applicable laws.

Bank Responses to Restraining Notices on LLC Accounts: Understanding Judgment Debtor Roles

1. Judgment Debtor as Signer: When a judgment debtor is merely a signer on an LLC account, banks generally won't honor a restraining notice for the individual's personal debts. Signers are viewed as authorized agents, not owners of the funds. Banks typically require a court order specifically addressing the LLC's assets or clear evidence that the LLC is an alter ego of the individual.
2. Judgment Debtor as Member or Manager: Whether the judgment debtor is a member (including sole member) or manager of the LLC, banks usually treat the account as belonging solely to the LLC. They generally won't freeze the account based on a restraining notice against the individual. This applies to both single-member and multi-member LLCs. Banks typically require a specific court order or clear legal directive to take action against the LLC's assets.
3. Account Ownership Structure: LLC accounts are typically owned solely by the LLC entity, not by individual members or managers. It's rare for an LLC account to be jointly held with an individual. If such a joint account exists, it might indicate commingling of funds, which could have separate legal implications but doesn't automatically allow banks to honor a restraining notice against the individual.
4. Beneficial Ownership: While banks collect beneficial ownership information for regulatory compliance (e.g., Bank Secrecy Act), this information doesn't typically affect how banks respond to restraining notices. A restraining notice against a beneficial owner doesn't give the bank grounds to freeze an LLC's account.
5. Authorized Representatives: Designations such as "authorized representative" are treated similarly to signers. Banks don't typically consider these roles as justification for honoring a restraining notice against the individual's personal debts.

Key Considerations for Banks:

• Banks prioritize adhering to account ownership structures and protecting against liability.
• They typically require clear, specific court orders to take action against LLC accounts, regardless of an individual's role in the LLC.
• Evidence of fraud, alter ego status, or piercing the corporate veil usually needs to be established in court before a bank will restrain an LLC's account for an individual's debts.
• State laws and regulations play a crucial role in how banks interpret and respond to restraining notices.
• Banks often consult their legal departments when faced with complex situations involving LLCs and restraining notices.

For Creditors: To effectively restrain an LLC's account based on a judgment against an individual associated with the LLC, creditors typically need to:

1. Obtain a court order specifically addressing the LLC's assets.
2. Provide clear evidence of fraud or alter ego status.
3. Secure an order to pierce the corporate veil.

For LLC Owners: To protect LLC assets, ensure:

1. Strict separation of personal and business finances.
2. Proper documentation of all LLC activities and transactions.
3. Compliance with all LLC formalities required by state law.

In conclusion, banks generally err on the side of caution, protecting LLC accounts from restraints based on individual judgments unless presented with specific court orders or clear legal justification to do otherwise. The role of the judgment debtor in the LLC, while relevant to the overall legal context, typically doesn't alter the bank's approach to honoring restraining notices.

Banks consider several factors in these scenarios:

• The specific language of the restraining notice
• Clear court orders addressing the LLC's assets
• Evidence of commingling of personal and business funds
• State laws governing LLCs and creditor rights
• The bank's own policies and legal guidance

In most cases, banks err on the side of caution, protecting the LLC's assets unless there's clear legal justification to do otherwise. They're wary of potential liability for wrongfully freezing accounts or ignoring valid legal orders.

For creditors seeking to restrain an LLC's account based on a judgment against an individual with a role in the LLC, the most effective approach is often to obtain specific court orders addressing the LLC's assets. This might involve demonstrating that the LLC is an alter ego of the judgment debtor or that there has been significant commingling of personal and business funds.

In conclusion, while a judgment debtor's role in an LLC can influence a bank's decision to honor a restraining notice, the general principle of LLCs as separate legal entities usually prevails. The specific circumstances, clear legal directives, and evidence of improper use of the LLC structure are typically necessary to successfully restrain an LLC's account based on an individual judgment.

Can a creditor automatically seize an LLC's assets based on a judgment against its individual owner?

Generally, no. LLCs are separate legal entities from their owners, so a judgment against an individual doesn't automatically allow creditors to restrain or seize assets of an LLC owned by that person. This separation means that a judgment against an individual owner doesn't automatically allow creditors to restrain or seize assets of an LLC owned by that person. This protection is one of the primary reasons entrepreneurs choose to form LLCs.

When can an LLC's bank account be restrained?

An LLC's bank account can be restrained if the judgment is specifically against the LLC itself. The process typically involves obtaining a judgment against the LLC, securing a court order or writ of execution, and serving a restraining notice on the bank where the LLC has its account. It's important to note that this process requires the creditor to have a valid claim against the LLC, not just its owner.

