The Michigan Court of Appeals recently concluded that it is sufficient for a garnishee to claim a right to a setoff to deny a release of funds to a garnishor. The garnishee need not actually exercise that right to setoff.
In Ladd v. Motor City Plastics Co., garnishee bank received a garnishment for one of its customers. (A garnishment is a means of collecting a monetary court judgment against a defendant by ordering a third (the garnishee) to pay money, otherwise owed to the defendant, directly to the plaintiff.)
The bank did not send the funds in the accounts to the creditor and the customer continued to use the funds in the accounts. The creditor claimed the bank should have attached the funds in the customer’s accounts. Thus, the credtor asked the court to enter judgment against the bank for the amount of the judgment and for sanctions.
The primary issue that arises in the case is a bank’s right to set-off – a bank’s right, without prior notice, to take the funds from a bank account and apply them to an outstanding debt. The creditor further argued that since the bank failed to exercise this right and apply the funds in the account to the customer’s loan obligations, therefore waiving its right to set-off.
The Michigan Court of Appeals ruled in favor of the bank, holding that the bank had acted properly in not withholding the funds and sending them to the creditor, and that the bank was not required to actually exercise its right to set-off against the funds in the accounts. According to the court, the bank did not waive its right to set-off or its security interest by allowing the customer to continue using its bank accounts after service of the garnishment. In the same breath, the court held that a perfected security interest is a valid defense against a writ of garnishment.
Due to the lack of unanimity within the court, it is likely the creditor will appeal the decision to the Michigan Supreme Court. However, until such a time, Michigan banks which receive a creditor garnishment for customers who are in default of their secured loans may file garnishment disclosures which state that the bank has a right to set-off against the accounts of the garnished customer, without actually exercising their set-off rights and applying the funds against the loan balance.
This post was authored by law clerk Roger Leshinsky. Please contact Demorest Law Firm if you have any questions.
