Bernie Huggins v. George Pataki, HSBC Bank USA and Spring Creek Associates, LP - July 21, 2003

T/U/W Blanche Hunter F/B/O Pamela Creighton

INTEREST OF AMICUS CURIAE - HSBC Bank USA

MEMORANDUM OF LAW OF THE NEW YORK BANKERS ASSOCIATION AS AMICUS CURIAE IN SUPPORT OF PLAINTIFFS’ MOTION FOR A PRELIMINARY INJUNCTION

Bernie Huggins v. George Pataki, HSBC Bank USA and Spring Creek Associates, LP - July 21, 2003

 

The New York Bankers Association ("NYBA") is comprised of community, regional and money center commercial banks in New York State. In the aggregate, NYBA's members have more than 220,000 employees and assets in excess of $1 trillion. NYBA regularly appears as amicus curiae before courts in cases that raise significant legal issues relating to banking.

NYBA is concerned with plaintiff's contention that HSBC Bank USA ("HSBC") may be found liable for damages under 42 U.S.C. 1983 for doing nothing more than following State-mandated procedures regarding a restraining notice served pursuant to NY CPLR 5222. Plaintiff's theory, if true, could force banks to defend innumerable lawsuits arising from purely involuntary actions by banks in their performance of normal business operations. NYBA is also concerned that plaintiff's proposed rule requiring banks (rather than debtors) to identify whether funds held in certain debtor accounts are exempt from attachment would disrupt well-established, judicially-approved procedures, impose heavy financial and administrative burdens on banks, and fail to accomplish plaintiff's goal of minimizing delays experienced by debtors seeking to access exempt funds. NYBA respectfully submits that plaintiff has misstated the law under Section 1983, the Due Process and Supremacy Clauses of the Constitution, and 42 U.S.C. 407(a), and that this Court should affirm the District Court's decision dismissing the case.¹

ARGUMENT

INTRODUCTION

Plaintiff-appellant Bernie Huggins ("plaintiff") brought this action against HSBC after the bank restrained his account, as it was required to do under state law, in response to a restraining notice received from plaintiff's judgment creditor, Spring Creek Associates, L.P. ("Spring Creek"). Spring Creek's notice was much like the other 160,000 restraining notices that HSBC receives each year.² HSBC had done nothing to initiate or solicit the notice. By restraining plaintiff's account as directed by state law, HSBC ensured the maintenance of the status quo pending any claim of exemption by plaintiff. Actual seizure of the funds could be accomplished only through service upon the bank of a separate "execution" by a sheriff or support collection unit. See NY CPLR 5222(b). If HSBC had permitted plaintiff to withdraw from his account non-exempt money subject to the restraining notice, HSBC could have been found in contempt of court and liable to Spring Creek for the entire amount withdrawn. See Mazzuka v. Bank of N. Am., 280 N.Y.S.2d 495 (N.Y. Civ. Ct. 1967).

Even though (i) HSBC was a passive recipient of the notice; (ii) HSBC did exactly what New York law required by following procedures previously upheld by this Court; and (iii) HSBC was subject to possible penalty if it disobeyed the notice, plaintiff seeks damages from the bank under Section 1983. Plaintiff claims that HSBC is liable under Section 1983 and that CPLR 5222 violates the Due Process and Supremacy Clauses of the Constitution. Meanwhile, plaintiff has abandoned his claims for injunctive and declaratory relief and damages against New York (which enacted Section 5222) and Spring Creek (which caused its application and enforcement here). See Plaintiff-Appellant's Brief ("Appellant's Br.") at 7.

The District Court's grant of summary judgment to HSBC should be affirmed. Plaintiff's claims for injunctive and declaratory relief are now moot. Plaintiff's only remaining claim for damages against HSBC is unavailing because HSBC did not act "under color of state law" within the meaning of Section 1983. HSBC simply complied with New York procedures. To hold otherwise would produce the absurd result of requiring banks to defend themselves against lawsuits that complained about conduct mandated by State law. Because plaintiff cannot proceed under Section 1983, this Court does not need to address his claims under the Due Process and Supremacy Clauses.

In the event this Court does address plaintiff's claims, New York's post-judgment attachment procedures are not invalid under federal law. Contrary to plaintiff's contentions, due process does not require that banks bear the burden of checking whether each restraining notice would affect the subset of debtors whose accounts contain only exempt Social Security funds. This conclusion is buttressed by the decision of the U.S. Department of Treasury ("Treasury") not to impose a similar requirement on banks when Treasury issued final guidance for the Electronic Transfer Account ("ETA") program for recipients of federal benefits payments. Notice of Electronic Transfer Account Features, 64 Fed. Reg. 38510, 38512-13 (1999) ("Notice"). Treasury expressly considered and rejected various proposals that would have required banks to identify and protect exempt funds on behalf of debtor recipients. See id. Finally, New York's procedures do not violate Social Security's anti-attachment provision.

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I. PLAINTIFF'S SUIT IS LARGELY MOOT

Plaintiff challenges New York law through an attenuated damages claim against HSBC because his other claims are moot. The mootness doctrine is based on the rule under Article III of the Constitution that federal courts may adjudicate only actual, ongoing cases or controversies. See Lewis v. Cont'l Bank Corp., 494 U.S. 472, 477 (1990). Claims become moot when "the parties 'lack a legally cognizable interest in the outcome.'" Murphy v. Hunt, 455 U.S. 478, 481 (1982) (citation omitted); see also Muhammad v. City of New York Dep't of Corrections, 126 F.3d 119, 123 (2d Cir. 1997).

Plaintiff's claims for declaratory and injunctive relief are moot as to all defendants. Governor Pataki has been voluntarily dismissed from the lawsuit and injunctive relief sought from Spring Creek and HSBC was obtained when the money in plaintiff's account was released from restraint. Joint Appendix ("JA") 10, 32. The mere possibility that other restraining notices might be applied to plaintiff's account at some point in the future would not create a "case or controversy of 'sufficient immediacy and reality'" to give plaintiff standing to seek prospective relief from defendants." City of Los Angeles v. Lyons, 461 U.S. 95, 104 (1983) (quoting Golden v. Zwicker, 394 U.S. 103, 109 (1969)).³ Furthermore, these claims do not fall into the exception to mootness for situations "capable of repetition yet evading review." First, there is no "reasonable expectation that the same complaining party would be subjected to the same action again." Murphy, 455 U.S. at 484. Second, other Social Security recipients will not be precluded from challenging the provisions in issue. See Swan, 635 F.2d at 102 n.6.

In short, the only potentially justiciable claim still pursued by plaintiff is for unspecified monetary damages against HSBC under 42 U.S.C. 1983.⁴ Such a money damages claim does not give plaintiff standing to seek prospective relief. See City of Los Angeles, 461 U.S. at 105.

II. PLAINTIFF CANNOT SUE HSBC UNDER SECTION 1983 BECAUSE HSBC IS NOT A STATE ACTOR

Despite HSBC's total lack of connection to the underlying dispute between plaintiff and Spring Creek, plaintiff contends that HSBC is liable for damages under Section 1983 because HSBC froze his bank account under a restraining notice as required by state law. Plaintiff's claim fails because HSBC did not become a "state actor" merely by following state law.

The Supreme Court has made clear that conduct does not occur "under color of state law" within the meaning of Section 1983 unless both of the following requirements are met: (i) the alleged deprivation of federal rights "must be caused by the exercise of some right or privilege created by the State or by a rule of conduct imposed by the State or by a person for whom the State is responsible;" and (ii) "the party charged with the deprivation must be a person who may fairly be said to be a state actor." Lugar v. Edmondson Oil Co., 457 U.S. 922, 937 (1982) (emphasis added). In other words, the plaintiff must show not only that the defendant's actions were allowed or required by the State, but also that such actions are "chargeable to the State." Id. The Supreme Court's "repeated insistence" that plaintiffs meet both prongs reflects clear recognition of the "'essential dichotomy' between public and private acts" under Section 1983. Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 50, 53 (1999).

Plaintiff here cannot meet the second prong of the Lugar test because HSBC is a private party that took no action whatsoever that transformed its status to that of a state actor. Plaintiff contends that HSBC became a state actor under the so-called "state-compulsion" test because it complied with the dictates of CPLR 5222. Appellant's Br. at 27-33. This contention misstates the law. "[I]n a case involving a private defendant, the mere fact that the government compelled a result does not suggest that the government's action is 'fairly attributable' to the private defendant." Sutton v. Providence St. Joseph Med. Ctr., 192 F.3d 835, 838 (9th Cir. 1999); see also Brentwood Acad. v. Tenn. Secondary Sch. Athletic Assoc., 531 U.S. 288, 295 (2001) ("[S]tate action may be found if, though only if, there is such a 'close nexus between the State and the challenged action' that seemingly private behavior 'may be fairly treated as that of the State itself.'" (citation omitted)); Carey v. Cont'l Airlines, Inc., 823 F.2d 1402, 1404 (10th Cir. 1987); Johnson v. Chemical Bank, 1996 WL 706893, at *5 (S.D.N.Y. Dec. 9, 1996).