What laws govern this process?

In New York, for example, CPLR § 5222 governs restraining notices, allowing service on entities "within the state" who hold property of the judgment debtor. The Exempt Income Protection Act (EIPA) sets limits on restraining bank accounts, but these protections are primarily designed for individual debtors, not business entities like LLCs. 

 Can an LLC challenge a restraint on its bank account?

Yes, an LLC can challenge a restraint on its bank account. If an LLC's account is restrained, it has the right to claim exemptions if any apply, challenge the restraint if it believes the action is improper, and request a hearing to contest the validity or amount of the judgment. The LLC might argue, for example, that the restrained funds are necessary for ongoing business operations or that the restraint was improperly executed.

Are there any circumstances where a creditor can reach an LLC's assets for an individual owner's debts?

While it's generally difficult, there are circumstances where a creditor might attempt to reach an LLC's assets for an individual owner's debts. Piercing the Corporate Veil is a legal doctrine that allows courts to disregard the LLC structure and hold owners personally liable in cases of fraud, undercapitalization, or when the LLC is essentially an alter ego of the owner. In some states, creditors of an LLC member can obtain a charging order, which redirects distributions from the LLC to the creditor. However, this doesn't allow direct access to the LLC's assets. Some courts have been more willing to allow creditors to reach assets of single-member LLCs, viewing them as less separate from their owners than multi-member LLCs.

What factors influence the ability to restrain an LLC's account?

Several factors can influence whether an LLC's account can be restrained. The nature of the judgment is crucial; a judgment against the LLC itself is more likely to result in account restraint than a judgment against an individual owner. The LLC structure matters, as single-member LLCs may be more vulnerable to creditor claims than multi-member LLCs. State laws vary in their level of protection for LLCs and their members. Commingling of funds can be an issue; if personal and business funds are mixed, it may be easier for creditors to argue that the LLC is not truly separate from its owner. Fraudulent transfers can also play a role; if an owner transfers personal assets to an LLC to avoid creditors, courts may allow those creditors to reach the LLC's assets.

10 Scenarios Where a Judgment Creditor May Freeze a Judgment Debtor's LLC Account or Interest

1. The judgment is directly against the LLC itself, not just an individual member.
2. The LLC is a single-member LLC and the court allows "piercing the corporate veil" due to commingling of personal and business funds.
3. The judgment creditor obtains a charging order against the debtor's LLC interest, allowing them to intercept distributions.
4. The LLC is found to be an alter ego of the judgment debtor, allowing the creditor to reach LLC assets.
5. The judgment debtor fraudulently transferred assets to the LLC to avoid creditors, and the court allows reverse piercing.
6. The creditor obtains a court order for turnover of the debtor's LLC membership interest.
7. In states that allow it, the creditor forecloses on the debtor's LLC interest, potentially gaining management rights.
8. The judgment is for unpaid taxes, allowing government agencies broader powers to freeze business accounts.
9. The LLC's operating agreement specifically allows for seizure of a member's interest in case of a judgment.
10. The judgment creditor successfully argues that the LLC was formed as a sham to shield assets from creditors, leading the court to disregard the LLC structure.

How a Judgment Creditor Can Restrain the Assets of a Judgment Debtor's LLC in New York

1. Restraining Notice: Under CPLR § 5222, a judgment creditor can serve a restraining notice to freeze property held by the debtor or third parties. This powerful tool can be used to restrain bank accounts, brokerage accounts, accounts receivable, and rents.
2. Scope of Restraint: The restraining notice forbids the debtor (in this case, the LLC) from making "any sale, assignment, transfer or interference with any property in which he or she has an interest".
3. Third-Party Restraints: The real power of the restraining order comes from serving third parties who hold the LLC's assets. This could include banks, financial institutions, or other entities holding funds or property of the LLC.
4. Discovery: Under CPLR § 5223 and § 5224, the creditor can take broad discovery to investigate and trace assets. This includes subpoenas for books and records, demands for sworn answers to interrogatories, and depositions. Notably, the creditor is not required to notify the judgment debtor of this discovery.
5. Execution on Personal Property: CPLR §§ 5232 and 5233 allow for execution on the debtor's personal property held by another. For example, the creditor could demand turnover of the debtor's interest in a closely held LLC so that the shares could be sold to satisfy the debt.
6. Bank Account Restraints: If the LLC has bank accounts, these can be restrained. The bank would be served with the restraining notice and required to freeze the accounts.
7. Exemptions: While individuals have certain exemptions under CPLR § 5205 and § 5206, these generally do not apply to LLCs. Business entities typically have fewer protections against judgment enforcement.
8. Court Involvement: If there are disputes about the restraint or claims of exemption, the court may become involved to determine the validity of the restraint and any claims.

