McMahan & Co v. Po Folks Inc

• Court: Court of Appeals for the Sixth Circuit
• Decided: March 8, 2000
• Docket: 99-5012
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0083P (6th Cir.) File Name: 00a0083p.06

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _________________

;  MCMAHAN & COMPANY,  Plaintiff-Appellant,   No. 99-5012 v.  > PO FOLKS, INC.,  Defendant-Appellee,     TRADITIONAL BANK,  INCORPORATED f/k/a MONTGOMERY TRADERS   Garnishee-Appellee.  BANK & TRUST COMPANY,

 1 Appeal from the United States District Court for the Eastern District of Kentucky at Lexington. No. 95-00342—Karl S. Forester, District Judge. Argued: January 28, 2000 Decided and Filed: March 8, 2000 Before: SUHRHEINRICH and GILMAN, Circuit Judges; COHN, District Judge.*

* The Honorable Avern Cohn, United States District Judge for the Eastern District of Michigan, sitting by designation.

1 2 McMahan & Co. v. Po Folks, Inc., et al. No. 99-5012

_________________ COUNSEL ARGUED: Leigh R. Isaacs, ISAACS & EVANS, New York, New York, for Appellant. Alan B. Peck, WHITE, PECK, CARRINGTON, WILLIAMS & NEAL, Mt. Sterling, Kentucky, for Appellees. ON BRIEF: Leigh R. Isaacs, ISAACS & EVANS, New York, New York, Denise H. McClelland, FROST & JACOBS, Lexington, Kentucky, for Appellant. Alan B. Peck, WHITE, PECK, CARRINGTON, WILLIAMS & NEAL, Mt. Sterling, Kentucky, for Appellees. _________________ OPINION _________________ COHN, District Judge. I. Introduction and Facts This is an action to enforce a judgment. Plaintiff-Appellant McMahan & Co. (McMahan) appeals the district court’s grant of summary judgment for Defendant-Appellees Po Folks, Inc. (Po Folks) and Montgomery Traders Bank & Trust Co., now known as Traditional Bank, Inc. (Bank). A. On February 28, 1995, McMahan obtained a default judgment in the United States District Court of Delaware against Po Folks for failure to pay on a promissory note given to McMahan. The judgment, in the amount of $288,763.14 (including interest), was registered in the United States District Court for the Eastern District of Kentucky on April 3, 1995. McMahan thereafter attempted to enforce its judgment through more than twenty garnishment orders issued to the Bank, at which Po Folks maintained accounts. However, McMahan's efforts were largely unsuccessful, with less than $12,000 being remitted to McMahan by the Bank. No. 99-5012 McMahan & Co. v. Po Folks, Inc., et al. 3

McMahan therefore moved for a writ of execution, attachment and/or sequestration against Po Folks' property held by the Bank, as is the standard procedure to challenge a bank's garnishment disclosure in Kentucky. See KY. REV. STAT. ANN. § 425.526; see also FED. R. CIV. P. 69 (a) (federal garnishments are to proceed according to the laws of the state in which the federal court sits). The district court denied McMahan's motion, finding that the Bank did not possess any Po Folks property on 1the date and the time the garnishment orders were received. On appeal, we reversed the district court's decision and ordered that discovery be conducted. McMahan & Co. v. Po Folks, Inc. 1997 WL 78497 (6th Cir. Feb. 24, 1997). On remand, discovery revealed that the reason the Bank did not satisfy the garnishment orders served by McMahan was because of the internal procedures of the Bank, and the structure of Po Folks' accounts. Po Folks had several accounts with the Bank, specifically, a general account and 5 independent, named accounts. The named accounts were “zero balance” accounts, which meant that at the close of business every day, the account funds would be “swept” into the general account, leaving a zero balance. Po Folks paid the Bank a monthly fee to allow2 Po Folks to significantly overdraw on its general account. When a garnishment order was served, the Bank's policy was to check the balance of the account by computer, which only reflected the account balances as of the close of business the previous day and did not show any deposits or withdrawals made during the day the garnishment orders were served. Thus, since all of Po Folks' accounts were either “zero balance” accounts, or overdrawn as of the close of business the preceding day, whenever a garnishment order was served the Bank would respond that no

