Authored By: Matthew Smith
Garnishments are common and cost-effective means for judgment creditors to collect monies held by a third-party garnishee. Upon receipt of a writ of garnishment, the garnishee must prepare a garnishee disclosure and take care to follow the procedures set forth in MCR 3.101. This may require withholding some or all of the money due to the judgment debtor identified in the writ, and payment of the correct amount of the indebtedness subject to garnishment. The consequences of a garnishee-business’s failure to carefully adhere to the strictures of MCR 3.101 is illustrated in the to-be-published opinion in Premiere Prop. Servs. v. Crater, Docket No. 350784 (Sept. 17, 2020).
In Premiere Property Services, the plaintiff obtained a $331,320.67 judgment against Matthew Crater (“Crater”) and two entities owned or controlled by Crater – Better Brush Painting, LLC (“Better Brush”) and Fresh Outlook Painting, LLC. The plaintiff obtained periodic writs of garnishment directed to True North Painting, LLC (“True North”) seeking monies owed to the defendants. The writs also prohibited True North from paying monies to defendants and commanded that any indebtedness owing to Crater must be paid to plaintiff until the judgment is satisfied. True North filed an untimely garnishee disclosure stating that it was obligated to make “subcontractor progress payments” to defendants. It also stated in its post-disclosure discovery responses that it had paid $22,746.64 to Crater after being served with the garnishment, while withholding only $7,7610.62. True North did so claiming that the “subcontractor progress payments” paid to Crater were employee earnings subject to the federal 25% garnishment cap on disposable earnings. See 15 U.S.C. 1673(a)(1). After retaining counsel, True North did not contend that its failure to remit the additional 75% was proper.
In the midst of the garnishment proceedings, Crater filed for Chapter 7 bankruptcy in his individual name. In light of True North’s admissions, the plaintiff filed a motion seeking a judgment against True North for the $22,746.64 paid to Crater in violation of the writ. True North opposed plaintiff’s motion arguing that the automatic stay in Crater’s bankruptcy proceedings prevented further garnishment proceedings, and that it had no additional indebtedness to the defendants. Plaintiff countered that the subcontractor payments were owed pursuant to an agreement with Better Bush, and that Crater’s personal bankruptcy was of no moment. The trial court denied plaintiff’s motion, reasoning that “it would effectively be obligating True North to pay ‘175 Percent’ of the garnished funds,” and that “plaintiff could seek recovery of those funds in the bankruptcy court.” The plaintiff appealed, arguing that the trial court erred in refusing to hold True North liable for the amounts paid to Crater in violation of the writ of garnishment.
On appeal, the Michigan Court of Appeals held that the trial court erred in refusing to issue a judgment against True North for payment of monies to Crater in violation of the writ. Relying on MCR 3.101(G)(1) and its decision in Chayka v Brown, 92 Mich App 360 (1979), the Court disposed of True North’s argument that it no longer possessed funds owing to Crater, holding that “[u]nder such reasoning, a garnishee who violates a writ of garnishment by making payment directly to the defendant cannot be held liable because it is no longer in possession of an obligation owed to the defendant. We reject this reasoning as circular.” The Court further rejected the argument that a garnishee-judgment could not be satisfied against a garnishee’s personal assets, reasoning that MCR 3.101(G)(1) “says nothing about how that liability may be satisfied,” and that such an “interpretation would allow garnishees to escape all liability by turning over property and paying obligations to the defendant in violation of the writ.” Furthermore, the Court refused True North’s invitation to pronounce a “good faith” or “inadvertent noncompliance” exception to garnishee liability, noting the absence of any supporting court rule, statute, or case law.
As to the trial court’s conclusion that the automatic stay in Crater’s personal bankruptcy applied to the garnishment proceedings, the Court remanded for additional findings. It reasoned that there was “no doubt” that the bankruptcy proceeding stayed any action concerning the bankrupt – Crater. But to the extent the monies subject to garnishment were owed to Crater’s businesses – including Better Brush – his personal bankruptcy “would not stay any enforcement of a garnishment” against the businesses. Furthermore, “[p]laintiff’s motion to enforce the garnishment is based on the garnishee’s liability, a matter within the trial court’s, as opposed to the bankruptcy court’s, jurisdiction.” (Emphasis in original).
The lesson of Premiere Prop. Servs. is a simple one: Businesses and persons served with writs of garnishment must timely and carefully adhere to the procedures set forth in MCR 3.101. Failure to do so may open the door for a judgment creditor to obtain a judgment against the garnishee for amounts paid in violation of a writ, in addition to those amounts mistakenly paid to the judgment debtor. Good faith or unwitting mistakes will not insulate a person or business for failing to withhold and remit amounts subject to garnishment.