Bankers: Tennessee Court of Appeals issues opinion on safe practices on handling bank levies.

A few weeks ago, I went to Chancery Court on a conditional judgment motion and part of my presentation to the Judge was to acknowledge how rare it is to be in court on conditional judgment proceedings.

Under Tennessee law, a creditor can get a “conditional judgment” against a non-debtor garnishee (usually an employer or a bank) when the creditor issues a garnishment and the garnishee fails to respond. This conditional judgment is then made a final judgment if the garnishee never responds.

As you can imagine, asking that a bank or an employer be made 100% liable for a debtor’s judgment (regardless of whether the debtor actually works or banks there) tends to get the garnishee’s attention, thus eliminating the need for a hearing. In practice, most banks instantly respond to a conditional judgment.

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A few weeks ago, the Tennessee Court of Appeals issued an opinion detailing a conditional judgment fight between a judgment creditor and a garnishee bank over an allegedly inaccurate response, at Tullahoma Industries, LLC v. Navajo Air, LLC (No. M2019-02036-COA-R3-CV)(Tenn. Crt. Apps., June 29, 2021).

In that case, US Bank was served with a garnishment and immediately froze all accounts that might be relevant, including accounts in the name of a non-debtor entity, but that was clearly related (same principals, same address) to the debtor and with a very similar name. While the accounts were frozen, the third party’s lawyer sent a demand that the funds be released, pointing out the different entities’ names and different EINs.

After verifying that the debtor and the account holder entity had different tax identification numbers, US Bank released the funds back into the account and answered “no accounts.” In response, the judgment creditor challenged US Bank’s response by filing a Motion to Show Cause (i.e. asking for a conditional judgment for failure to provide an accurate/correct response). The trial court agreed with US Bank, and the Court of Appeals upheld the ruling.

A recap of the analysis:

  • A judgment creditor’s remedy in response to an inaccurate garnishment response will be to examine the garnishee under Tenn. Code Ann. § 26-2-204.
  • There is some suggestion that moving directly into a “Show Cause” / conditional judgment proceeding is procedurally improper.
  • Instead, the creditor starts with an examination (i.e. discovery) to vet the garnishee’s answer, with the purpose to determine whether the garnishee actually holds (or held) money or property of the judgment debtor.
  • The judgment creditor has the burden of proof that the garnishee holds the debtor’s property.
  • As to bank accounts, a court will not go beyond an analysis of account ownership (i.e. the account name, the tax identification number of the owner). The Bank does not need to inquire into the source of the funds or equitable ownership claims.
  • Even though the Court questioned the procedural path, it appears that the conditional judgment process is appropriate, but only after the examination takes place.

I note that this opinion was authored by Judge Neal McBrayer, a former debtor/creditor lawyer, who does a great job on commercial and real property cases.

This case provides important guidance to all parties. To creditors, it shows the value in naming the correct party-defendant, as well as any related entities, in your original proceeding.

To banks, it provides a great outline in how to process bank levies, including what to do when it’s not entirely clear that the judgment debtor is your account customer. That’s why I get all those calls asking for social security or tax id numbers, dates of birth, and other information like that. Smart banks avoid conditional judgments.

Author: David

I am a creditors rights and commercial litigation attorney in Nashville, Tennessee.

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