1 As the losing party, the district court held McMahan responsible for paying the fees of an independent expert appointed by the district court to conduct an independent review of the accounts in question. 2 The propriety of such practice is not explained in the record. The effect of such procedure appears to be no more than a demand obligation. 4 McMahan & Co. v. Po Folks, Inc., et al. No. 99-5012 No. 99-5012 McMahan & Co. v. Po Folks, Inc., et al. 13

monies were in Po Folks' account, even if deposits had been consistent with this opinion, including a determination and made the day that the garnishment order was served, and order regarding the amount of prejudgment interest and particularly that part of the day preceding the exact time the attorney's fees. garnishment order was served. B. Following the completion of discovery, McMahan again moved for writs of execution, attachment and/or sequestration against Po Folks' property, an order of contempt against the Bank, and summary judgment. The district court found that due to the Bank's procedures and the structure of Po Folks' accounts, the Bank did not hold property belonging to Po Folks as of the dates and times the garnishment orders were served, and further, that the Bank did not intentionally manipulate the account balances in order to assist Po Folks in defeating garnishment orders. The district court additionally held that it would be too burdensome on Kentucky banks to take steps “outside of the ordinary course of business” to facilitate the determination of whether they are in possession of garnished property as of the dates and times the garnishment orders were served. Accordingly, it denied McMahan's motion for a writ of execution and, in turn, denied “as moot” both parties' summary judgment motions. II. Summary of Arguments This is a case of first impression under Kentucy law. McMahan argues on appeal that the Bank had an obligation to determine whether it was in possession of Po Folks' property as of the date and time of service of a garnishment order and since it failed to do so, it violated the garnishment orders and as such, is liable to McMahan. McMahan says that the Bank cannot aggregate the balances of all of Po Folks' accounts for purposes of determining its obligations on the garnishment orders because the district court found that the named accounts were not sub-accounts of the general account. The Bank responds that the district court correctly found that the Bank did not violate the garnishment orders by stating it owed no money and correctly refused to require the Bank to 12 McMahan & Co. v. Po Folks, Inc., et al. No. 99-5012 No. 99-5012 McMahan & Co. v. Po Folks, Inc., et al. 5

V. Prejudgment Interest and Award of Attorney Fees determine account balances outside of the normal course of business, i.e. except as of the close of business the day before A. the garnishment orders were served. McMahan also asserts that it is entitled to prejudgment For the reasons that follow, the decision of the district court interest. Under Kentucky law, prejudgment interest follows is REVERSED. a liquidated claim even if the refusal to pay is based upon “good faith denial of liability.” Hale v. Life Ins. Co. of North III. Violation of Garnishment Orders America, 795 F.2d 22, 24 (6th Cir. 1986). A claim is liquidated if the amount has been agreed to by the parties or At the heart of this dispute is the issue of whether the Bank is fixed by operation of law. See id. at 24. Here, McMahan's possessed any property belonging to Po Folks on the dates claim is liquidated since the amount of the judgment and each and times the garnishment orders were served. The district garnishment order was a fixed sum. Accordingly, McMahan court answered in the negative, and all of its subsequent is entitled to prejudgment interest. holdings flow from this holding. Thus, we must address this threshold issue with great care. We review de novo the B. district court's denial of summary judgment. See FED. R. CIV. P. 56, Smith v. Ameritech, 129 F.3d 857 (6th Cir. 1997). Additionally, under FED. R. CIV. P. 70, a party may be held in civil contempt for violating a garnishment order. The A. primary purpose of a civil contempt order is to “compel obedience to a court order and compensate for injuries caused The district court found that the Bank did not “hold by non-compliance.” TWM Manuf. Co. v. Dura Corp., 722 property belonging to, nor was it indebted to, Po Folks” on F.2d 1261 (6th Cir. 1983). We have previously recognized the dates and times the garnishment orders were served. that an award of attorney's fees is appropriate for civil Opinion and Order filed December 9, 1998 (Opinion and contempt in situations where court orders have been violated. Order) at 6. It noted that the Bank's policy for processing a See Redken Lab., Inc. v. Levin, 843 F.2d 226 (6th Cir. 1987). garnishment order solely utilized the Bank's computers to Here, an award of attorney's fees is warranted because determine if a customer had funds subject to the garnishment McMahan was forced to expend a significant amount of order. Although it recognized that the Bank's computers at all money in attorney's fees to recover monies clearly owed to it; times reflected only the account balance from the close of an undertaking that was made arduous solely through the business the previous day, the district court decided that conduct of Po Folks' and the Bank. requiring the Bank to do anything else beyond a computer check would require the Bank to go “outside the ordinary Furthermore, as the unsuccessful parties, the Bank and Po course of business” and it was unwilling “to impose such a Folks are also responsible for the court appointed expert's fees burden.” Opinion and Order at 6. We disagree. and McMahan is entitled to reimbursement in the amount of $6,783.82. 1. VI. Conclusion The Kentucky garnishment statute, KY. REV. STAT. ANN. § 425.501(5) provides that “[i]f the court finds the garnishee For the reasons stated above, we REVERSE the district was, at the time of the service of the order upon him, court's decision and REMAND for further proceedings possessed of any property of the judgment debtor, . . . the 6 McMahan & Co. v. Po Folks, Inc., et al. No. 99-5012 No. 99-5012 McMahan & Co. v. Po Folks, Inc., et al. 11