It's important to note that the specific process may vary depending on the circumstances of the case and the nature of the LLC's assets. A judgment creditor should consult with an attorney experienced in New York judgment enforcement to ensure proper procedures are followed.

Understanding Key New York Laws for LLCs, Creditor Rights, and Fraudulent Conveyances

New York’s legal framework for Limited Liability Companies (LLCs) and creditor rights is primarily established through the New York Limited Liability Company Law (NY LLC Law), the Civil Practice Law and Rules (CPLR), and the Debtor and Creditor Law (DCL). These laws define the structure and protection of LLCs while outlining the rights creditors have to enforce judgments. Here’s a detailed overview of these laws and their key provisions:

New York Limited Liability Company Law (NY LLC Law):

This law provides the foundational structure for LLCs in New York, outlining essential protections and operational guidelines. Some of the most significant sections include:

• § 203: This section establishes the LLC as a separate legal entity from its members. This is crucial for providing the limited liability protections that shield individual members from personal responsibility for the LLC’s debts and obligations.
• § 609: Limits the personal liability of LLC members and managers, ensuring they are not personally responsible for the LLC’s debts or obligations unless they explicitly assume that responsibility.
• § 607: Addresses liability for wrongful distributions, ensuring that members or managers do not make unlawful payments to themselves or others if the LLC cannot pay its debts as they come due.
• § 701: Describes the process for the dissolution of an LLC, including voluntary and involuntary dissolution, ensuring that proper steps are followed to wind down the LLC's affairs.

This law helps LLCs maintain their distinct legal identity while protecting owners and members from personal liability.

New York Civil Practice Law and Rules (CPLR):

The CPLR governs procedural aspects of New York law, including the enforcement of money judgments. Several provisions within Article 52 are key for creditors seeking to enforce judgments against LLCs or their members:

• CPLR § 5201: Defines property subject to enforcement, including any debts or property rights the debtor may hold, which can be used to satisfy a judgment.
• CPLR § 5222: Allows creditors to issue restraining notices to third parties holding assets of the debtor. This can include financial institutions where the LLC may hold accounts, effectively freezing assets to prevent their transfer.
• CPLR § 5225: Provides for the turnover of property held by third parties (such as bank accounts or other assets) to satisfy the judgment against the debtor.
• CPLR § 5227: Authorizes the creditor to compel payment of debts owed to the judgment debtor by third parties, which could apply in situations where the LLC owes money to the debtor.

These provisions outline the legal processes for enforcing judgments against LLCs and other entities, ensuring creditors can pursue debts in an orderly and lawful manner.

New York Debtor and Creditor Law (DCL)

The New York Debtor and Creditor Law complements the CPLR by defining creditor rights and providing mechanisms to address fraudulent conveyances. Some key sections include:

• § 273: Defines fraudulent conveyances, focusing on transfers made by a debtor without fair consideration, particularly when the debtor is insolvent or made insolvent by the transfer.
• § 276: Addresses conveyances made with the actual intent to defraud creditors, allowing creditors to challenge and reverse such transactions in court.

With recent updates under the Uniform Voidable Transactions Act (UVTA), New York law continues to evolve to better protect creditors and ensure fairness in the enforcement of debts.

Case 1: LLC Owner's Personal Liability: Fraud and Fraudulent Conveyance Claims Survive Despite Veil-Piercing Rejection

Magazine owners sued an LLC and its owner for unpaid advertising services. The lower court dismissed all claims against the owner. On appeal, the court reinstated the fraud and fraudulent conveyance claims against the owner while upholding dismissal of the veil-piercing and unjust enrichment claims.

Key Legal Principles:

1. Conclusory allegations are insufficient to pierce the corporate veil and hold an LLC owner personally liable for the company's debts.
2. Misrepresentations of present fact that are collateral to a contract can support a separate fraud claim, even if related to a breach of contract.
3. Repayment of loans to an insider when a company is insolvent may constitute a fraudulent conveyance, regardless of whether it was for an antecedent debt.

Conclusion: The main takeaway is that while courts are reluctant to pierce the corporate veil, LLC owners may still face personal liability for fraud or fraudulent transfers related to the company's obligations. Specific factual allegations are crucial in maintaining such claims against individual owners.

