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On May 1, 2008, the Supreme Court of Florida decided an issue of first impression important to corporate counsel, law firms, and business owners. In Arnold, Matheny and Eagan, P.A. v. First American Holdings, Inc., 982 So. 2d 628 (Fla. 2008), the state's highest court held a garnishee served with a writ of garnishment has a duty to order a stop payment on a check it had already written and delivered to a third party payee if it is possible that the check has not yet been presented to the garnishee's bank for payment. The failure of the garnishee to order a stop payment on the check may subject the garnishee, who is otherwise an innocent stakeholder, to liability to a judgment creditor. The extent of the garnishee's liability is the amount of the check or of the judgment against the payee, whichever amount is less.
A garnishment proceeding is used by a creditor who has obtained a judgment against a debtor. The judgment creditor applies for an order of the court, called a writ of garnishment. The writ directs all third parties served with a copy thereof, whom are called garnishees, to hold and essentially freeze the further disposition of all tangible and intangible property within their "possession or control" and then to report that property in their written answer to the writ filed with the court. The court will then determine the rights of the judgment creditor and debtor in the seized property and subsequently enter an order determining the disposition of the property.
In AME, the garnishee was a law firm that had received $50,000 for a settlement reached on behalf of its client, Preclude. On June 21st, the law firm issued a check out of its trust account in the amount of approximately $23,000, representing the client's portion of the settlement, and hand delivered the check to the client. On June 25th, four days later, a creditor holding a $26,000 judgment against Preclude from another lawsuit, served a writ of garnishment on AME. The law firm answered the writ within days and denied that it was in possession or control of any funds of Preclude. However, it was later determined that the check given to the client was not presented to the law firm's bank for payment until June 28th, which date was after both the service of the writ of garnishment and the law firm's answer to the writ.
Construing Florida's garnishment statute, Florida Statutes Section 77.01 et seq., the Supreme Court of Florida found that a garnishee is in "possession or control" of the funds in its bank account at least up to the point in time when the check is presented to the garnishee's bank for payment. Relying upon a bank customer's right to stop payment of a check under Florida Statutes Section 674.403(1), the court reasoned that a garnishee is still in control of its funds if they can order a stop payment on a check and thereby retain the funds in its account. The court rejected the law of other jurisdictions holding that a check delivered to a payee constitutes an assignment of those funds, such that the garnishee no longer has possession of them.
Accordingly, the court held that the Florida garnishment statute "imposes a duty on garnishees to issue a stop payment order on a check that has not yet been presented for payment if a garnishee has the ability to do so." Id. at 635. The court recognized that because of the possibility of different banking practices, whether a garnishee has the ability to stop payment and took "reasonable steps" to do so after a writ of garnishment is served would be resolved in the future on a case by case basis. Further, the court indicated it was not addressing the issue of whether a stop payment must be ordered in the time period after a check was presented for payment to the garnishee's bank but before it was actually paid by that bank. The court expressly noted its ruling did not apply to cashiers or certified checks, citing the legal obstacles to ordering a stop payment order on such instruments.
The court refused to make any distinction between bank and non-bank garnishees in the application of its ruling, relying upon the lack of any such difference in the Florida garnishment statute. The court also noted that Section 77.06(3) provides immunity from liability to garnishees who act in good faith. Under this statute, a garnishee faced with competing claims to funds or other property in its possession from both its customer\client, as well as from a judgment creditor which has served a writ of garnishment, may refuse to disburse the property, report the property in its answer to the writ of garnishment, and retain the property pending a court ruling as to its disposition.
The Supreme Court of Florida refused to carve out any exception to its ruling for attorney garnishees or attorney trust account checks. The attorney\client relationship between a law firm and its client was deemed insufficient by the court to supersede the operation of the Florida garnishment statute.
Applying the law to the facts presented, the Supreme Court of Florida held the law firm garnishee had subjected itself to liability for its failure to order a stop payment on its check to its client in the three day interval between the service of the writ (and the law firm's answer thereto) and the presentation of the check for payment to the firm's bank. The court held a garnishee has an affirmative obligation under Florida law "to inquire of the bank as to the status of the funds in its account and to issue a stop payment order if he or she has the ability to do so." Id. At 641.
The financial result in this case was that the trial court after the AMEruling entered a final judgment against the law firm ordering it to pay the garnishee not only the approximately $23,000 for the check that was paid but also another almost $12,000 in prejudgment interest, for a total judgment against the law firm of over $35,000, notwithstanding that the law firm would not but for the garnishment owed a penny to its client's creditor.
Obviously this decision strongly impacts the duties of garnishees and could create a trap for the unwary garnishee who does not act with due diligence in retaining a judgment debtor's property. Any person receiving a Florida writ of garnishment who is holding any funds of the judgment debtor may not disburse those funds to the debtor, even if it is the garnishee's customer or a law firm client. Further, unless a check was already delivered to the customer or client and also was in the form of either a cashier's or certified check, a garnishee has an affirmative duty to try to immediately stop payment on such a check after being served with a writ.
