The United States Court of Appeals for the Second Circuit recently affirmed a district court’s holding that third-party garnishees violated restraining notices by disbursing monies pursuant to a settlement agreement approved by the state court. See CSX Transp., Inc. v. Island Rail Terminal, Inc., 879 F.3d 462 (2d Cir. 2018). The underlying breach of contract suit arose out of Island Rail Terminal, Inc.’s (“Island Rail”) 2012 purchase of substantially all of the assets of Emjay Environmental Recycling, Ltd. (“Emjay”). Maggio Sanitation Services (“Maggio”) and Eastern Resource Recycling, Inc. (“Eastern Resource”) (Maggio, Eastern Resource, and Island Rail, as the “Garnishees”) guaranteed Island Rail’s payment and performance obligations. In September 2014, the district court entered a judgment in the amount of $1,056,444.15 for plaintiff, CSX Transportation, Inc. (“CSX”) and against Emjay. At least three other creditors also already held judgments against Emjay at that time. In November 2014, CSX served the Garnishees with restraining notices, which prohibited them from disposing of any monies owed to Emjay. In February 2015, the New York State Supreme Court approved a consolidated $2.2 million settlement in two unrelated actions involving Emjay, the Garnishees, and several of Emjay’s other creditors (the “State Settlement”); CSX declined to participate in the settlement discussions. Under the State Settlement, the Garnishees settled the claims for $2.2 million, which was distributed to three creditors to satisfy their judgments against Emjay. In June 2015, CSX filed a motion for a turnover order to compel Garnishees to satisfy CSX’s amended judgment against Emjay. CSX argued that Garnishees were liable to CSX for damages because entering into the State Settlement violated the restraining notices.
The district court granted CSX’s motion in February 2016, and directed the Garnishees to turn over $1,056,444.15 to CSX. The court also held that, if the Garnishees already had disbursed the funds to the other creditors, CSX was entitled to damages. In March, CSX moved to enter judgment against the Garnishees, and the Garnishees moved for reconsideration of the district court’s order. In November 2016, without oral argument or providing a hearing, the district court denied the Garnishees’ motion and granted CSX’s motion. Garnishees subsequently filed this appeal, arguing that: (i) CSX improperly proceeded by motion under F.R.C.P. 69(a) rather than by instituting a new proceeding pursuant to CPLR article 52; (ii) they did not violate the restraining notices because they transferred funds pursuant to an order of the state court; and (iii) even if they did violate the restraining notices, the district court erred in concluding that CSX suffered damages when CSX was the creditor last in line and in failing to hold a hearing before fixing an amount of damages.
The Second Circuit first determined that CSX was permitted to seek relief from Garnishees by motion under Rule 69(a), so long as the district court otherwise had personal jurisdiction over the Garnishees. Here, the Garnishees do not contest they are New York corporations, and therefore, personal jurisdiction is clear. The Court also affirmed the district court’s finding that the Garnishees negligently violated the restraining notices, noting that they were properly served with the restraining notices in November 2014, and the restraining notices’ injunctive effect was still in place when the Garnishees agreed to pay $2.2 million to settle Emjay’s debts in the State Settlement in February 2015. In doing so, the Court rejected the Garnishees’ claim that C.P.L.R. § 5222(b) permits disbursements if ordered by a court, holding that the statute allows disbursements “pursuant to an order of the court,” which refers only to the court out of which the restraining notice issued. (emphasis added). Thus, the Court rejected the Garnishees’ claim that a state court could order a garnishee to ignore a federal court’s restraining notice.
However, the Court found that the district court abused its discretion by failing to hold a hearing to resolve factual issues concerning the relative priorities of the judgment creditors, a necessary predicate to determining the proper amount of damages, if any, sustained by CSX. If the other parties to the State Settlement had priority over CSX, CSX would not have been damaged by the Garnishees’ disbursements because it would not have been entitled to any monies. Therefore, the Court vacated and remanded the portion of the district court’s judgment fixing the award of damages, and instructed the district court to hold a hearing to resolve factual issues concerning damages.