Citation: Am. Media, Inc. v Bainbridge & Knight Labs., LLC, 135 AD3d 477 (1st Dept 2016).

What is a Fraudulent Conveyance under New York Law?

A fraudulent conveyance under New York law is a transfer of assets or property that unfairly diminishes a debtor's estate, potentially harming creditors. New York's Debtor and Creditor Law, particularly sections 273 and 275, governs fraudulent conveyances.

Key elements of a fraudulent conveyance include:

1. Transfer of assets: This can involve selling, gifting, or otherwise moving assets out of the debtor's control.
2. Lack of fair consideration: The transfer is made without receiving reasonably equivalent value in return.
3. Insolvency: The debtor is insolvent at the time of the transfer or becomes insolvent as a result.
4. Intent: While actual intent to defraud is not always necessary, it can be a factor in some cases.

In Am. Media, Inc. v Bainbridge & Knight Labs., LLC, 135 AD3d 477, 22 NYS3d 437 (1st Dept 2016), the court highlighted a crucial aspect of fraudulent conveyances involving insiders. The court held that repayment of loans to an LLC owner when the company was insolvent could constitute a fraudulent conveyance, even if the payments were for antecedent debts. Importantly, the court stated that "An insider payment is not in good faith, regardless of whether or not it was paid on account of an antecedent debt."

This ruling underscores that transactions between a company and its insiders (such as owners, directors, or officers) are subject to heightened scrutiny. The "good faith" requirement is not met when insolvent companies make preferential transfers to insiders at the expense of other creditors.

Furthermore, New York courts have consistently held that the requirement of good faith "is not fulfilled through preferential transfers of corporate funds to directors, officers or shareholders of a corporation that is, or later becomes insolvent, in derogation of the rights of general creditors" (Matter of EAC of N.Y., Inc. v Capri 400, Inc., 49 AD3d 1006, 1007 [3d Dept 2008]).

In assessing whether a conveyance is fraudulent, courts will look at the totality of circumstances surrounding the transfer, including the relationship between the parties, the adequacy of consideration, the financial condition of the transferor, and the chronology of events.

Case 2: Bank's Superior Interest in LLC Account Funds Used as Credit Collateral Protected Against Judgment Creditor's Turnover Action

A judgment creditor sought turnover of LLC account funds, including portions used as collateral for a bank's line of credit. The LLC's account was opened using proceeds from a $55 million building sale, with approximately $20 million transferred through multiple accounts. Though the bank's subsidiary had knowledge of potential adverse claims, the court held that this knowledge couldn't be imputed to the bank, which had a superior interest in the collateral funds for its $17 million line of credit.

Key Legal Principles:

1. A bank's notice of adverse claims requires both awareness of facts indicating a significant probability of an adverse claim AND deliberate avoidance of information that would establish the claim's existence (UCC 8-105(a)(2))
2. "Willful blindness" test is more limited than negligence or recklessness, requiring deliberate actions to avoid confirming a high probability of wrongdoing
3. Knowledge of a bank's subsidiary cannot be imputed to the bank when they operate as separate entities with distinct interests and services

Conclusion: The case establishes that when a bank issues credit secured by LLC account funds without actual notice of adverse claims, its security interest remains protected even if its subsidiary had knowledge of potential claims. The key factor was timing - the funds were on deposit for 10 months before the credit line was established, with no subpoenas regarding the specific LLC account.

Citation: Matter of Scher Law Firm, LLP v DB Partners I, LLC, 97 AD3d 590 (2d Dept 2012).

Case 3: Court's Discretion to Issue Charging Order Instead of Full Turnover of LLC Membership Interest Upheld in Judgment Collection Action

Summary: A judgment creditor who obtained a $2 million judgment by confession sought turnover of a debtor's LLC membership interest. The court instead issued a charging order against the membership interest. The Appellate Division affirmed, holding that courts have broad discretion under CPLR 5240 and LLC Law § 607 to choose between different enforcement remedies, including opting for a charging order over full turnover of membership interests.

Key Legal Principles:

1. LLC membership interests qualify as "property" under CPLR Article 52 and are assignable/transferrable unless restricted by operating agreement
2. Courts have broad discretionary power under CPLR 5240 to modify enforcement procedures in judgment collection actions
3. Under LLC Law § 607, charging orders limit judgment creditors to assignee rights rather than full membership rights in the LLC

Conclusion: The case establishes that courts can exercise discretion to protect LLC interests by issuing charging orders instead of full membership transfers, particularly when presented with limited evidence. This preserves the LLC's integrity while still providing judgment creditors a path to recovery.