The state-compulsion test does not control this case because that test originated, and has since primarily been recognized, in cases in which the government not a private party was the defendant. See Sutton, 192 F.3d at 836-37 (discussing early case law). The Supreme Court highlighted this distinction in Blum v. Yaretsky, 457 U.S. 991 (1982), emphasizing that the case before it an action by Medicaid recipients against New York State challenging certain decisions by private nursing homes regarding their patients was "obviously different from those cases in which the defendant is a private party and the question is whether his conduct has sufficiently received the imprimatur of the State so as to make it 'state' action for purposes of the Fourteenth Amendment." Id. at 1003 (emphasis added).⁵

The government's role as defendant in the state-compulsion cases is critical, as the case law and the facts of this case make plain. It is one thing for plaintiff to claim state action on the part of New York in causing, through HSBC, plaintiff's bank account to be frozen upon issuance of a creditor's restraining notice. It is quite another for plaintiff to claim that the bank should be held liable for damages under Section 1983 on the theory that it is the "state actor." The bank did not initiate the attachment procedures in issue and, upon receiving Spring Creek's notice, only followed State law on pain of being held in contempt of court. See CPLR 5222(b); Appellant's Br. at 30-31; JA 18.

None of the cases cited by plaintiff supports his vastly overbroad theory of state action. In each of them the defendant was the government, see Connecticut v. Doehr, 501 U.S. 1 (1991); Catanzano v. Dowling, 60 F.3d 113 (2d Cir. 1995), and/or the court found an additional factor beyond a private party's mere compliance with law as a predicate for state action. Unlike the defendants in all of these cases, HSBC is a private party that simply followed a clear (and previously upheld) State law as a matter of course in its business operations, and thereby became an involuntary participant in conduct alleged as unlawful.

Both Lugar and Doehr, for instance, involved claims against actual or potential creditors who had "invoke[ed] the aid of state officials to take advantage of state-created attachment procedures" and, therefore, had become "willful participant[s] in joint activity with the State or its agents." Lugar, 457 U.S. at 942, 941 (citation and internal quotation marks omitted); see also Doehr, 501 U.S. at 10-11. In Brentwood, a "close nexus" resulted from the "pervasive entwinement" between Tennessee's high schools and a not-for-profit athletic association which, although "nominally private," set standards followed by state schools and was run largely by school officials and employees. 531 U.S. at 295-302. In Chan v. City of New York, 1 F.3d 96 (2d Cir. 1993), this Court found that the close nexus test was met by a construction contract entered into by the private party and the City of New York, which was also a defendant. See id. at 106-07. Finally, in Adickes v. S.H. Kress Co., 398 U.S. 144 (1970), the Supreme Court held that a private restaurant could be a state actor if its waitress entered into a "conspiracy" with a policeman against a white customer who sat with African Americans, so that the restaurant became "a willful participant in joint activity with the States or its agents." See id., 398 U.S. at 152 (citation and internal quotation omitted).⁶ These rulings do not control the present case because HSBC did not act as a "willful" conspirator or participant in joint activity with any State agent; was not entwined with the State; and did not affirmatively invoke State procedures to serve its own self-interest.

To accept plaintiff's theory of state-compulsion in this case would be to make every bank indeed, every private party a state actor when it (or he or she) complies with a presumptively valid, generally applicable state law. This would put private parties in the untenable position of "defend[ing] those laws and pay[ing] any consequent damages, even though they bear no real responsibility for the violation of rights arising from the enactment of the laws." Sutton, 192 F.3d at 838-39. For example, a bank providing information about an account holder pursuant to a subpoena issued under state law, would, if the account holder sued the bank alleging a violation of a federal right, automatically bear responsibility for defending that law and paying damages if found liable.⁷ Absent "some affirmative indication that Congress, the Supreme Court, or this court intended for every private entity to 'be dragooned into defending [state] law,'" this Court should not adopt such a requirement. Id. at 839 (quoting Printz v. United States, 521 U.S. 898 (1997)); cf. Brentwood, 531 U.S. at 295-96 (observing that no "set of circumstances" is "absolutely sufficient" for finding state action).

Finally, the result urged by plaintiff is foreclosed by the Supreme Court's decision in Walker v. City of Birmingham, 388 U.S. 307 (1967) upholding the criminal contempt convictions of civil rights marchers who engaged in protests prohibited by a city ordinance and state court injunction. The ordinance and court injunction "unquestionably raise[d] substantial constitutional issues." Id. at 316-17. The Supreme Court nevertheless held that it was "for the court of first instance to determine the validity" of these rules, and, therefore, the marchers still could be punished under the rules unless they first obtained appropriate judicial relief nullifying them. Id. Applied here, Walker precludes plaintiff from seeking to hold HSBC liable for its innocent compliance with New York attachment rules, where plaintiff failed to obtain a court order setting aside the disputed rules before HSBC applied them to his account. Accordingly, HSBC cannot be deemed a state actor and plaintiff's claim against it under Section 1983 fails.

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III. HSBC'S COMPLIANCE WITH CPLR 5222 DID NOT VIOLATE THE DUE PROCESS CLAUSE

Even assuming HSBC acted "under color of state law" within the meaning of Section 1983 when it froze plaintiff's bank account, such action did not violate plaintiff's due process rights. In McCahey v. L.P. Investors, 774 F.2d 543 (2d Cir. 1985), this Court held that procedures similar to those that HSBC was required to follow here afford sufficient due process to judgment debtors whose moneys are exempt from attachment. Plaintiff's argument that the Court should "re-weigh" the due process factors for bank accounts that contain only electronically-deposited Social Security payments is without merit.

A. Due Process Does Not Prohibit States From Requiring Debtors To Assert Statutory Exemptions For Funds

Due process does not require rewriting of New York law so that the burden for claiming statutory exemptions is transferred from debtors to third-party banks. In McCahey, as here, the State's attachment procedures were initiated when the attorney for the judgment creditor issued a restraining notice to the holder of plaintiff's property. See id. at 546. Upon receipt of the notice, the bank was forbidden from releasing plaintiff's funds upon pain of punishment of contempt of court. See id.; CPLR 5222(b). In addition, the judgment creditor was required to mail a copy of the notice to plaintiff no later than four days after service on the bank, 774 F.2d at 546; CPLR 5222(d), and to alert plaintiff that: (i) that monies in her account could be exempt from legal process if, for example, they were from Social Security or welfare; (ii) if the plaintiff believed any money taken or held under the restraining notice was exempt, she should contact the issuer of the notice and also consider contacting an attorney; and (iii) CPLR 5239 and 5240 provided procedures through which exemptions could be determined. See id. at 546; CPLR 5222(e). If plaintiff wished to dispute the creditor's seizure of her account, plaintiff could either initiate a "special proceeding" prior to execution against her account, or seek a protective order. See 774 F.2d at 546; CPLR 5239, 5240.

The plaintiff in McCahey contested these procedures in part on the ground that, "if ex parte orders are permitted, they must be issued only by neutral judicial officers on the basis of affidavits submitted by judgment creditors disclaiming knowledge of the existence of any exemptions the debtor may assert." 774 F.2d at 550. The Court rejected this argument, observing that "the debtor is in the best position to provide evidence of the exemption and may legitimately be required to carry the burden of proving its existence." Id. (emphasis added). The McCahey Court likewise rejected plaintiff's contention that due process entitled her to notice and a hearing before the creditor's issuance of a restraining notice. This Court noted the Supreme Court's guidance that "the existence of the underlying judgment [is] sufficient 'notice of what will follow.'" Id. at 547 (quoting Endicott-Johnson Corp. v. Encyclopedia Press, Inc., 266 U.S. 285, 288 (1924)).

The decisions of other courts of appeals similarly make clear that, consistent with due process, states may require judgment debtors to claim exemptions in post-attachment proceedings. See e.g., Reigh v. Schleigh, 784 F.2d 1191 (4th Cir. 1986); Dionne v. Bouley, 757 F.2d 1344, 1344 (1st Cir. 1985); Finberg v. Sullivan, 634 F.2d 50 (3d Cir. 1980); Duranceau v. Wallace, 743 F.2d 709, 711-13 (9th Cir. 1984); Brown v. Liberty Loan Corp., 539 F.2d 1355, 1362-69 (5th Cir. 1976); see also Phillips v. Bartolomie, 121 Cal. Rptr. 56, 60 (Cal. Ct. App. 1975) ("It is eminently reasonable to place the burden of applying for and proving that the wages are exempt on the debtor" (citation and internal quotation omitted). Although in Dionne and Finberg the courts found that certain aspects of the states' laws were constitutionally deficient, these decisions left intact the basic structure of those laws which made debtors, rather than creditors or garnishees, responsible for claiming (or disclaiming) statutory exemptions. See Finberg, 634 F.2d at 62 (rejecting contention that creditor must submit affidavit); Dionne, 757 F.2d at 1352.

