The courthouse at 111 Centre Street in Manhattan, which houses the borough's Civil Court. After a landmark decision by a state appeals court last month, a New York Civil Court judge is being asked to rethink whether a debt collector's allegedly fraudulent service of a 2012 lawsuit should free a Harlem woman from a default judgment that resulted in years of wage garnishment.
Banks told the collection agency, Esgro Capital Management LLC, that she had never received notice of the lawsuit, which resulted in a default judgment against her, and that her tuition was supposed to have been covered by a grant, but the company was able to garnish more than $16,000 in wages over the next three years anyway.
It wasn't until several years later that Banks learned she could challenge the garnishment in court. As she moved ahead in September 2020 with efforts to have the judgment overturned, she learned that Esgro had filed an affidavit falsely claiming it had served her with notice of the lawsuit at an address in Manhattan when the collections case was filed in 2012. At the time, however, Banks was living in Staten Island, and she had a New York City Housing Authority lease to prove it.
It's known as sewer service — when debt collectors file false affidavits with a court claiming to have served notice of a lawsuit without having done so — and experts say it has been a rampant problem in New York.
In 2020, it doomed Banks' case, as a New York state judge ruled that she had waited too long to challenge her garnishment, even though she never actually received notice of the lawsuit.
On Dec. 7, however, attorneys from Quinn Emanuel Urquhart & Sullivan LLP, the Legal Aid Society and the New Economy Project won a unanimous decision from a state appeals court giving Banks, and potentially thousands like her, a new chance to challenge potentially unscrupulous debt collectors.
In a ruling overturning more than a decade of precedent, the Supreme Court of New York Appellate Division, First Judicial Department, concluded that just because Banks hadn't challenged the judgment within the one-year statute of limitations, that didn't necessarily mean she wasn't entitled to relief.
"The mere fact that a defendant, like defendant here, was subject to payments pursuant to a wage garnishment order for more than one year without taking some action is not, without more, a proper basis for finding waiver of the ability to seek relief," the Appellate Division said in its ruling.
The Appellate Division remanded the case to civil court for further proceedings on a motion to vacate on the grounds that the summons and complaint were never properly served.
"This decision on our appeal is really a game changer," said Susan Shin, director of the New Economy Project, which runs a free legal assistance hotline for low-income New York City residents. "Now, instead of letting debt collectors get away with rampant sewer service and punishing people for not knowing their legal rights, our courts have to enforce people's fundamental due process right to have their day in court. We're really excited about the potential impact of this decision on many New Yorkers, especially low-income New Yorkers and New Yorkers of color."
Punished for Being Poor
Under New York law, clear proof of improper service should normally be enough to get a default judgment vacated and a collection suit dismissed. In Banks' case, however, the trial court said it couldn't consider the lease Banks offered, showing she lived at a different address than the one where the collection suit was purportedly served. Instead, the court said it was bound by a 2007 appellate ruling in Calderock Joint Ventures LP v. Mitiku, holding that individuals waive their right to challenge a default judgment based on improper service once they have been subject to involuntary wage garnishment for more than one year.
Unlike Banks' case, though, the Calderock case concerned an individual who had actively participated in the collection suit against him. Judgment was entered, and he then waited more than a decade to challenge the judgment.
Other New York courts have, until now, cited Calderock in enforcing the one-year window, allowing debt collectors to continue to enforce ill-gotten default judgments against low-income New Yorkers who were denied their due process right to notice and an opportunity to be heard.
"For years after that decision, our state courts were using that decision to deny basic justice to New Yorkers who didn't find their way to court fast enough, even though a lot of them were in Ms. Banks' situation where they didn't know their legal rights and they couldn't afford an attorney," Shin said. "So our courts were effectively punishing people for being poor and lacking legal representation."
Armed with the Appellate Division's decision from last month, Shin said the hope is that Banks will be able to return to the trial court to successfully challenge the judgment against her.
"The right thing for them to do is to vacate this judgment, dismiss the case and order the debt collector to return the $16,000 plus interest in wages that it garnished from her," Shin added.
An "Epidemic" of Sewer Service
Sharae Banks says that the rampant practice of "sewer service" — when debt collectors falsely claim to have served people with collection suits — left her facing a default judgment and years of wage garnishment. A recent ruling by a New York appeals court, however, is giving Banks and others like her a new chance to fight back. (Courtesy of Sharae Banks)
Sometime over the next half dozen years, Esgro Capital acquired the school's debt buyer and filed suit against Banks in 2012 — after the six-year statute of limitations had expired and despite the fact that a grant was supposed to have paid the full cost of Banks' tuition, Lhewa said. Lhewa said that after the collection suit was lodged, a process server filed an affidavit saying the complaint had been served on Banks' mother at the Manhattan address it had on file for Banks.