Citation: Matter of Sirotkin v Jordan, LLC, 141 AD3d 670, 35 NYS3d 443 (2d Dept 2016) (affirming trial court's discretion to issue charging order under LLC Law § 607 rather than full turnover of membership interest where judgment creditor presented limited evidence in support of $2 million confessed judgment collection action; court may exercise broad discretion under CPLR 5240 to modify enforcement procedures).

Case 4: New York's "Separate Entity Rule" Bars Enforcement of Restraining Notice on Foreign Bank Accounts Despite Service on NY Branch

A judgment creditor sought to enforce a $1.7 million judgment by serving a restraining notice on a bank's New York branch to freeze accounts held in Canada. The court held that under New York's "separate entity rule," serving a restraining notice on a bank's NY branch cannot restrain accounts maintained at foreign branches, even when the bank is subject to NY jurisdiction. Critical fact: The accounts were opened and maintained exclusively in Canada, with transfers of over $920,000 occurring after the restraining notice was served in NY.

Key Legal Principles:

1. The separate entity rule treats bank branches as distinct entities for attachment/garnishment purposes, requiring service at the specific branch maintaining the account
2. Personal jurisdiction over a bank in NY does not override the separate entity rule or allow restraint of foreign accounts through NY branch service
3. The rule serves policy interests beyond mere technological limitations, including protecting against conflicts with foreign banking laws and regulations

Conclusion: The case affirms that despite modern banking technology and recent cases expanding NY courts' reach over foreign assets, the separate entity rule remains valid for restraining notices served on banks. This protects banks from having to monitor worldwide accounts based on service at any NY branch.

Citation: Global Tech., Inc. v Royal Bank of Can., 34 Misc 3d 1209(A), 943 NYS2d 791 (Sup Ct, NY County 2012) (holding separate entity rule barred enforcement of restraining notice served on NY branch against Canadian accounts; service must be made at branch maintaining account despite bank's presence in NY; $920,000 transfers after NY service did not violate restraining notice).

Case 5: Judgment Creditor's Unperfected Security Interest in Bank Account Fails to Gain Priority Over Competing Creditor's Judgment Lien

Two judgment creditors disputed priority over a restaurant's bank account. The first creditor held judgments totaling $331,141 and entered a forbearance agreement for payment from the account. The second creditor then froze the account based on its $50,384 judgment. Though the first creditor had filed a UCC-1 financing statement earlier, the court held it failed to establish priority because it hadn't perfected its security interest by obtaining control over the account after its forbearance agreement release.

Key Legal Principles:

1. Under UCC 9-317(a)(2)(A), an unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before perfection
2. Security interests in deposit accounts must be perfected by control under UCC 9-312(b)(1)
3. Courts may convert an improperly filed motion into a special proceeding under CPLR 103(c) to determine creditors' competing claims to property

Conclusion: The case establishes that early UCC filing alone doesn't guarantee priority in bank accounts - creditors must perfect their security interests through actual control of the account. Mere forbearance agreements without maintaining account control may result in loss of priority.

Citation: World Global Capital, LLC v Sahara Rest. Corp., 219 AD3d 553, 182 NYS3d 261 (2d Dept 2023) (holding judgment creditor failed to establish priority over competing creditor's lien where it lost control of bank account after forbearance agreement despite earlier UCC filing; first filing of financing statement insufficient without perfection through control).

Case 6: Court Upholds Restraining Notice on Bank Account Despite Account Holder Being Distinct Entity from Judgment Debtor

A judgment creditor served a restraining notice on a bank account held by an entity distinct from the judgment debtor. The account holder petitioned to vacate the restraining notice, arguing its status as a separate entity should prevent the restraint. The court rejected this argument because evidence showed the judgment debtor could access the account holder's funds, and therefore affirmed the lower court's denial of the petition to vacate the restraining notice.

Key Legal Principles:

1. A restraining notice functions as an injunction that prohibits the transfer of a judgment debtor's property
2. Judgment creditors may restrain judgment debtor's property held by third parties under CPLR § 5222(b)
3. A distinct corporate identity alone does not prevent restraint of funds if the judgment debtor has access to those funds

Conclusion: The case establishes that corporate separateness will not shield bank accounts from restraining notices when evidence shows the judgment debtor has access to the funds, regardless of formal account ownership.

