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A New York State Alternative to Chapter 11 for Judgment Debtors

A New York State Alternative to Chapter 11 for Judgment Debtors By Wayne Greenwald

Many things precipitate chapter 11 reorganization cases. Frequently, it's a response to a judgment creditor's efforts to enforce its money judgement. Those efforts interfere with customer relations, cash flow and the judgment debtor's economic survival.

Smart judgment creditors realize that crushing their judgment debtor won't get them paid. Judgement debtors and creditors may not agree on what is destructive. That's where a chapter 11 reorganization case comes in. It stops the enforcement efforts while the judgment debtor attempts to reorganize.

While valuable, reorganization cases are not inexpensive. Cash-strapped judgment debtors may be unable to provide a large initial retainer usually required by experienced bankruptcy counsel. However, New York State, at least, provides an alternative to chapter 11.

Article 52 Protective Orders

Article 52 of the New York Civil Practice Law and Rules (the "CPLR") provides tools for judgment creditors to enforce their money judgments. It also provides judgment debtors with protections against judgment creditors' efforts and abuses.1

CPLR § 5240 offers "Modification or protective order; supervision of enforcement." It provides, in pertinent part:

The court may at any time, on its own initiative or the motion of any interested person, and upon such notice as it may require, make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure.

Thus, a judgment debtor may avert disastrous consequences caused by a judgment's enforcement.

CPLR § 5240 authorizes courts to regulate the enforcement of money judgment to prevent "unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person or the courts."2

That discretion was exercised where judgment enforcement would destroy a judgment debtor's sole source of income and means of repaying the judgment,3 or where turnover would require the sale of a residence and creditors had a less onerous means of satisfying the judgment.4

We recently used this novel application of CPLR § 5240 to save a business after an unsuccessful Chapter 11 reorganization was dismissed. The judgment creditor resumed enforcing its judgment against our client's accounts receivable. This stopped cash flow and injured customer relations. It also prevented the judgment creditor from receiving any payments beyond its initial enforcement efforts.

We obtained a stay of enforcement under CPLR § 5240. This revived cash flow and improved customer relations. The stay was conditioned on our client making monthly payments which it could afford. The business survived. The parties ultimately achieved an agreement for paying the judgment while preserving the business. This was at a fraction of the cost of a chapter 11 reorganization.

If you have situations which could use or used this approach, please contact us. We'd appreciate your concerns and insights.

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1 Other state laws probably have comparable statutes.

2 Guardian Loan Co., Inc. v. Early, 47 N.Y.2d 515, 519, 392 N.E.2d 1240, 419 N.Y.S.2d 56 (1979) (citing Third Preliminary Report of the Advisory Comm. on Practice and Procedure, 1959, at 314)

3 See, e.g., Tokio Marine and Fire Ins. Co. Ltd. v. Rosner, No. 02 CV 5065 (RJD), 2007 U.S. Dist. LEXIS 90846, 2007 WL 4373240, at *4-5 (E.D.N.Y.) (Staying turnover of a law practice partnership where turnover would not have satisfied the judgment and would have deprived the judgment debtor of her sole source of income); Moskin v. Midland Bank & Trust Co., 96 Misc. 2d 600, 409 N.Y.S.2d 327, 328 (Sup. Ct. 1978) (staying turnover of a seat on the New York Stock Exchange where the seat provided the sole source of income to satisfy child support payments and the judgments).

4 See, Hammond v. Econo-Car of N. Shore, Inc., 71 Misc. 2d 546, 336 N.Y.S.2d 493, 495 (Sup. Ct. 1972).

Wayne M. Greenwald Wayne M. Greenwald
Phone: 212-983-1922 & 888-496-1553 (Toll Free)
Fax: 212-983-1965
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