Court rules for some states, such as Michigan, allow for a judgment creditor to seek judgment against a garnishee for failure to answer a writ of garnishment. Grounds for liability are based on contempt of court and damages incurred by the judgment creditor due to the garnishee’s failure to respond to the garnishment. (See M.C.R. 3.101). In the context of bankruptcy, an issue has arisen in some jurisdictions as to whether enforcement of a judgment against a garnishee is a violation of the automatic stay as to a judgment debtor who files for bankruptcy.
There is a split of authority on this matter. Some jurisdictions hold that an action against the garnishee is an action against the debtor in violation of the automatic stay. However, the majority opinion is that there is no violation of the automatic stay to enforce a judgment against a garnishee that fails to respond to a writ of garnishment.
Enforcement of Judgment against Garnishee as a Violation of the Automatic Stay
In In re Feldman, 303 B.R. 137 (Bankr. E.D. Mich. 2003), the creditor served a garnishment on the debtor’s employer. The employer failed to answer the garnishment, and soon after the garnishment was served, the debtor filed bankruptcy. The judgment creditor then sought and obtained a judgment against the employer for its failure to answer the garnishment. The court held that where a creditor seeks a post-petition judgment against an employer, the creditor violates the automatic stay for the reason that the garnishment of the employer satisfies the debt owed by the bankrupt debtor.
The Feldman court reviewed Kanipe v. First Tenn. Bank (In re Kanipe), 293 B.R. 750 (Bankr. E.D. Tenn. 2002), which held that enforcement of a judgment against the employer who does not answer a writ of garnishment does not violate the automatic stay. Kanipe reasoned that enforcement of the judgment was not a collection action against the debtor since the employer’s failure to timely respond to the garnishment gave rise to separate liability under Tennessee law.[1]
Feldman rejected the reasoning in Kanipe, finding that the majority rulings among the cases that have addressed this issue “focus on the wrong question.” “[I]it is simply irrelevant whether the creditor's post-petition act to obtain a judgment against the employer is an act to collect on the employer’s liability. The relevant question under §362(a) is whether that act is an act to collect on the debtor’s liability. Surely the answer to that question is yes, that act is an act to collect on the debtor’s pre-petition debt.” Id. at 140.[2]
The Feldman court identified three bases for its holding. First, it ascertained “that there would be no garnishment judgment against the employer absent the underlying debt.” Second, under the Michigan court rules, the debtor becomes liable to the employer for the amount of the garnishment. Finally, Feldman determined that “the employer's payment on the garnishment judgment requires the creditor to file a satisfaction of the judgment against the debtor.”
Timing of the Garnishee Judgment May Affect Whether There Is a Violation of the Automatic Stay
It should be noted that the Feldman court addresses the §362 issue in the context of a creditor who seeks judgment against the employer post-petition. The result may be different where the judgment is obtained pre-petition and enforced post-petition. For example, the state court opinion of Kenosha Hosp. & Med. Ctr. v. Garcia, 2004 WI 105 (Wis. 2004), found no violation of the automatic stay. In that case, the garnishment was served on the debtor’s employer, the employer did not respond, and judgment was entered against the employer accordingly. After the garnishment proceedings and entry of judgment against the employer, the debtor filed for bankruptcy.
Liability for the Entire Judgment Amount Despite Bankruptcy Filing in the Midst of a Garnishment Proceeding
In Bour v. Johnson, et al., 122 Wn.2d 829; 864 P.2d 380 (1993), the Washington Supreme Court addressed the issue of garnishee liability where the debtor filed for bankruptcy between two payment periods that were both subject to the garnishment proceedings. The garnishee, Deep Pacific Fishing Co., failed to respond to the writ of garnishment on the first pay period. Thereafter, the judgment creditor obtained default judgment against the garnishee for the entire judgment amount. The debtor then filed for bankruptcy.
On appeal, Deep Pacific sought to reduce the judgment to the amount of the debtor’s pre-petition wages that were subject to garnishment. It argued that the purpose of garnishee liability was to put the judgment creditor in the position it would have been in had the garnishee answered the writ. Since the debtor filed bankruptcy before the second pay period that was subject to the garnishment proceedings, the garnishment would have been released by operation of the automatic stay. For that reason, Deep Pacific contended that by operation of the automatic stay it would only be liable for the pre-petition portion of the garnishment judgment.
The Bour court rejected the garnishee’s argument based on the Washington statute, which prescribed triggering events for early termination of a garnishee’s liability on a garnishment. (RCW 6.27.350). Such events included termination of employment, where the underlying judgment is vacated, modified or satisfied or if the writ is dismissed. The court found that the legislature did not include bankruptcy as a basis for authorizing early termination of the garnishment. For that reason, the court held that Deep Pacific remained liable for the entire judgment amount due to its failure to respond to the writ of garnishment.
Section 362 May Have All the Answers with Regard to Garnishee Liability
Courts that have addressed the issue of garnishee liability rely on state law garnishment proceedings in conjunction with §362. Nonetheless, the timing of judgment against a garnishee is a key factual issue that courts have not yet closely reviewed. It seems that there would be a clear violation of the automatic stay where a judgment creditor seeks judgment against a garnishee post-petition, and where the judgment creditor obtains judgment pre-petition, §362 would not be implicated.
Where courts have not looked at timing, the majority opinion has at least allowed for the protection of a bankrupt debtor in a garnishment conundrum. While debtors’ employers may be subject to liability for not responding to a writ of garnishment, debtors are still protected by the automatic stay. Outside of bankruptcy, an employer may withhold an employee’s wages to satisfy a garnishment debt. By contrast, if in bankruptcy, “an employer held personally liable for failing to comply with the garnishment statutes attempted to collect from the debtor on that debt, or retaliate in some other way, it might be liable for violating a bankruptcy stay or discharge as well as the Consumer Credit Protection Act.” Kanipe at 369.
Conclusion
The majority opinion holds that liability of a garnishee that does not answer a writ of garnishment is the garnishee’s liability alone. The minority opinion, on the other hand, holds that enforcement of such a judgment is an indirect attempt to collect a debt of the bankrupt debtor and therefore implicates §362.
[1] In re Schneiderman, 254 B.R. 296 (Bankr. D. D.C. 2000); In re Sowers, 164 B.R. 256 (Bankr. E.D. Va. 1994); In re Waltjen, 150 B.R. 419 (Bankr. N.D. Ill. 1993); In re Gray, 97 B.R. 930 (Bankr. N.D. Ill. 1989); and United Guar. Residential Ins. Co. v. Dimmick, 916 P.2d 638 (Colo. Ct. App. 1996), have all held that there is no violation of the stay since the employer’s liability arose separately from the debtor.
[2] The Feldman holding was previously reached in O'Connor v. Methodist Hosp. of Jonesboro, Inc. (In re O'Connor), 42 B.R. 390 (Bankr. E.D. Ark. 1984); Univ. of Alabama Hosps. v. Warren (Matter of Warren), 7 B.R. 201 (Bankr. N.D. Ala. 1980).