Citation: Best Energy Power 2015, LLC v Federal Deposit Insurance Corporation, 220 AD3d 854 (2d Dept 2023).

Understanding NY's Restraining Notice Law: A Powerful Tool for Judgment Creditors

CPLR § 5222 governs the issuance and effect of restraining notices in New York, providing judgment creditors a mechanism to freeze assets of judgment debtors. The statute allows court clerks or judgment creditors' attorneys to issue notices that prevent the transfer of a debtor's property until the judgment is satisfied. It includes significant protections for judgment debtors, particularly regarding exempt funds and banking institutions.

Key Elements:

• A restraining notice functions as a court-ordered injunction, preventing the transfer of judgment debtor's property and requiring third parties holding debtor's assets to freeze them for up to one year
• Certain funds are protected from restraint, including $2,500 of statutorily exempt payments (like Social Security) deposited electronically within 45 days before the restraint
• Banking institutions cannot restrain accounts containing less than 240 times the federal minimum hourly wage (with some exceptions for child support and government creditors)
• Judgment creditors are limited to serving only two restraining notices per year on a natural person's banking institution account
• The statute requires specific notice to judgment debtors within four days of service, including detailed information about exempt funds and their rights to challenge the restraint

Bank's Right of Setoff Supersedes Restraining Notice When Account Balance Exceeds Twice Judgment Amount

A judgment creditor sought to collect approximately $4,800 from a judgment debtor's bank account by serving a restraining notice on the bank. Although the bank kept the account active and allowed transactions after receiving the notice, it maintained a balance exceeding twice the judgment amount throughout. The bank ultimately exercised its right of setoff against the debtor's $124,597 loan obligation. The court held that the bank did not violate the restraining notice since it maintained the required balance, and its right of setoff was superior to the judgment creditor's claims.

Key Legal Principles:

1. A restraining notice is not effective as to funds beyond twice the judgment amount when the garnishee maintains that minimum balance
2. Service of a restraining notice does not create a lien or confer priority rights to the judgment creditor
3. A bank's statutory right of setoff under Debtor and Creditor Law § 151 is superior to a judgment creditor's rights under a restraining notice

Conclusion: This landmark case establishes that banks can continue processing transactions in restrained accounts as long as they maintain twice the judgment amount, and their right of setoff takes precedence over restraining notices.

Citation: Aspen Industries, Inc v Marine Midland Bank, 52 NY2d 575 (1981).

New York's Exempt Income Protection Act Creates No Private Right of Action Against Banks for Statutory Violations

Judgment debtors brought putative class actions against their banks seeking damages for failing to provide required notices and claim forms under New York's Exempt Income Protection Act (EIPA). The Court held that the EIPA does not create a private right of action against banks, finding that while banks serve as conduits for information under the law, the legislature did not intend to subject them to new forms of liability. The judgment debtors' sole avenue for relief is through special proceedings under CPLR Article 52.

Key Legal Principles:

1. The absence of an express private right of action requires courts to examine whether legislative intent to create such a right is fairly implied from the statutory provisions and history
2. A bank's statutory safe harbor from liability for inadvertent failures does not, by negative implication, create liability for other violations
3. CPLR Article 52's special proceedings provide the exclusive mechanism for judgment debtors to seek relief from improper account restraints

Conclusion: This decision establishes that while banks must comply with EIPA's notice requirements, judgment debtors cannot bring plenary actions for damages against banks for violations but must instead seek relief through existing statutory special proceedings.

Citation: Cruz v TD Bank, NA, 22 NY3d 61 (2013).

Non-Party Companies Controlled by Judgment Debtor Can Be Enjoined from Transferring Assets

After obtaining a $450,000 judgment, a creditor sought an injunction against two companies controlled by the judgment debtor to prevent asset transfers. The creditor demonstrated that the debtor owned 100% of both companies and used them to receive payments for medical services and pay personal expenses in an apparent attempt to hide assets. The court held that the companies could be bound by the injunction despite being non-parties because they acted in combination with the debtor.

Key Legal Principles:

1. Non-parties may be bound by an injunction if they have knowledge of it and are servants/agents of defendants or act in collusion with them.
2. Courts can issue injunctions against non-party entities to protect court orders when evidence shows they are controlled by and acting in combination with the judgment debtor.
3. A judgment creditor who obtains an economic interest in an LLC has no right to exercise control over its operations, but can obtain injunctive relief to prevent asset dissipation.

