New York Appeals Court Shields Banks From Suits Over Frozen Customer Accounts

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Recently, the New York Court of Appeals, in answering questions , held that no private right of action exists for judgment debtors to seek money damages and injunctive relief against banks that allegedly violate New York’s Exempt Income Protection Act (EIPA) procedural requirements. In this case, two groups of judgment debtor plaintiffs alleged that their banks failed to provide them and other members of putative classes with exemption notices and claim forms as required by the EIPA, and asserted that the banks unlawfully froze their accounts and charged them various fees in violation of the statute. The federal district courts held that the EIPA, which provides a special exemption from satisfaction of money judgments for certain amounts and types of a debtor’s income, permits judgment debtors and creditors to bring claims against each other but provides no private right of action against the banks. On a consolidated appeal, the Second Circuit asked New York’s highest court to address the issue, given (i) there was no controlling precedent in New York that governs the cases and (ii) the questions presented involve important issues of New York state law and policy that are likely to recur. The New York Court of Appeals agreed with the federal district courts that a private right of action cannot be implied from the EIPA. As to whether judgment debtors can seek money damages and injunctive relief against banks that violate EIPA in special proceedings and, if so, whether those special proceedings are the exclusive mechanism for such relief or whether judgment debtors may also seek relief in a plenary action, the New York Court of Appeals held that the banks had no obligation under the common law to provide the notices and form, and therefore any right debtors have to enforce that obligation arises from the statute.