As the case proceeded without her knowledge, the court ultimately entered a default judgment against her. It wasn't until 2016, when Esgro sent a letter informing Banks that her wages would be garnished, that she learned about the collection action.
Even then, however, Banks was unaware that she had the option of going to court to try to challenge her judgment. Instead, to try to continue to make ends meet as Esgro took a 10% cut of her wages, Banks started picking up overtime shifts at the FedEx facility where she worked at the time.
After the city's housing authority saw the resulting spike in Banks' gross income, however, Shin said the agency raised her rent.
As Banks fell behind on rent and she faced legal action in the city's housing court, where tenants are guaranteed counsel, an attorney looked into the garnishment and referred her to the New Economy Project's legal assistance program, which helped her draft her motion to challenge the default judgment against her.
"I went through the courts because I was unable to pay my rent — which was $1,200 and some change — with me being low income," Banks told Law360. "I was working at FedEx and made a great amount with overtime, but remember, they take 10%, and it was really damaging my pocket. Debt collectors do a lot of things to scare people."
Tashi Lhewa, a consumer attorney at the Legal Aid Society of New York City, helped represent Banks as she appealed the decision to deny her motion challenging her default judgment.
"That case was a mortgage foreclosure action," he said, adding that the debtor in Calderock had been afforded multiple chances to respond to the claims against him. "Prior to the default judgment, there were multiple foreclosure proceedings."
And since Calderock was decided, Lhewa said there have been a series of civil court and appellate decisions that have improperly cited the case to prevent people who may have had no prior knowledge of their judgments from challenging them.
"Every day when I'm in court, there are so many default judgments being entered," he said. "And there's an assumption that some people make, that because [someone may] owe the money, that they don't want to appear in court, and that's why they're not filing an answer, and it couldn't be further from the truth," he said. "We have this huge epidemic of sewer service."
A Long Road
After a judge denied Banks' pro se motion to overturn her judgment, the Legal Aid Society of New York City stepped in to represent her in bringing her case to the Appellate Term, an intermediate appellate court that hears appeals from the New York City Civil Court. When the Appellate Term affirmed the civil court's decision, the Legal Aid Society and the New Economy Project asked Quinn Emanuel to get involved in asking the Appellate Division, the appeals court above the Appellate Term, to take the case.
The Legal Aid Society has previously partnered with Quinn Emanuel on a number of pro bono cases over the years.
"Our role was kind of the appellate specialists, although we are looking forward to working with Ms. Banks now that we go back to the civil court," said Owen Roberts, a partner in Quinn Emanuel's New York office who worked on the case. "We will stay involved and try to make sure that she not only is not subject to any further garnishment but actually gets her money back — the $16,000 that Esgro Capital has taken from her so far."
In addition to helping Banks, last month's decision also provides a strong opportunity for many New Yorkers to go back to court to renew challenges to default judgments that may have been previously rejected as time-barred, Roberts said.
"Our opponents in this case, Esgro Capital, have obtained nearly 400 default judgments against other people like Ms. Banks who had alleged debts from for-profit educational institutions," he said. "That's just one plaintiff and one debt collector and this happens over and over and over again throughout New York. So all of those people — anyone who has been subjected to a wage garnishment order but was never served — now have the ability to go to court, speak their peace and finally be heard."
Roberts added that the Appellate Division's decision made it very clear that any waiver of a person's right to challenge a default judgment must be intentional and knowing, especially for people who don't have easy access to legal representation.
"She attended the school in 2005 — nearly two decades ago," he said. "And when she left the school she was told that she had no debt and that the grant had covered everything. So I don't know what happened. It's on Esgro Capital to prove that they actually had a valid debt, and that the debt was validly sold to them. They never proved any of that."
Attempts to track down a phone number for Esgro Capital were unsuccessful. Its attorney of record, David De Andrade of Steven Grodensky PC, did not respond to emails seeking comment.
Today, Banks has a job with NYU Langone Health doing housekeeping, an 8-month-old baby, and plans to finish up her final two college classes this semester to earn her degree in medical assisting.
She said she's proud that her situation is shining a light on the sewer service problem and will help other low-income people know what to do if they're hit with a wage garnishment.
"This has been a long road for us," Banks said. "I was ready to just give up, because it was just so tedious. I had to deal with the headaches of going to work and working overtime out the ying-yang just to be able to come home with a decent check so that I'm able to support my family. Now, to see that the courts have finally listened and are ruling in my favor this time, it's like, 'Thank God.'"
--Editing by Robert Rudinger.
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