Notwithstanding uniform precedent on the issue, plaintiff contends that HSBC violated his due process rights because HSBC "easily" and "quickly" could have determined that all of the funds in his account were exempt. Appellant's Br. At 14, 40. Because, according to plaintiff, the tracking system for electronic deposit allows banks to identify funds received from Social Security, due process requires banks to disregard restraining notices that affect accounts containing only such funds. This claim is without merit. Even assuming plaintiffs' factual assertions about banks' tracking capabilities are correct which they are not, see infra Part III.B his proposed rule would dramatically shift the burden of claiming exemptions from the debtor to a third-party garnishee. The Due Process Clause does not require such a change. Because "a state legislature has the resources and opportunities to consider the needs and rights of creditors or debtors generally in light of numerous factors . . . a court should be very reluctant to substitute a judicial policy preference for a legislative scheme" in this area. Motz & Baida, The Due Process Rights of Postjudgment Debtors and Child Support Obligors, 45 Md. L. Rev. 61, 78 (1986); see also Reigh, 784 F.2d at 1197. Although plaintiff here might appropriately direct his proposed scheme to the New York legislature, it is not properly before this Court. See McCahey, 774 F.2d at 551 (that New York could create "simplified" attachment procedures does not mean they are required by due process). Accordingly, this Court should reject plaintiff's due process claim.

B. Weighing Relevant Due Process Factors Demonstrates That Current New York Attachment Procedures Are Constitutional

In any event, consideration of the relevant due process factors shows New York procedures to be constitutional. The factors to be considered include the competing interests at stake, the risk of erroneous deprivation under existing procedures, and the value of substitute procedures. See McCahey, 774 F.2d at

548-49 (citing Mathews v. Eldridge, 424 U.S. 319, 334-35 (1976)).⁸ Contrary to plaintiff's contentions (Appellant's Br. at 33-44), a new requirement that banks protect solitary-use accounts would offer little additional protection to benefits recipients and would impose a heavy burden on banks.

1. Requiring Banks To Claim Exemptions Would Still Cause Delays And Offer Little Advantage To Recipients

Plaintiff's proposed rule offers little likely value to Social Security recipients compared to the current system because the rules still would result in delayed access to funds, create inefficiency by shifting the burden away from the parties best positioned to seek prompt action, and at best help only a limited number of recipients, all at the cost of introducing greater complexity and confusion to the attachment process.

Plaintiff mistakenly assumes that a rule requiring banks to disregard restraining notices for accounts containing only Social Security funds would eliminate all delays that debtors have in accessing these funds. This assumption ignores practical reality. Under such a rule, banks still would have to temporarily freeze targeted accounts to allow time for banks to determine whether, in fact, the accounts contain only exempt funds. If banks did not do so, debtors in receipt of copies of restraining notices (which they are entitled to have under New York law) would simply withdraw their funds and impose potential liability for these amounts on the banks. See Section 5222(b); Mazzuka, 280 N.Y.S.2d at 1056-58.

"[T]echnological developments" (Appellant's Br. at 34) notwithstanding, banks would have to do more than take a "quick look" (id. at 40) at targeted accounts to determine whether special treatment was appropriate. First, banks would have to identify those accounts that consist solely of electronic deposits of funds presumptively exempt under statute. This step would require banks to review account records to ensure that no funds were potentially traceable to non-exempt sources. For many accounts, banks would be unable perform these reviews quickly. This is especially true where records necessary for inspection have been archived or are maintained on obsolete computer systems or computer systems of banks taken over through acquisition or merger. Moreover, if plaintiff's proposed rule were adopted, recipients of other types of presumptively exempt benefits, such as Supplemental Security Income (42 U.S.C. 1383), Veteran's (38 U.S.C. 5301), and Federal Railroad Retirement (45 U.S.C. 231m(a)) benefits,⁹ undoubtedly would demand that banks also protect those funds.

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Second, a determination that certain monies were received from Social Security does not answer whether they are statutorily exempt from legal process under Section 407(a) (or a comparable statute), because such monies can be garnished to collect unpaid child support or alimony. See 42 U.S.C. 659; Knickerbocker v. Norman, 938 F.2d 891 (8th Cir. 1991). Accordingly, banks would have to implement procedures sufficient to support a determination that all relevant funds are legally exempt. Plaintiff makes the unrealistic suggestion that banks trying to decide whether an exception to exemption applies could simply make a "phone call to the creditor." Appellant's Br. at 22. This cannot be the sole method available to banks because debtors would seek to hold banks liable if they mistakenly froze accounts based on misinformation furnished orally by creditors. Banks understandably might insist on more formal procedures, such as an affidavit or other written confirmation from the creditor. Regardless of the procedures used, some delay would be inevitable.

Misalignment of incentives under the plaintiff's rule would create additional inefficiency. Judgment debtors, not banks, are in the best position to take the initiative in asserting exemptions. The debtors have prompt notice of restraint under Section 5222, an incentive to act quickly if they depend on the money, and quick access to all of the relevant information supporting their exemptions. See McCahey, 774 F.2d at 550. Banks, by contrast, must balance the debtors' interests in prompt access with their own interest in minimizing liability. Although banks would have no stake in who ultimately received disputed funds, they would be forced to defend against the claims of debtors, on the one hand, and creditors on the other. Thus banks would play a role similar to that of an interpleader defendant which must join all interested parties in a dispute to obtain judicial protection from potential claims by them. See NY CPLR Commentaries 5222:4 at p. 207 (McKinney 1997). Given these realities, delays under the proposed rule might be comparable to or longer than delays under New York's current procedures, which, as the McCahey Court found, provide debtor recipients with an "opportunity for a prompt hearing," id. at 553.¹⁰

Furthermore, only a very narrow subset of benefits recipients those whose accounts contain solely exempt funds received by electronic deposit conceivably could benefit from plaintiff's proposed rule. Under this rule, banks would have to review all of the accounts targeted by incoming restraining notices. But critically, plaintiff does not and cannot contend that banks should be compelled to assert exemptions on behalf of recipients with commingled accounts. See Appellant's Br. at 8. There is no single method by which presumptively-exempt funds could be segregated and, in any event, it would be unreasonably complex for banks to implement such a procedure on a broad scale. See NCNB Fin. Servs. v. Shumate, 829

F. Supp. 178, 180-81 (W.D. Va. 1993) (concluding, after conducting tracing analysis, that only some of Social Security recipient's bank funds were entitled to exemption); cf. United States v. Banco Cafetero Panama, 797 F.2d 1154, 1158-61 (2d Cir. 1986) (addressing "problematic" task of tracing proceeds of drug transactions in bank accounts also used for legitimate transactions). If plaintiff's proposal were that banks should identify all moneys traceable to electronically-deposited Social Security in all accounts, his due process argument would be even weaker because of the even longer delays and heavier burden on banks that would result. See infra Part III.B.2 (discussing burden).

Thus, under plaintiff's actual proposal that banks identify accounts containing solely Social Security funds, the potential class of beneficiaries would be limited, and possibly quite small. Deposit of even a single check could cause a recipient's account to lose its solitary-use status. At the same time, the new procedure would disserve many recipients by confusing them about the level of protection to which they are entitled. For example, a debtor who has forgotten that she made a deposit of non-Social Security funds into her account might erroneously assume that all restraining notices served on her account are without force. Consequently, she might fail to take prompt action to release exempt funds in response to a notice.

2. Claiming Exemptions Would Be Burdensome For Banks

Contrary to plaintiff's contention that banks would face only a "de minimis" burden (Appellant's Br. at 43) in complying with his proposed requirement, the burden on banks would be significant. Reviewing account records to ensure that all funds were from presumptively exempt sources would be time-consuming, especially for older accounts and accounts obtained from other banks through acquisition or merger. Banks would have to hire more staff to conduct these reviews or make expensive investments in the creation and maintenance of new computer information files. Banks also would incur additional substantial expense in creating and operating a decision-making system that necessarily would apply to all accounts affected by restraining notices, not just those that are ultimately shown to have only exempt funds received by electronic deposit.

More importantly, by coming under an obligation to assert exemptions in favor of certain debtors, banks would be forced to undertake the unprecedented task of asserting legal defenses on behalf of account holders, thereby increasing banks' potential liability. A mere clerical error in either the maintenance or the review of the account could result in a claim that an exemption defense had been mistakenly asserted or foregone. Disputes similarly could arise over the banks' determinations whether funds are excepted from exemption because they are sought for alimony or child support. These circumstances, in turn, would give banks a significant incentive to insist on judicial protection for its exemption determinations through an interpleader action involving the debtor and creditor. Resort to such a cumbersome process would impose expense on banks and interfere with their ability to make low-cost accounts available to Social Security recipients.

3. Other Factors Also Weigh Against Plaintiff's Proposal

Other factors also weigh against a finding that New York's current procedures are unconstitutional. First, plaintiff's proposed requirement would disserve creditors because it would further complicate post-judgment attachment proceedings by introducing a third stakeholder, the bank. The judgment creditor's interests in these proceedings "are straightforward: a swift, sure and inexpensive mechanism for collecting judgments." McCahey, 774 F.2d at 549; see also Dionne, 757 F.2d at 1352. Plaintiff's rule would be contrary to these interests because it would require creditors possibly to litigate against banks that hold the debtors' assets.

Second, assuming arguendo the federal government's interest in encouraging electronic deposit of benefits should be considered under due process, this interest similarly weighs against plaintiff because the added burden on banks resulting from the new procedure would discourage their participation in the ETA program, which is entirely voluntary. See 31 C.F.R. 208.5 ("A federally-insured financial institution shall be eligible, but not required, to offer ETAs as Treasury's Financial Agent.").