Conclusion: Courts have authority to enjoin non-party entities from transferring assets when evidence demonstrates they are being used by a judgment debtor to evade collection, even without making them parties to the original action.

Citation: Hyman v Golio, 195 A.D.3d 698, 150 N.Y.S.3d 282 (2d Dept 2021) (affirming injunction against judgment debtor's wholly-owned companies where evidence showed debtor used companies to receive payments and pay personal expenses in attempt to hide assets from judgment creditor).

Court Can Order Pre-Judgment Attachment of Foreign LLC Interests When Garnishee is Present in New York

A lender who made a $27.3 million mezzanine loan sought to attach the judgment debtor's ownership interests in out-of-state LLCs by serving an attachment order on the debtor while present in New York. Though the LLC interests were intangible and located outside New York, the Court held that serving the attachment order on the proper garnishee while physically present in New York was sufficient to establish jurisdiction over the property.

Key Legal Principles:

1. A court with personal jurisdiction over a nondomiciliary present in New York has jurisdiction over that individual's tangible or intangible property, even if located outside New York.
2. Uncertificated LLC ownership interests are attachable property that travels with the garnishee, subject them to attachment wherever the garnishee is found.
3. When attachment is used for security purposes rather than jurisdiction, the situs of intangible property is wherever the garnishee is present.

Conclusion: The presence of a proper garnishee in New York enables courts to reach foreign intangible assets for security purposes, even without the traditional jurisdictional analysis required for quasi in rem jurisdiction.

Citation: Hotel 71 Mezz Lender LLC v Falor, 14 N.Y.3d 303, 900 N.Y.S.2d 698, 926 N.E.2d 1202 (2010) (holding that court could attach debtor's ownership interests in out-of-state LLCs by serving garnishee temporarily present in New York where attachment served security rather than jurisdictional purpose).

New York Court Denies Pre-Judgment Attachment of Foreign Bank Account Despite Personal Jurisdiction Over Bank's NY Branch

A consulting company sought to attach and enjoin funds held in a London bank account as security for a pending arbitration in London. The funds were proceeds from an oil rights transfer and were held in the name of a foreign government. The court denied attachment and injunctive relief, finding it lacked jurisdiction over the foreign bank account despite having jurisdiction over the bank's NY offices.

Key Legal Principles:

1. The separate entity rule remains valid law - service of attachment on a bank's NY branch does not reach accounts at foreign branches
2. Pre-judgment injunctive relief is unavailable to unsecured creditors seeking only money damages unless directed at a specific fund that is the subject of the action
3. Foreign sovereign immunity protects foreign state property from pre-judgment attachment absent explicit waiver, even if the foreign state does not appear to assert immunity

Conclusion: Personal jurisdiction over a bank's NY offices does not confer authority to attach or enjoin funds held in the bank's foreign branches, particularly where the funds belong to a foreign sovereign. The case reinforces territorial limits on NY courts' attachment powers in international banking.

Citation: Matter of International Legal Consulting Ltd. v Malabu Oil & Gas Ltd., 35 Misc 3d 1203(A) (Sup Ct, NY County 2012).

