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.

What to do about a Late Filed Garnishment Response: An Employer Remains Liable for Monies Paid

I file wage garnishments all the time on my Tennessee judgments.

If you know where a defendant works, Tennessee law allows a judgment creditor to garnish the debtor’s wages for payment toward the judgment. (See Tenn. Code Ann. § 29-7-101). Without boring you with the details (see this earlier post instead), an employer then is required to pay about 25% of the employee’s wages to the Court Clerk, who then holds the wages and disburses them to the creditor.

In the event the employer fails to respond to the garnishment, the creditor can seek a judgment against the employer itself for the full amount of the judgment (not just 25% of it), which, clearly, is an awesome way to actually get your money.

I’ve explained this process before: you get a “Conditional Judgment” against the employer and then you issue a Scire Facias, which requires the employer to come to Court and “show cause” why it shouldn’t be a “final” judgment.

This sounds great, but nine times out of ten, the employer shows up in response and files (finally) an answer. Under Tennessee case law, a late filed response is good enough to stop the process and avoid a “final” judgment being entered. Last week, the Tennessee Court of Appeals issued a great opinion in Emrick v Moseley (July 30, 2014), reviewing this entire process.

So, if a conditional judgment is considered a “wake up call” to prompt a response from an employer, then what do you do about the money that the employer should have paid to the Clerk? Two weeks ago, I had this exact case and argued that, under the existing case law, the cow was out of the barn and the employer’s only obligation is to comply with future obligations (i.e. withhold future wages).

I was wrong. That’s where the Emrick case is so good. Via dicta, the Emrick Court says that the employer has exposure under Tenn. Code Ann. § 29-7-112 for any money that it should have paid in, if it had timely responded.

So, no, you can’t get a judgment for the full amount of the debtor’s judgment, but you can get a judgment for the garnishment amounts that should have been withheld.

This is good news for creditor attorneys, and, even though I was wrong on this issue in the past, I’m glad to have been wrong.