Finally, Treasury considered and rejected procedures similar to those proposed by plaintiff here when Treasury created the ETA program for recipients of federal benefits payments. See 31 C.F.R. Part 208; Notice at 38512-13. Treasury had proposed to restrict the types of funds that could be deposited in an ETA in order "to reduce the potential that funds in an ETA would be subject to attachment." Notice, at 38512. However, in its final rule, Treasury declined to adopt this restriction. Id., at 38513. In addition, Treasury rejected the requests of consumer organizations that it "prohibit attachment of all funds" in ETAs, or, alternatively, that "when presented with an attachment order, financial institutions should determine which funds are attachable (or not attachable) as a way to assist recipients." Id., at 38512-13. This Court should not second-guess Treasury's considered judgment that banks should not be burdened with a requirement that they assert exemptions on behalf of benefits recipients. Notably, the requirements that Treasury did impose on financial institutions regarding attachment are consistent with the States' long-standing practice of requiring debtors to claim exemptions.¹¹

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IV. HSBC'S COMPLIANCE WITH CPLR 5222 DOES NOT VIOLATE THE SUPREMACY CLAUSE

Unable to show that HSBC violated his due process rights when it froze his bank account, plaintiff contends that HSBC's actions violated the Social Security Act's anti-attachment provision, 42 U.S.C. 407(a). Plaintiff's argument fails because Section 407(a) prohibits only (in certain circumstances) the attachment of actual funds received from the government, not legal process that temporarily freezes bank accounts in which such funds may be deposited. In any event, an interpretation of the Act that forbids the temporary freezing of accounts to allow adjudication of applicable statutory exemptions would be practically unworkable.

Section 407(a) provides in relevant part that "none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process . . ." (emphasis added). Courts have interpreted this provision as prohibiting states from seizing from individuals the "income or payments" they receive from Social Security. Bennett v. Arkansas, 485 U.S. 395, 396 n.1 (1988) (per curium); see also Philpott v. Essex County Welfare Bd., 409 U.S. 413, 415 (1973) (Section 407(a) barred reaching "the federal disability payments paid"). The language of the statute does not preclude states from allowing temporary legal process on bank accounts that may contain such moneys. "An 'account' is a name, a routing device like the address of a building," to be distinguished from "money" or "funds" that may be subject to legal process. United States v. $448,342.85, 969 F.2d 474, 476-77 (7th Cir. 1992).

Consistent with the focus of Section 407(a)'s prohibition on "moneys paid," courts addressing the issue have uniformly concluded that state post-judgment attachment procedures that "avoid[] any significant interruption of access to benefits" do not violate the Act. Finberg, 634 F.2d at 63; see also Dionne, 757 F.2d at 1354-55; Zeppieri v. New Haven Provision Co., 163 F. Supp. 2d 126, 136-37 (D. Conn. 2001). In Finberg and Dionne, Social Security recipients similarly challenged state post-judgment attachment procedures on both Supremacy and Due Process Clause grounds. The Third and First Circuits respectively invalidated the states' laws because they found the notice and post-attachment hearing procedures to be inadequate. The clear implication of these decisions is that state procedures that afford sufficient due process protections to debtors do not conflict with Section 407(a), even if debtors are temporarily denied access to exempt benefits. See Finberg, 634 F.2d at 63; Dionne, 757 F.2d at 1354-55 (declining to address plaintiff's argument under Section 407(a) in light of its due process holding). Here, nothing in CPLR 5222 creates a "significant interruption" of Social Security recipients' access to benefits. Spring Creek's failure to abide by New York's rules, not the rules themselves, caused the delay experienced by plaintiff. See JA 32.

Similarly, in Zeppieri, the court flatly rejected plaintiff's argument that Section 407(a)'s exemption was "self-executing" and "do[es] not need to be claimed by social security recipients É in instances É where the account at issue contains only exempt funds." 163 F. Supp. 2d at 132, 136-37. The requirement of Connecticut law that debtor recipients initiate legal proceedings to claim exemptions for frozen funds was "not deceptive or unfair" and did not "violate federal law." Id. at 136-37; see also Phillips,121 Cal. Rptr. at 62. New York's attachment procedures, like those in Zeppieri, allow judgment debtors a reasonable means to compel release of exempt funds and therefore do not "stand as an obstacle" to the accomplishment of Congress's objectives in enacting Section 407(a). Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

In addition to the text of Section 407(a) and the case law, common sense renders plaintiff's Supremacy Clause challenge implausible. First, plaintiff's contention that Section 407(a) prohibits even a temporary denial of access to solitary-use bank accounts is inconsistent with his position that Section 407(a) permits freezing of commingled accounts. See Zeppieri, 163 F. Supp. 2d at 137 n.10. Second, as noted, if banks were responsible for claiming exemptions on behalf of debtor account holders, they would still have to freeze many of these accounts for some period while they determined whether any exemptions applied. See supra Part II.B. The practical necessity of this freeze belies plaintiff's interpretation of Section 407(a).
 

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CONCLUSION

The judgment of the District Court should be affirmed.

DATE: July 21, 2003

WILMER, CUTLER & PICKERING

By: ____________________________________

Christopher Lipsett

399 Park Avenue

New York, NY 10022

(212) 230-8800

ERIC MOGILNICKI

DAVID S. MENDEL

2445 M Street, N.W.

Washington, DC 20037

(202) 663-6000

ATTORNEYS FOR AMICUS NEW YORK BANKERS ASSOCIATION

(Footnotes)

¹ The parties have consented to the filing of this brief.

² NYBA accepts the facts of this case as set forth in the brief of Appellee HSBC.

³ In any event, plaintiff's claims for declaratory and injunctive relief are moot because he passed away in July 2002, while his appeal was pending (Appellant's Br. at 9), and therefore he presently cannot have a personal stake in these claims.

See Rhodes v. Stewart, 488 U.S. 1, 4 (1988); Swan v. Stoneman, 635 F.2d 97, 102 n.6 (2d Cir. 1980) (claims for injunctive and declaratory relief were moot as to deceased plaintiff).

⁴ Plaintiff has dropped his claim for the fee charged by HSBC for processing Spring Creek's notice.

See Appellant's Br. at 43 n.18.

⁵ In that context, the Court in Blum explained: "a State normally can be held responsible for a private decision only when it exercised coercive power or has provided such significant encouragement, either overt or covert, that the choice must in law be deemed to be that of the State."

Id. at 1004 (emphasis added). Although plaintiff selectively quotes from this portion of

Blum to mask the important fact that the State's liability was in issue in that case (Appellant's Br. at 29-30), the Court's full opinion makes clear that it was not addressing the liability of a private party.

⁶ Viewed in its proper historical context, the passage in Adickes cited by plaintiff (Appellant's Br. at 29) at most stands for the proposition that "a private person who discriminates on the basis of race and with the knowledge of and pursuant to a state-enforced custom requiring discrimination,

is a participant in joint activity with the State."

Sutton, 192 F.3d at 841 (quoting Adickes, 398 U.S. at 174 n.44). As the Ninth Circuit has observed: The conduct in Adickes occurred in 1964, 10 years after Brown v. Board of Education, 347 U.S. 483 (1954), and after the decade of publicized litigation that followed in its wake. In view of the intense national focus on issues of racial discrimination, it is virtually inconceivable that a private citizen then could have acted in the innocent belief that the state law and customs involved in Adickes still were presumptively valid. É In such a context, the private party could be characterized as hiding behind the authority of law and engaging in "joint participation" with the State in the deprivation of constitutional rights.Sutton, 192 F.3d at 841 (quoting Lugar, 457 U.S. at 955-56 (Powell, J., dissenting)); see also 1A Schwartz & Kirlin,

Section 1983 Litigation 5.10 at 522 (3d ed. 1997) (noting that Supreme Court's "expansive view of state action" during the 1960s and 1970s in "furtherance of its goal of eradicating societal racial discrimination" has since been significantly narrowed by numerous Court decisions involving private party defendants).

⁷ The same could be said for a bank providing information about persons receiving public assistance to State authorities as required by NY Banking Law 4 (2003), a lawyer responding to a subpoena or discovery request on behalf of a client, or a merchant collecting a sales tax that the customer alleges is unconstitutional.

⁸ One of the factors the Supreme Court specifically identified in Mathews was "the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail." 424 U.S. at 335. In the present case this factor should be supplanted by the interest of the banks, because it is they who bear the "burden" of "increasing procedural safeguards." Doehr, 501 U.S. at 11.

⁹ The notice that a judgment creditor must serve the debtor under CPLR 5522(e) lists nine different kinds of payments that could be exempt under state or federal law: Supplemental security income; Social Security; Public assistance; Alimony or Child support; Unemployment benefits; Disability benefits; Workers' compensation benefits; Public or private pensions; and Veterans benefits.

¹⁰ The record in this case provides this Court with no basis for concluding otherwise. Because of Spring Creek's failure to provide plaintiff with a copy of the restraining notice as required under CPLR 5222 (JA 32), plaintiff was temporarily denied information about available procedures that could have assisted him in obtaining a prompt release of his funds. Moreover, even after plaintiff learned about these procedures, he did not use them.

