Garnishment Error Results In Employer’s Debt

The Michigan Court of Appeals has published another employment related case, this time about the whacky world of garnishments.  I say whacky because an employer can incur the employee’s debt if the garnishment withholding is not handled properly. 

That’s what happened in Premiere Property Services, Inc v Crater. Let’s take a look so that you don’t make the same mistake.

The plaintiff, Premiere Property Services, served a “writ of periodic garnishment” on garnishee defendant True North Painting in order to satisfy a judgment it had obtained against the defendants, Matthew Crater, Fresh Outlook Painting and Better Brush Painting.

Before we get too deep into the case details, let’s take a step back and see how this is supposed to work for those who aren’t familiar with the process. 

Premiere Property would have filed a previous lawsuit against Matthew Crater, Fresh Outlook and Better Brush and succeeded in obtaining a judgment in that litigation. But obtaining a judgment is not the end of the story. The plaintiff must collect on the judgment. Sometimes a defendant will just pay the plaintiff the amount of the judgment (or negotiate a lower amount so that the plaintiff doesn’t have to jump hurdles or defend the judgment on an appeal, etc.). 

But, if the defendant does not pay, the plaintiff takes action such as placing a lien on property or garnishing the earnings of the defendant. That’s how “garnishee defendant” True North Painting became involved, and it did not end well for the company.

The process is described in the Michigan Court Rules, Subchapter 3.100 and is regulated by statute, MCL 600.4001, et seq. But, generally, a “periodic” garnishment is required when the total judgment cannot be collected all at once. This is often the case when the garnishment is against an employee’s paycheck because a formula limits the amount employers can withhold from each paycheck. Let’s follow the employer/employee example to keep it simple.

When served with a writ of garnishment, the garnishee (employer) is required to make certain disclosures about the amounts it owes (wages) to the original defendant (employee). Based on the disclosures and the formula, the amount of the periodic garnishment (money to be withheld from the employee’s paycheck) is established and paid “periodically” by the employer to the original plaintiff. But, if the garnishee/employer fails to follow the process correctly, it (instead of the employee) can end up owing the amount of the judgment to the plaintiff. 

Let’s go back to our case and pick up where plaintiff Premiere served garnishee True North Painting with the writ of garnishment. True North acknowledged in its disclosures that the three defendants, Crater, Fresh Outlook and Better Brush, were its subcontractors and that it owed money to them.

However, instead of withholding the full amount of the garnishment, it only withheld 25% of it ($7,610.62) for the plaintiff and paid the remaining 75% ($22,746.64) directly to Crater. Apparently, True North was under the mistaken belief that the amount was payable to Crater as “wages” owed to him as an employee. Crater then filed for bankruptcy. This placed a stay on the proceedings.

Sadly, several trees likely died as a result of the court filings that followed. Because the other two defendants did not file for bankruptcy, Premiere argued that it could still garnish the $22,746.64 from True North to Better Brush.  

In the end, the lower court ruled that it would be inappropriate to order True North to pay plaintiff the $22,746.64 it had already paid to Crater since it could seek payment directly from Crater in the bankruptcy court (at pennies on the dollar). 

The Michigan Court of Appeals saw things differently. Ignoring the bankruptcy, it found that True North was liable because it had disregarded the writ of garnishment by paying Crater. A writ of periodic garnishment continues until the original judgment is satisfied.

A garnishee is liable for the amount of the garnishment to the extent it owes a debt to the defendant(s). The lower court found that once Crater had been paid, there was no further debt owed to the defendants and, therefore, nothing from which True North could withhold. But this is the same as saying that “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” and is erroneous circular reasoning.

“Garnishees’ duties and obligations under the rules and their potential liability to the plaintiffs attach at the time they are properly served the writ. They then become responsible for the timely performance of the specific duties imposed…at the risk of default judgment against them which may be executed against their own funds or property…” Chayka v Brown, 92 Mich App 360 (1979). 

While it’s true that a garnishee’s liability is determined by the obligation it owes to the defendant (often the paycheck, but in this case the contract amount), the lower court was simply wrong by concluding that a garnishee can “escape all liability by turning over property and paying obligations to the defendant in violation of the writ.” The appellate court said this would be an “absurd” result.

The fact that True North had made a good faith mistake and failed to accurately understand it legal responsibilities does not deny plaintiff its recovery. “Allowing a garnishee to transfer garnished funds to a defendant without risk of liability could greatly frustrate” a key mechanism for prevailing parties to enforce their judgments.

While the bankruptcy applied to the garnishment directed at True North as against Crater, Better Brush and Fresh Outlook were not in bankruptcy.  Thus, the case was remanded to the lower court to determine whether the payments made to Crater were actually owed to Better Brush or Fresh Outlook and, therefore, unaffected by the bankruptcy.

You can see that an “inadvertent noncompliance” with the writ of garnishment can be a costly error. It is crucial to get it right!

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