Deciding a case of first impression, Southern District Judge P. Kevin Castel (See Profile) found that New York’s Exempt Income Protection Act does not provide a private right of action for money damages against a bank in a case involving a putative class of debtors who sued TD Bank for freezing their accounts pursuant to a restraint by a third-party creditor.

Debtors Gary Cruz and Claude Pain, the plaintiffs in Cruz v. TD Bank, N.A., 10 Civ. 8026, claimed TD Bank restrained their accounts and charged them fees in violation of Article 52 of the New York Civil Practice Law and Rules as amended by the Exempt Income Protection Act in 2008. The measure was designed to expand procedural protections to judgment debtors and broaden the types of property exempt from restraint by a creditor.

Mr. Cruz had $3,020 in his account at TD Bank and Mr. Pain had $340 when they received notice from the bank that their accounts had been frozen and that the bank had charged them administrative and overdraft fees associated with the restraints.

They filed suit in 2010 alleging the bank honored the restraint of third-party creditors without obtaining disclosures from the creditors as to income in the plaintiffs’ accounts that might be exempt, and the bank thus never passed along to the plaintiffs information on how to claim exemptions.

The exemptions under the act include Social Security and disability benefits as well as public assistance.

The bank moved for failure to state a claim upon which relief can be granted.

Judge Castel, in a 27-page opinion, explained the changes in the law, including CPLR §5222-a, which requires notifying debtors of available exemptions and how to claim them.

The Exempt Income Protection Act, he said, also prevents a bank from restraining a debtor’s account unless it receives the notices and forms from the creditor and mails copies to the debtor. Once a bank receives the debtor’s completed form, the bank must release all funds unless the creditor objects.

After first ruling that he would not abstain in the case, Judge Castel addressed the main issue, noting that the plaintiffs conceded that there is no specific provision of the Exempt Income Protection Act that gives plaintiffs a right to sue a bank.

The plaintiffs argued that two sections provide a private right of action by negative inference: §5222-a(b)(3), which exempts a bank from liability for inadvertently failing to send required notices and exemption claim forms to a debtor, and the catch-all language of §5222-a(h), which states that “nothing in this section shall in any way restrict the rights and remedies otherwise available to a judgment debtor, including but not limited to, rights to property exemptions under federal and state law.”

But the first provision, Judge Castel said, “contains no language creating liability,” and the second “does not enlarge the rights of a debtor, nor does it purport to create new liability for a bank.”

Judge Castel said a private right of action is also not consistent with the legislative scheme of the act, which permits “special proceedings” for Article 52 enforcement mechanisms, nor is it consistent with the legislative history or with the act’s available remedies.

Section 5225(b) permits a “special proceeding” by a creditor against a garnishee to retrieve property; §5227 permits a special proceedings by a creditor against “any person” to pay the debt; and §5239 permits a special proceeding against a creditor by “any interested person” pre-restraint to determine competing rights to property.

But Judge Castel said “these special proceedings do not fairly imply a post-restraint action against a garnishee bank for money damages and injunctive relief.”

The Exempt Income Protection Act’s “new provisions do not create a process for suing a bank,” he said. “Rather, they permit debtors and creditors to bring claims against one another.”

The court went on to grant TD Bank’s motion to dismiss common law claims against it—conversion, breach of fiduciary duty, fraud, unjust enrichment and negligence.

Alexander D. Bono of Duane Morris was the lead lawyer for TD Bank.

G. Oliver Koppell, who represented the plaintiffs, said he has three similar actions pending against other banks—two in the Southern District and one in New York state Supreme Court.

“I think it’s outrageous to not read a private right of action into the statute,” he said. “It’s basically leaving these poor people stranded because there’s no indication the Banking Department is going to look into this or do any about it.”

He added, “We even pointed out that the statute says if they merely made a negligent error, they’re not liable. The implication of that is that they are liable if they made an intentional error.”