See Appellant's Br. at 12-13. Here, as in McCahey, this Court is "not faced with a concrete example of the New York statute in action," and the Court should be "unwilling to invalidate a statute because it might, but need not, be applied in an unconstitutional manner." 774 F.2d at 553

¹¹ There are two such requirements under the ETA program: First, the financial institution must send a copy of any attachment or garnishment order that it receives and other relevant information to the benefits recipient. Second, the financial institutions must disclose to new ETA holders that certain Federal benefit payments (including Social Security) "are protected from attachment," subject to "exceptions." Notice, at 38513. Although in this case the record is silent as to whether plaintiff's account was an ETA account, some NYBA members participate in the ETA program and plaintiff seeks adoption of a rule that would apply to ETA and non-ETA accounts alike. Moreover, Treasury's determination that debtors should carry the burden of claiming exemptions in ETA accounts is equally significant for non-ETA accounts.

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The Chase Manhattan Bank

 

T/U/W Blanche Hunter F/B/O Pamela Creighton

INTEREST OF AMICUS CURIAE - HSBC Bank USA

 

TABLE OF CONTENTS

PRELIMINARY STATEMENT

INTEREST OF THE AMICUS CURIAE

STATEMENT OF FACTS

ARGUMENT

I. THE DECISION BELOW UNDERMINES STRONG NEW YORK PUBLIC POLICY

A. The Policy of Finality

B. The Decision Below Will Have a Chilling Effect on Fiduciaries and Wreak Havoc on the Law

II. THE DECISION BELOW IGNORES THE RATIONALE OF SCPA 2210(10)

A. The Decision Cannot Be Reconciled with the Plain Language of SCPA 2210(10) or with New York Case Law

B.The Decision Renders SCPA 2210(10) Superfluous

C. The Analogous Doctrine of Virtual Representation Demonstrates that the Objectant Represented Her Own Interests in the Prior Proceedings

III. THE DOCTRINE OF SUCCESSOR FIDUCIARY LIABILITY DOES NOT APPLY WHERE, AS HERE, THE PREDECESSOR AND SUCCESSOR IS THE SAME LEGAL ENTITY

A. The Doctrine of Successor Liability Has No Application Here

B. New York Courts Have Rejected the Pepper Rule.

IV. GENERAL PRINCIPLES OF LAW ALSO BAR OBJECTANT'S CLAIMS

A. As the Objections Could Have Been Raised in an Earlier Proceeding in Which Objectant Was a Party, the Objections Are Barred by the Doctrine of Res Judicata

B. Because the Objections Were Necessarily Decided in the Earlier Accounting Proceedings, They Are Barred Under the Doctrine of Collateral Estoppel

CONCLUSION

TABLE OF AUTHORITIES

CASES

In re Accounting of Cambeis, 27 Misc.2d 668 (Surr. Ct. Bronx Co. 1960) 11

Alvarado v. Dep't of State, 110 A.D.2d, 583 (1st Dep't 1985) 12

Brown v. Giesecke, 40 A.D.2d 1009 (2d Dep't 1972) 12

Bullis v. DuPage Trust Co., 72 Ill.App.3d 927 (Ill. App. Ct. 1979) 16

In re Campbell's Will, 38 N.Y.S.2d 827 (Surr. Ct. Westchester Co. 1942) 10, 21

In re Chapin, 171 Misc. 783 (Surr. Ct. N.Y. Co. 1939) 23

Columbus Trust Co. v. Campolo, 110 A.D.2d 616 (2d Dep't 1985) 9

In re Cornwell's Will, 78 N.Y.S.2d 622 (Surr. Ct. Queens Co. 1948) 10

Daashur Assocs. v. December Artists Apartment Corp., 226 A.D.2d 114 (1st Dep't 1996) 9

Dickerson v. Camden Trust Co., 1 N.J. 459 (N.J. 1949) 16

In re Edward's Will, 102 N.Y.S.2d 715 (Surr. Ct. Onondaga Co. 1950) 10

In re Estate of Alker, 20 A.D.2d 894 (2d Dep't 1964) 22

In re Estate of Bingham, 97 Misc.2d 370 (Surr. Ct. N.Y. Co. 1978) 13

In re Estate of Emmerich, 175 Misc. 228 (Surr. Ct. Kings Co. 1940) 10

In re Estate of Fales, 294 A.D.2d 165 (1st Dep't 2002) 12, 20

In re Estate of Massimino, 143 Misc. 119 (Surr. Ct. Bronx Co. 1932) 10, 17, 18

In re Estate of Sage, 54 Misc. 2d 779 (Surr. Ct. N.Y. Co. 1967) 13, 17

In re Estate of Schmidt, 163 Misc. 610 (Surr. Ct. N.Y. Co. 1937) 22

In re Estate of Zaharis, 148 A.D.2d 868 (3d Dep't 1989) 6

In re Estate of Ziegler, 157 Misc.2d 423 (Surr. Ct. N.Y. Co. 1993) 11

In re Estate of Ziegler, 161 Misc. 2d 203 (Surr. Ct. N.Y. Co. 1994) 20, 23

Fisher v. Banta, 66 N.Y. 468 (1876) 9

In re Gibson's Will, 40 N.Y.S.2d 727 (Surr. Ct. Westchester Co. 1943) 11

Gramatan House Investors Corp. v. Lopez, 46 N.Y.2d 481 (1979) 6

In re Haigh, 125 Misc. 365 (Surr. Ct. N.Y. Co. 1925) 9

Hernandez v. Barrios Paoli, 93 N.Y.2d 781 (1999) 11

In re Hoyt's Estate, 47 N.Y.S.2d 929 (Surr. Ct. Westchester Co. 1943) 10, 21

Juan C. v. Cortines, 89 N.Y.2d 659 (1997) 24

In re Kemske, 205 N.W.2d 755 (Minn. 1981) 16

Krimsky v. Lombardi, 78 Misc.2d 685 (Sup. Ct. Albany Co. 1974) 6, 15

In re Lawyers Trust Co., 182 Misc. 845 (Surr. Ct. Kings Co. 1943) 6, 10, 15, 23

Liska v. First Nat'l Bank in Sioux City, 310 N.W.2d 531 (Iowa Ct. App. 1981) 16

In re Long Island Loan & Trust Co., 92 A.D. 1 (2d Dep't 1904) 22

In re Matter of Harley, 746 N.Y.S.2d 137 (1st Dep't 2001) 12

In re Matter of Rudin, 292 A.D.2d 283 (1st Dep't 2002) 6, 15, 20

O'Brien v. City of Syracuse, 54 N.Y.2d 353 (1981) 19

In re Parkinson, 134 Misc.2d 565 (Surr. Ct. Nassau Co. 1987) 10

Pepper v. Zions First Nat'l Bank, 801 P.2d 144 (Utah 1990) 5, 15, 16, 17

In re Petition of the Union Elevated R.R. Co. of Brooklyn, 112 N.Y. 61 (1899) 12

In re Schaaf's Estate, 12 A.D.2d 811 (2d Dep't 1961) 10

Schwartz v. Public Adm'r, 24 N.Y.2d 65 (1969) 24

Stevens v. Wing, 293 A.D.2d 49 (1st Dep't 2002) 11

Windsor Metal Fabrications, Ltd. v. General Accident Ins. Co. of Am.,

295 A.D.2d 502 (2d Dep't 2002) 19

Estate of Winston v. Northern Trust Co., 99 Ill.App.3d 278 (Ill. App. Ct. 1981) 16

In re Zilkha, 174 A.D.2d 331 (2d Dep't 1991) 6, 20

STATUTES

New York Banking Law 100 2

New York SCPA 1506 14

New York SCPA 2210(10) 1, 2, 3, 5, 7-14, 16, 18

OTHER AUTHORITY

Restatement (Second) of Judgments 36(2) 19

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PRELIMINARY STATEMENT

The New York Bankers Association (the "Association") respectfully submits this brief as amicus curiae in support of the appeal taken by The Chase Manhattan Bank (the "Bank").¹

In its decision dated December 31, 2002 (the "Decision"), the Surrogate's Court of Westchester County (the "Surrogate's Court") held that neither SCPA 2210(10) nor the doctrines of res judicata and collateral estoppel bar an objectant's claims against a trustee, seeking to hold a trustee liable as a successor fiduciary to itself, for its acts as executor and as a trustee of a terminated trust. Those acts, essentially the retention of Eastman Kodak ("Kodak") stock, were clearly reflected in the prior judicially settled estate accounting to which Pamela Townley Creighton (the "Objectant")² was a party and in a subsequent judicially settled trust accounting in a trust for Objectant's sister under the same Will, to which Objectant was also a party.

A fiduciary may settle an accounting either judicially or by agreement. Section 2210(10) of the Surrogate's Court Procedure Act ("SCPA") requires a fiduciary accounting to itself as successor fiduciary, to cite in the accounting proceeding all persons who have an interest in the succeeding estate or trust. In a non-judicial settlement, such persons need to be party to the contract. The Decision not only undermines the finality of numerous accounting decrees where a fiduciary has acted in a dual capacity, but also undermines contracts settling fiduciary accounts of proceeding under the same circumstances.

Consequently, the Decision undermines the very purpose of SCPA 2210(10) and, if sustained, will open a floodgate of litigation. Objectant was a party to the prior accounting proceedings, had an opportunity to be heard in each of those two prior proceedings, and should not be given a third bite at the apple, based upon an erroneous reading of SCPA 2210(10). The Decision clashes with New York public policy favoring finality of decrees and interferes with contractual relationships and should not stand.