LLC Bank Account Restraints Quiz

1. When can a bank typically restrain an LLC's account for a judgment debtor's personal debts? A. Whenever the judgment debtor is a signer on the account B. Only with a specific court order or clear evidence of alter ego status C. Automatically if the judgment debtor is the sole member D. Any time there's a valid judgment against an individual member
2. Under New York law, what is NOT considered a fraudulent conveyance element? A. Transfer of assets B. Lack of fair consideration C. Presence of multiple creditors D. Insolvency of the debtor
3. What is typically required for a judgment creditor to reach an LLC's assets for an individual owner's debts? A. Only a valid judgment against the owner B. Proof of the owner's majority stake in the LLC C. Evidence of fraud or alter ego status D. The LLC's operating agreement
4. Under CPLR § 5222, how long can a restraining notice typically remain in effect? A. 6 months B. 1 year C. 2 years D. Indefinitely until the judgment is satisfied
5. What is a charging order's primary function in LLC judgment enforcement? A. Immediate seizure of LLC assets B. Direct control over LLC operations C. Interception of distributions to the debtor member D. Forced dissolution of the LLC
6. According to New York's "separate entity rule," what happens when serving a restraining notice on a bank's NY branch? A. It automatically restrains all worldwide accounts B. It only affects accounts at that specific branch C. It affects all domestic accounts D. It depends on the amount of the judgment
7. What is required to perfect a security interest in a bank account under UCC 9-312(b)(1)? A. Filing a UCC-1 financing statement B. Obtaining control over the account C. Recording a lien D. Notifying the account holder
8. How many restraining notices per year can judgment creditors serve on a natural person's banking institution account? A. One B. Two C. Three D. Unlimited
9. What is the minimum account balance that banks must maintain when honoring a restraining notice? A. The full judgment amount B. Half the judgment amount C. Twice the judgment amount D. Three times the judgment amount
10. What happens when a judgment debtor is merely a signer on an LLC account? A. The account can be fully restrained B. Half the account can be restrained C. Banks generally won't honor a restraining notice D. The court automatically orders a turnover
11. Under NY LLC Law § 203, what is established? A. LLC tax requirements B. LLC as a separate legal entity from members C. LLC management structure D. LLC dissolution procedures
12. What protection is available for exempt funds under the EIPA? A. $1,000 of exempt payments B. $2,500 of exempt payments C. $5,000 of exempt payments D. No protection for exempt payments
13. What is required to bind non-party companies to an injunction against asset transfers? A. Only a valid judgment against the debtor B. Evidence they act in combination with the debtor C. Formal corporate relationship D. Written agreement to be bound
14. When can a bank exercise its right of setoff against a restrained account? A. Never once restrained B. Only with court permission C. When maintaining twice the judgment amount D. Only after notifying all parties
15. What is the result of serving a restraining notice on a bank under CPLR § 5222? A. Creation of an automatic lien B. Transfer of ownership C. Injunction against property transfer D. Immediate account closure
16. What protection do LLCs have against judgment enforcement that individuals don't? A. Higher exempt amounts B. Longer notice periods C. Additional hearing rights D. Generally fewer statutory exemptions
17. What factor most strongly indicates possible piercing of the corporate veil? A. Single-member LLC status B. Commingling of personal and business funds C. Multiple business locations D. High debt-to-income ratio
18. Under NY law, what can a judgment creditor do to investigate an LLC's assets? A. Only subpoena bank records B. Only depose LLC members C. Take broad discovery including subpoenas and depositions D. Nothing without court permission
19. What happens if a bank violates EIPA notice requirements? A. Criminal penalties apply B. Civil penalties apply C. No private right of action exists D. Automatic account unfreezing
20. What is required to attach foreign LLC interests in New York? A. Foreign court order B. Presence of garnishee in New York C. LLC registration in New York D. International treaty authorization

ANSWER KEY:

• B - Banks require specific court orders or clear alter ego evidence to restrain LLC accounts for individual debts. Simple signatory status or membership is insufficient (CPLR § 5222).
• C - The text identifies three key elements of fraudulent conveyance: transfer of assets, lack of fair consideration, and insolvency. Multiple creditors is not a required element under NY DCL § 273.
• C - Creditors must show fraud or alter ego status to pierce corporate veil; mere ownership insufficient (Am. Media, Inc. v Bainbridge & Knight Labs., LLC).
• B - CPLR § 5222 explicitly limits restraining notices to one year duration.
• C - Per LLC Law § 607, charging orders only allow interception of distributions, not direct asset seizure or control.
• B - The "separate entity rule" requires service at specific branch maintaining account (Global Tech., Inc. v Royal Bank of Can.).
• B - UCC 9-312(b)(1) specifically requires control, not just filing, for perfection of security interests in deposit accounts.
• B - CPLR § 5222 limits creditors to two restraining notices per year on natural persons' bank accounts.
• C - Banks must maintain twice the judgment amount (Aspen Industries, Inc v Marine Midland Bank).
• C - Banks treat signers as authorized agents only, not owners of funds deserving restraint.
• B - NY LLC Law § 203 explicitly establishes LLCs as separate legal entities from members.
• B - EIPA protects $2,500 of exempt payments deposited within 45 days before restraint.
• B - Courts can bind non-parties acting in combination with debtors (Hyman v Golio).
• C - Banks can exercise setoff rights while maintaining twice judgment amount (Aspen Industries).
• C - CPLR § 5222 creates injunction against property transfer, not automatic lien.
• D - Unlike individuals, LLCs generally lack statutory exemptions under CPLR § 5205 and § 5206.
• B - Commingling of funds is primary evidence for piercing corporate veil (Am. Media case).
• C - CPLR §§ 5223-5224 authorize broad discovery including subpoenas and depositions.
• C - EIPA creates no private right of action (Cruz v TD Bank).
• B - Garnishee presence in NY sufficient for attachment (Hotel 71 Mezz Lender LLC v Falor).