Garnishees would be well served to develop internal, "standard operating procedures" so that writs of garnishment are treated with high priority in terms of the personnel assigned to receive and deal with them. Procedures implemented in advance should also be designed to minimize a delay between service of the writ and an investigation by the garnishee's internal personnel to determine whether any checks to the debtor are outstanding and, if so, to have a stop payment order immediately issued to the garnishee's bank. The first contact with the bank should be by telephone in light of the need for speed, but then the stop payment order should be carefully documented by the garnishee in writing by either fax or email. The garnishee needs to develop a record to prove its reasonableness in acting on the writ and issuing its stop payment order, especially if the bank inadvertently fails to timely honor the garnishee's stop payment order and pays the check. The garnishee should not permit the payee, which may be the garnishee's customer, to delay the issuance of a timely stop payment order. Given the significant risk of liability for the entire amount of the judgment up to the amount of the check, a garnishee has no practical choice but to stop payment and then to retain the funds pending a court resolution of the dispute between the payee and the judgment creditor. The exact boundaries of what are or are not "reasonable" steps to stop payment are not clearly delineated by the AME opinion. Nonetheless, a garnishee should act with all due dispatch in searching for outstanding checks to the debtor and then ordering a stop payment. If a garnishee discovers from its bank that a check has already been paid such that a stop payment order would be futile, that information should be timely preserved in writing, both by internal memorandum and in an immediate communication to the bank.
An interesting fact of the AME case was that prior to the service of the writ of garnishment in question, the same creditor had previously served a first writ of garnishment upon the same law firm several days earlier. At the time the first writ was served, the law firm had not yet received the settlement funds relating to their client's lawsuit. The firm quickly filed an answer to the first writ, denying it was holding any of the client's property. The funds then arrived and thereafter, the creditor served a second writ of garnishment, which was the order at issue in the case. The Supreme Court of Florida did not expressly attach any significance to this fact in its holding or reasoning. Nor does the AME decision limit the duty of garnishees to order a stop payment to only situations where there are multiple writs served or the garnishee has knowledge of judgment collection activities against the debtor. In sum, while the fact of the earlier writ may have influenced the court to expand the law because it may have appeared that the law firm here was actively attempting to aid its client with knowledge of the creditor's collection activities, it appears unlikely that this fact, or the absence thereof, in a future case will alter the application of the AME ruling as to other garnishees.
The court's decision can be reasonably read to relieve a garnishee of an obligation to stop payment if either a cashier's or certified check is used and the check is actually delivered to the payee before the writ of garnishment is served. Additionally, if a check has already been paid by the garnishee's bank before the garnishee could have reasonably ordered a stop payment, there should be no garnishee liability under AME. Nonetheless, a garnishee also has the option of reporting in its answer to a writ that it has been unable to stop payment and listing the checks in question and the payees, or admitting a payment was completed with a cashier's and certified check, unless there is some duty of confidentiality that prevents disclosure. Armed with such disclosure, the judgment creditor can then proceed directly against the payee(s) of the check to seize the paid funds, if allowable by law, resulting in the judgment creditor being potentially paid by the debtor with no need to then pursue liability against the garnishee.
Law firms are not exempt from the ruling. It is critical that both attorneys, their secretaries, and bookkeeping and accounting staff be aware of the AME ruling and its consequences regardless of whether a check is issued out of the firm's operating or trust bank accounts.
From the standpoint of a judgment creditor or their counsel, it is important to inquire of all garnishees as to the existence of any outstanding checks and perhaps to propound related discovery to the garnishee. Also, as a practical matter, whether by serving discovery on the garnishee that highlights the issue of outstanding checks or even by serving a copy of the AME decision with the writ, creditor's counsel is well served in alerting the garnishee to the stop payment duty under AME to maximize the chance that the debtor's assets may be seized to satisfy the judgment. Finally, based upon the service of the two different writs of garnishment in AME, it appears likely that the judgment creditor was monitoring the underlying lawsuit or dispute that gave rise to the settlement funds such that the creditor knew the law firm would likely be receiving those funds shortly. The clear message is that the diligent judgment creditor is more likely to get paid and that if a clear lead to assets of the debtor is discovered, the creditor should vigorously and timely pursue it, even if multiple writs of garnishment are required. In this case, the judgment creditor is going to recover almost all of its judgment against the debtor through the garnishment proceedings from a third party who would not have owed a penny to the creditor but for its refusal to stop that check!
Henkel & Cohen, P.A. is a Miami, Florida boutique business litigation law firm whose partners hold the highest AV rating from Martindale-Hubbell®. For additional biographical and contact information, please visit the firm's website at www.miamibusinesslitigators.com.