 

INTEREST OF THE AMICUS CURIAE

The New York Bankers Association (the "Association") is the principal trade association of the commercial banking industry in New York State. Its over 125 domestic and non-resident member banks comprise both national and state-chartered banks and trust companies, and include community, regional and money-center banks. The Association's members include virtually every commercial banking institution in New York that has fiduciary powers pursuant to New York Banking Law 100.

Banks and trust companies, many of which are Association members, commonly serve as both executor under a will and as trustee of trusts thereunder. As many Association members serve in the same dual capacities, as did the Bank in this action, the Decision has significant ramifications for the Association and its members.³ In circumstances where a bank or trust company is acting in dual capacities and accounts to itself, in accordance with the requirements of SCPA 2210(10), Association members cite through to estate or trust beneficiaries on accounting proceedings or make such beneficiaries parties to the agreement settling the accounting. It is widely believed in the industry that providing beneficiaries with the opportunity to review and question a fiduciary's acts or omissions in compliance with SCPA 2210(10) forecloses such beneficiaries from relitigating issues disclosed on the accounting in a subsequent proceeding.

The Association, whose members are fiduciaries for thousands of trusts and estates in this State, has an interest in ensuring that the law governing the obligations and liabilities of its members is fair, clear and consistent. Toward that end, the Association generally appears as amicus curiae when a question is presented of fundamental importance to the banking industry in New York State. Many of the Association's members have extensive experience with the legal issues raised in this case regarding the duties of executors and trustees, and the Association is therefore well-positioned to apprise this Court of the practical consequences for the banking industry should the Decision be upheld. The Association thus has a compelling interest in ensuring that judicial decrees and contracts that settle accounts of fiduciaries are accorded the finality to which they are due.

 

STATEMENT OF FACTS

Blanche D. Hunter ("Decedent") died testate in December 1972. Record on Appeal ("RA") at 5. Her Will sets up identical trusts for her granddaughters, Alice Creighton (the "Alice Creighton Trust") and Objectant ("Objectant's Trust"), and named James W. Cook ("Cook") and the Bank as co-Executors and co-Trustees. Id. Between the initial funding of the trusts in 1973 and 1977, the Executors transferred over 12,000 shares of Kodak common stock into the trusts (id.), having sold the balance of Decedent's 133,000 Kodak shares. Id. at 177. In April 1976, the Executors commenced a proceeding to settle their account of proceedings. Id. at 5. This accounting fully set forth the Executors' retention of the unsold Kodak stock and its decrease in value during the accounting period and disclosed the dates and amounts of Kodak shares distributed to the trusts. See id. at 231-45. Pursuant to SCPA 2210(10), Objectant, in her capacity as beneficiary of her Trust, was served with process in that proceeding, and she appeared by counsel. Id. at 263-65. Her only objections related to the Bank's counsel fees. Id. at 5-6. Those objections were resolved and the Surrogate's Court entered a decree (the "1977 Decree") settling the account of the Executors through April 15, 1977. Id. at 6.

Following the death of Alice Creighton in 1980, the Bank and Cook, as co-Trustees of the Alice Creighton Trust, distributed the remainder of her trust, consisting mostly of Kodak stock, to Objectant's Trust. Id. In 1981, the co-Trustees commenced a proceeding to settle their account of proceedings as co-Trustees of the Alice Creighton Trust, and Objectant, in her capacity as beneficiary of her Trust, the remainderman of Alice's Trust, was duly served with process in that proceeding. Id. As in the earlier Executors' accounting, this accounting fully set forth the Trustees' retention of Kodak stock and disclosed the dates and amounts of Kodak stock received from the Decedent's estate and the distribution of Kodak shares to Objectant's Trust. Id. at 269-76. Objectant executed a waiver of citation and consented to the entry of a decree settling the co-Trustees' accounting, and the Surrogate's Court entered a decree (the "1981 Decree") settling the co-Trustees' account of proceedings through May 2, 1980. Id. at 315. Cook and the Bank continued to act as co-Trustees of the Objectant's Trust until Cook's death in 1996; thereafter the Bank has continued to act as sole Trustee. Id. at 6.

In November 1997, the Bank commenced an intermediate accounting proceeding, covering the period from the funding of the Objectant's Trust in 1973 through Cook's death. Id. On May 6, 2002, Objectant filed her verified objections to the accounting (the "Objections"), based primarily on the Bank's retention of the Kodak shares from 1973 through the early 1980s in its capacities as Executor and Trustee of both trusts. Id. at 6-7. On July 17, 2002, the Bank moved to dismiss certain Objections because Objectant was a party to both previous accountings and had failed to object to the retention of Kodak stock in either of those proceedings. Id. at 146-47.

The Surrogate's Court dismissed certain Objections but denied the Bank's motion to dismiss other objections which sought to impose successor fiduciary liability on the Bank as Trustee of Objectant's Trust on account of its actions as Executor and as Trustee of the Alice Creighton Trust. The Surrogate's Court, finding no New York precedent on the question of whether the doctrine of res judicata barred the prosecution "of a claim that a successor trustee breached a fiduciary duty, as successor trustee, in failing to redress misdeeds it committed as a predecessor executor or trustee," Id. at 10, relied on a Utah case, Pepper v. Zions First Nat'l Bank, 801 P.2d 144 (Utah 1990), and held that the doctrine of res judicata did not bar Objectant from claiming that the Bank had breached its fiduciary duty to her "in failing to redress any improprieties it may have committed" as co-Executor of Decedent's estate and/or co-Trustee of the Alice Creighton Trust. Id. at 11.

The Surrogate's Court further concluded that there was no requisite "identity of parties" to warrant the application of the doctrine of res judicata. Id. at 12. Noting that Objectant did not seek to reopen accountings settled in 1977 and 1981, the Surrogate's Court found that the Bank's actions as Trustee of Objectant's Trust were not subject to judicial scrutiny in either of those prior proceedings. Id. The Surrogate's Court also rejected the Bank's argument that making the Objectant a party in both prior accounting proceedings pursuant to SCPA 2210(10) protected it from failing to scrutinize its own actions in those proceedings. Id. at 12-13. Finally, the Surrogate's Court noted the courts' reluctance to invoke the doctrine of res judicata where a colorable claim for breach of a trust duty has been raised. Id. at 13.

On January 15, 2003, the Bank noticed its appeal. Id. at 1. The Association's motion to appear as amicus curiae was granted on or about June 12, 2003. For the reasons stated herein, this Court should reverse the Decision except to the extent that the Surrogate's Court dismissed the Objections.

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ARGUMENT

I. THE DECISION BELOW UNDERMINES STRONG NEW YORK PUBLIC POLICY

A. The Policy of Finality

This State's public policy favors the recognition of the finality of judicial determinations. New York law incorporates a number of equitable principles to prevent a party from seeking to raise issues that either were heard previously and decided in a judicial proceeding or could have been raised but were not. As the New York Court of Appeals has stated:

[A]s to the parties in a litigation and those in privity with them, a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action . . . . This principle, so necessary to conserve judicial resources by discouraging redundant litigation, is grounded on the premise that once a person has been afforded a full and fair opportunity to litigate a particular issue, that person may not be permitted to do so again.

Gramatan House Investors Corp. v. Lopez, 46 N.Y.2d 481, 485 (1979).

The purpose of an accounting proceeding is to offer an opportunity to necessary parties to review and, if they choose, object to the conduct of the accounting fiduciary. Basic principles of finality mandate that, after an accounting proceeding has been completed and a judicial decree has been entered (or, in the case of a non-judicial settlement of an account, a contract has been signed), no issue (i) clearly presented in an accounting actually objected to and resolved in the proceeding; or (ii) that could have been objected to in the proceeding, but was not, may be objected to subsequently by a party to the original proceeding. As stated in In re Lawyers Trust Co., 182 Misc. 845, 847 (Surr. Ct. Kings Co. 1943):

Every issue actually or potentially tendered by the account, to which no objection is asserted, is rendered res judicata by the entry of a decree judicially settling such account. The benefit of the finality and conclusiveness granted to such decrees Éwould be destroyed if the courts did not thus rigidly seek to maintain their sanctity on this basis.

See also In re Matter of Rudin, 292 A.D.2d 283, 283 (1st Dep't 2002) (finding that objectant was estopped by her participation in and consent to prior judicial proceedings from objecting to matters covered in a prior accounting); In re Zilkha, 174 A.D.2d 331, 334 (2d Dep't 1991) (stating that a prior judicial decree settling the executor's account "precludes relitigation by the parties to an action and their privies of any matters that were necessarily decided in the prior action"); In re Estate of Zaharis, 148 A.D.2d 868, 869 (3d Dep't 1989); Krimsky v. Lombardi, 78 Misc.2d 685, 687 (Sup. Ct. Albany Co. 1974). The conclusiveness extends to every material matter within the issues that were expressly litigated and determined and also to those matters which, although not expressly determined, are comprehended and involved in the matter expressly stated and decided, whether they were or were not actually litigated or considered. Id. While the aim of the accounting is to inform the beneficiary of a fiduciary's actions, the Decree on an accounting (or the signed contract) finally discharges the accounting fiduciary from liability for the actions revealed in the accounting. Thus, no party to an accounting can challenge the accounting decree (or contract) in a later proceeding absent allegations of fraud or misrepresentation as to facts material to the accounting.

In this case, Objectant was made a party to the prior accounting proceedings, as required under SCPA 2210(10). She appeared by counsel in the estate proceeding, waived her right to do so in the trust proceeding, and raised no substantive objections in either. She has not alleged any fraud or misrepresentation with respect to those prior accountings, nor has she contended that she was unaware that the trusts for her sister and herself consisted primarily of Kodak stock that had substantially declined in value by 1977 and still further by 1981. Objectant could have raised her objections to the Executors' retention of Kodak at the time of the 1977 accounting, and she could have raised her objections to the Trustees' retention of Kodak at the time of the 1981 trust accounting. Her failure to do so bars her from seeking to raise such objections as to such actions under the guise that the Bank, as successor fiduciary to itself, as Executor and as Trustee of the Alice Creighton Trust, should have raised objections.

B. The Decision Below Will Have a Chilling Effect

on Fiduciaries and Wreak Havoc on the Law

If upheld, the Decision could lead to a deluge of litigation brought by beneficiaries seeking to raise objections that they could have raised but did not raise in prior accounting proceedings. Such a result will impose huge costs on the fiduciary industry. The passage of time will make it very difficult for fiduciaries to defend themselves against claims that relate to accounts, such as the ones at issue in this case, that have been closed for decades. In this case, many of the parties, including the co-Executor and co-Trustee and many of the Bank's employees who handled the Estate, are no longer living. Even if all the parties were still alive, there is no reason to think that either memories or records will be reliable with respect to accounts closed 20 years earlier.

Moreover, rather than face such litigation in the future, fiduciaries will either refuse to serve as successor fiduciary to themselves, or they will provide executor's and successive trustee's accountings, thus imposing needless expenses on the trust. In short, the Decision will force the fiduciary industry to either limit its services to its clients or to impose new and unnecessary costs on those clients, a result clearly at odds with the intent of SCPA 2210(10), which provides a mechanism for protecting the interests of beneficiaries while permitting fiduciaries to account to themselves.

Where a successor fiduciary is a different entity from its predecessor, the successor may be liable as a successor fiduciary for its predecessor's actions, because it is charged with a duty to protect the beneficiaries' rights in the predecessor's accounting. Where a fiduciary accounts to itself, by operation of SCPA 2210(10), it is charged with no such duty. Rather in such circumstances, New York law recognizes that a fiduciary will not object to its own accounting because it has already reviewed the account and found its own actions reasonable. By imposing a duty on fiduciaries to object to their own deeds as predecessor fiduciaries in addition to their fiduciary duties as predecessors, the Decision exposes fiduciaries to double liability for the same acts and gives beneficiaries two bites at the apple, while undermining the finality of judicial decrees settling accounts.

Furthermore, a fiduciary's accounting can be settled in either of these two ways: judicially by court decree or non-judicially by contractual Receipt and Release Agreement. If the Decision stands, it is likely that beneficiaries, who are dissatisfied in hindsight, will attempt to extend the Decision to re-open a Receipt and Release Agreement that they knowingly signed. It is thus possible and, in fact, likely, that the Decision will not only wreak havoc on the finality of judicial decrees, but will also undermine the sanctity of agreements entered into freely between parties, violating the policy against interfering with clear contracts between parties, in the absence of fraud or duress. Daashur Assocs. v. December Artists Apartment Corp., 226 A.D.2d 114 (1st Dep't 1996); Columbus Trust Co. v. Campolo, 110 A.D.2d 616, 617 (2d Dep't 1985).

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II. THE DECISION BELOW IGNORES THE RATIONALE OF SCPA 2210(10)

A. The Decision Cannot Be Reconciled with the Plain

Language of SCPA 2210(10) or with New York Case Law

In cases such as this one where a predecessor fiduciary accounts to itself as a successor fiduciary, because there is no expectation that the successor fiduciary will object to its own accounting, the legislature enacted SCPA 2210(10), which provides in pertinent part:
Where an accounting fiduciary accounts to himself in a separate capacity É it shall not be sufficient to issue process or obtain the appearance of the accounting party in such separate capacity only, but in addition process shall issue to all persons interested in É the trust of which the accounting party is trustee.

The statute addresses the fact that a fiduciary accounting to itself cannot be expected to challenge its own actions, a fact that was clearly recognized by New York case law predating the statute. Fisher v. Banta, 66 N.Y. 468, 482 (1876) (holding that beneficiaries could not be bound by an accounting to which they were not parties where the executor accounted to himself); In re Haigh, 125 Misc. 365, 366-67 (Surr. Ct. N.Y. Co. 1925) ("In such cases it has been the rule since the rendition of [Fisher v. Banta] that the persons interested in the deceased beneficiary's estate must be cited, otherwise the decree is not conclusive upon them."). These cases set forth a rule of law later codified by SCPA 2210(10) that a decree settling a predecessor fiduciary's account is conclusive on all beneficiaries of the succeeding trust made party to the accounting proceeding where the identity of the predecessor and successor fiduciary is the same.

In the 75 years since New York adopted SCPA 2210(10), New York courts have uniformly interpreted it as barring actions to challenge the conduct of a fiduciary that accounted to itself in a prior proceeding to which the objectant was a party. See In re Hoyt's Estate, 47 N.Y.S.2d 929, 931 (Surr. Ct. Westchester Co. 1943), modified on other grounds, 294 N.Y. 373 (1945) (barring the prosecution of a claim against a trustee based on its alleged misdeeds as a predecessor executor); In re Campbell's Will, 38 N.Y.S.2d 827, 830-31 (Surr. Ct. Westchester Co. 1942) (barring negligence claims against fiduciary serving as both executor and trustee and relating to conduct that preceded the executor's accounting); In re Estate of Massimino, 143 Misc. 119, 121 (Surr. Ct. Bronx Co. 1932) (noting that a decree settling an account approves the trust as set up and is conclusive as against all parties to the accounting proceeding). Where as here, a person beneficially interested in an estate or trust is made a party to an accounting proceeding and thereby has an opportunity to be heard, that person is bound by a decree settling the account. See In re Schaaf's Estate, 12 A.D.2d 811, 812 (2d Dep't 1961) (finding parties bound by an accounting decree where they were parties to the accounting proceeding and made no motion to change or modify the provisions of the decree). The reasons for this doctrine have been clearly articulated:

By reason of their inclusion in the former account, issues were inevitably tendered to the respondents in the proceeding respecting the propriety É of the accountant in respect of [the securities in question]. . . . So long as the decree stands, it is conclusive upon the parties in respect of all issues that might have been litigated in the former proceeding. It is not subject to attack either collaterally or by indirection . . . .

In re Estate of Emmerich, 175 Misc. 228, 229 (Surr. Ct. Kings Co. 1940); accord In re Edward's Will, 102 N.Y.S.2d 715, 720 (Surr. Ct. Onondaga Co. 1950); In re Cornwell's Will, 78 N.Y.S.2d 622, 626 (Surr. Ct. Queens Co. 1948); Lawyers Trust, 182 Misc. at 847.

The principle animating SCPA 2210(10) is the recognition that a fiduciary accounting to itself cannot represent the interests of the beneficiary. See In re Parkinson, 134 Misc.2d 565, 566 (Surr. Ct. Nassau Co. 1987) ("SCPA 2210(10) states in no uncertain terms that an accounting fiduciary may not account to himself[,] recognizing that an individual may not discharge himself from liability"); see also In re Estate of Ziegler, 157 Misc.2d 423, 427 (Surr. Ct. N.Y. Co. 1993) (recognizing that SCPA 2210(10) carves out an exception to the general rule that beneficiaries can be represented by their trustee, thus recognizing that where a fiduciary accounts to itself it cannot represent the beneficiary). The statute recognizes the conflict that the accounting fiduciary has when accounting to itself and, by requiring all persons interested in the estate accounting to be made parties to the proceeding, ensures the finality of the decree or agreement settling the accounting. Indeed, one court has stated that "an executor may always choose to cite all of the trust beneficiaries rather than postpone their potential objections to the trustee's accounting." Ziegler, 157 Misc.2d at 431. It is the beneficiaries cited under SCPA 2210(10), and not the successor fiduciary, who are charged with the representation of their interests. See In re Accounting of Cambeis, 27 Misc.2d 668, 669 (Surr. Ct. Bronx Co. 1960) ("In order to preserve his rights, [SCPA 2210(10)] makes this petitioner a necessary party to any voluntary proceeding to judicially settle the account of these executrices."); In re Gibson's Will, 40 N.Y.S.2d 727, 732 (Surr. Ct. Westchester Co. 1943) (noting that trust beneficiaries are necessary parties to a proceeding to settle the accounts of the executor and that a decree settling such an account "is conclusive as to all persons of whom jurisdiction was obtained as to all matters embraced in the account and decree").

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B. The Decision Renders SCPA 2210(10) Superfluous

It is a well-accepted principle of statutory construction that a court must avoid an interpretation that renders a provision meaningless. See, e.g., Hernandez v. Barrios Paoli, 93 N.Y.2d 781, 787 n.2 (1999) ("[T]he Appellate Division's reading of the statute would render this provision meaningless, in direct contravention of settled principles of statutory construction"); Stevens v. Wing, 293 A.D.2d 49, 54 (1st Dep't 2002) (reversing the trial court and noting that "contrary to principles of statutory construction, [the trial court's] interpretation would render some of the statutory and regulatory language meaningless"). The Decision states that the Bank interprets SCPA 2210(10) as providing protection for a successor fiduciary by exonerating the fiduciary for failing to scrutinize its actions as predecessor. RA at 12-13. To the contrary, SCPA 2210(10) exists to provide protection to the beneficiaries by allowing them to scrutinize the predecessor fiduciary's actions. The Decision's interpretation of SCPA 2210(10) deprives that statutory provision of any purpose. If process to the beneficiary does not result in finality and a discharge of the fiduciary, the requirement that the beneficiary be cited serves no purpose.

A fundamental requirement of due process in any proceeding that is to be accorded finality is notice and an opportunity to be heard. See Alvarado v. Dep't of State, 110 A.D.2d, 583 (1st Dep't 1985); Brown v. Giesecke, 40 A.D.2d 1009 (2d Dep't 1972). It is well established under New York law that, where a party has notice and opportunity to be heard on certain questions, it is "estopped . . . from ever afterward raising the question" as the "judgment is no longer open to collateral attack." In re Petition of the Union Elevated R.R. Co. of Brooklyn, 112 N.Y. 61, 78 (1899); see also In re Estate of Fales, 294 A.D.2d 165, 165-66 (1st Dep't 2002) (affirming denial of motion to modify decree settling trustee's accounting where objectant "had notice reasonably calculated to apprise him of the pendence of the proceeding and afford him an opportunity to present his objections."); In re Matter of Harley, 746 N.Y.S.2d 137, 139 (1st Dep't 2001) (finding that the requirements of collateral estoppel were met where a party has notice and opportunity to be heard on the issue in a prior proceeding). There is no reason why Section 2210(10) should be treated any differently from any other provision of law that provides an opportunity to be heard.

C. The Analogous Doctrine of Virtual Representation Demonstrates that the Objectant Represented Her Own Interests in the Prior Proceedings

Ensuring the finality of court decrees is also an issue in application of virtual representation. Pursuant to SCPA 315 one party may represent the interests of another person or class of persons having a future interest in an estate or trust. However, courts have refused to allow the party, who is both an accounting fiduciary and a beneficiary, to virtually represent the interests of another trust beneficiary, requiring the appointment of a guardian ad litem to do so. In re Estate of Bingham, 97 Misc. 2d 370 (Surr. Ct. N.Y. Co. 1978); In re Estate of Sage, 54 Misc.2d 779 (Surr. Ct. N.Y. Co. 1967). Courts have refused to permit virtual representation in such cases because of the damage such representation would do to the finality of court decrees:

In the instant case, the proposed representors are co-trustees of the trust in question as well as part of the class of potential remaindermen. In addition, the proposed representors are also the accounting parties. As accounting parties and representors, questions may be raised as to their adequately reviewing their own petition and final accounting in terms of separating their interests as petitioners from their interests as representors É The court is in no way suggesting that the petitioners would act in any way other than in the best interest of the representees and in accordance with the highest fiduciary standards. The court, however, must be concerned with conflicts inherent with persons serving in multiple capacities. Indeed, the court's concern for the finality in the ensuing decree is a concern that touches upon all the parties, not just the representees.

In re Estate of Prianti, N.Y.L.J., Aug. 15, 1997, at p. 16-17 (Surr. Ct. Suffolk Co., Aug. 15, 1997).

Representation of a beneficiary's interest by an accounting fiduciary in the context at hand gives rise to concerns identical to those in the virtual representation context. The trust beneficiaries are made parties to the proceeding in order to represent themselves because the law recognizes that there are conflicts inherent with persons serving in multiple capacities. Both SCPA 315 and SCPA 2210(10) make clear the underlying expectation that once beneficiaries are made parties to a fiduciary's accounting, they must assert any objections they have to such accounting then, or lose them forever.

III. THE DOCTRINE OF SUCCESSOR FIDUCIARY LIABILITY DOES NOT

APPLY WHERE, AS HERE, THE PREDECESSOR AND SUCCESSOR IS

THE SAME LEGAL ENTITY
The Decision rests in large part on the theory that, notwithstanding the fact that Objectant was a party to two accounting proceedings, Objectant is not foreclosed from asserting that the Bank may be liable as a successor fiduciary to her on two grounds: One, as Trustee of Objectant's Trust for failing to object to its accounting as Executor, and two, as Trustee of Objectant's Trust for failing to object to its accounting as Trustee of the Alice Creighton Trust. See RA at 10. There simply is no New York authority that can provide the basis for imposing successor fiduciary liability in this context, and SCPA 2210(10) provides authority for not imposing liability in such cases. Indeed it would be preposterous for the law to require a fiduciary to object to its own actions.
A. The Doctrine of Successor Liability Has No Application Here

There is no statutory basis for the imposition of successor fiduciary liability on an entity that is acting as successor fiduciary to itself. Indeed, the statute which the Surrogate's Court cites as evidence of successor fiduciary liability, SCPA 1506, expressly applies only where the predecessor and successor fiduciary are not the same entity. SCPA 1506 does not impose successor fiduciary liability but instead sets forth exceptions to such liability of "[a] trustee who was not an executor of the estate of the same decedent." Therefore, SCPA 1506 only evidences that there is successor fiduciary liability when the predecessor fiduciary has a different identity from the successor. In such case, the successor fiduciary is a necessary party to an accounting proceeding of the predecessor under SCPA 2210 and is charged with the duty of reviewing the account of the predecessor to protect the interests of the beneficiaries of the succeeding trust who are not necessary parties. If the successor fiduciary fails to carry out its duty, it will be liable for the actions of its predecessor unless it falls within an exception set forth in SCPA 1506.

However, that is not the case where the predecessor fiduciary has the same identity as the successor fiduciary. There SCPA 2210(10) requires the beneficiaries of the succeeding trust to be necessary parties to protect their own interests. The Surrogate's Court fails to citetha any case or statute that supports the imposition of liability on the Bank as successor fiduciary in these circumstances. That is because there is no statute imposing successor fiduciary liability on the Bank and New York courts have rejected the notion that a fiduciary can be liable as a successor fiduciary, in the absence of fraud, where all relevant facts had been disclosed to the objectants in a prior accounting and the prior accounting as such had been approved. See Lawyers Trust, 182 Misc. at 849 ("Here the prior account correctly described the investments, disclosed the source of purchase, and apprised the parties . . . sufficiently to bind them . . . ."). In addition, New York courts have repeatedly rejected the notion that a fiduciary whose actions as executor have been approved in an executor's accounting can later be held liable for those same actions in its capacity as trustee. See Rudin, 292 A.D.2d at 283 (holding that res judicata barred objectant from arguing that "certain assets that should have been used to fund the trust were omitted" from an accounting settled by an earlier decree); Krimsky, 78 Misc.2d at 686-87 ("[A] judicial decree of settlement is conclusive evidence against all the parties of whom jurisdiction was obtained as to all matters covered in the account and decree.") (emphasis added).

 

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B. New York Courts Have Rejected the Pepper Rule.

Failing to find any basis for its ruling in New York law, the Surrogate's Court relied on case law from other jurisdictions and on the Restatement (Second) of Trusts for its position that the Bank could be liable in these circumstances as a successor fiduciary to itself. RA at 11. The central authority relied on by the Surrogate's Court in finding that the Bank can be liable as successor to itself is a decision of the Utah Supreme Court. See RA at 10-11. (citing Pepper, 801 P.2d at 153-54). In Pepper, Zions First National Bank ("Zions") was named the executor of the Jerome B. Pepper estate and the trustee of the Jerome B. Pepper inter vivos trust (the sole beneficiary of the estate). Id. at 145. As executor Zions filed a final accounting seeking approval of, among other things, the sale of the estate's interest in a joint venture. Id. at 146. Zions made no mention of the fact that it would use this sale to pay off the security interest that Zions, as a commercial bank, had securing a line of credit it had extended to one of the estate's other businesses. Id. In fact, the Pepper beneficiaries alleged that Zions, as trustee, represented to them that the sale of the interest in the joint venture was to benefit the beneficiaries. Id. at 147.

The Pepper beneficiaries were given notice of Zions' petition for closure of the estate but they did not appear at the hearing. Id. at 146. Utah apparently has no analogue to SCPA 2210(10) and does not require that beneficiaries be made parties to proceedings at which a fiduciary accounts to itself. The court entered a decree approving the estate's first and final accounting and closed the estate. Id. In determining that the executor's accounting was not res judicata as to a claim against Zions as trustee for failing to object to its own actions as executor, the court noted that "[t]he grounds alleged in the complaint here were not actually litigated in the probate proceeding and therefore cannot collaterally estop the beneficiaries against the trustee." Id. at 154.

Given that there were allegations of misrepresentation and self-dealing in the prior accounting in Pepper, to which the objectant was not a party, the result in Pepper is not surprising. However, there is simply no basis for concluding that the Pepper rule, which applies where the fiduciary engaged in unlawful self-dealing, should also apply in actions such as this one where the only question is whether or not the fiduciary acted "prudently." Clearly, if a fiduciary came to the conclusion that its actions were prudent as executor, it would come to the same conclusion as trustee.⁴⁴ In addition, all of the cases cited in support of the decision in Pepper are distinguishable for various reasons, the most significant of which is that none seem to be constrained by a statute such as SCPA 2210.

See