court shall order the property or the proceeds of the debt 581-2. Second, the Bank delayed paying the first two applied upon the judgment.” In our prior opinion, we garnishment orders for two years. characterized the Kentucky statute as effecting a “snapshot” rule, operating only on property that the garnishee possessed Although, as noted by the district court, none of this at the time the garnishment order was served and does not evidence conclusively establishes that “the Bank intentionally operate in the future. manipulated Po Folks' accounts in order to defeat garnishment,” the Bank had an independent duty to refrain The district court's opinion focused on the fact that the from conduct that would obstruct enforcement of the Bank, in following their ordinary garnishment procedures, judgment. See Board of Regents v. Harriman, 857 S.W. 2d could not have discovered property belonging to Po Folks, 445 (Mo. Ct. App. 1993). As the court in Harriman stated: absent “manually processing all items on hand at that particular moment.” The district court therefore concluded It is the duty of a garnishee to stand neutral in the that since the Bank could not locate Po Folks' property in the litigation over the fund in his hands, to disclose all the “ordinary course of business,” it did not possess any of Po information it has concerning the fund to the court, and Folks' property. Nowhere in the statute does it say that to hold the fund in readiness to abide by the decision of locating garnished property is required only if it can be done the court. When he follows this course, he is entitled to in the “ordinary course of business”3 or without being unduly the fullest protection; but when the garnishee . . . burdensome. abandons his position as stakeholder and takes up the role of a litigant . . . he must be content to accept the 2. outcome of the battle fought out on the field he has chosen. Moreover, even assuming that such a requirement exists, the record reflects that the Bank had the ability to locate Id. at 451 (citing Potter v. Whitten, 155 S.W. 80, 88 (Mo. Ct. property belonging to Po Folks in the “ordinary course of App. 1913); Restatement (Second) of Judgments §§ 63 business.” Although the Bank was unable to view a current comment a (1982)). daily account balance from the computer terminals since the computer always had a one day lag, several Bank employees Thus, in light of the Bank's conduct in changing the non- testified that it was common practice, in a number of “zero balance” account with the knowledge of Po Folks' situations including garnishments, for the Bank to place a motivation, coupled with the Bank's own garnishment “hold” on an account for up to 14 days. See JA pp. 354-5, procedures, and the fact that Po Folks was the Bank's largest 360-362. A “hold” prevents any withdrawals or deposits from customer, we believe that a genuine issue of material fact the account until it is lifted. If the Bank had placed a “hold” exists as to whether the Bank breached its duty to remain neutral and actively assisted Po Folks in evading garnishment of its property. However, having already found that the Bank is liable for the full amounts of the garnishment orders, supra, 3 The district court relied too heavily on dicta found in the this issue is of no practical significance. concurrence to our previous decision which states that “if during the business day on which a garnishment was served the customer's accounts would have shown a net positive balance in the ordinary course of business, then the plaintiff should have been entitled to recover that balance.” McMahan, 1997 WL 78497 at *5. Not only was this language dicta, but the Bank has proffered no authority for such a proposition. 10 McMahan & Co. v. Po Folks, Inc., et al. No. 99-5012 No. 99-5012 McMahan & Co. v. Po Folks, Inc., et al. 7

exact time the deposits or debits occurred does not relieve the on any of Po Folks' accounts for even 24 hours, which the Bank of liability. In fact, the general rule is that “[w]here Bank was able to do, the Bank would have been able to relevant information . . . is in the possession of one party and process the deposits and debits received prior to the hold in its not provided, then an adverse inference may be drawn that normal procedure, and ascertained if there was any surplusage such information would be harmful to the party who fails to the next day. provide it.” Weeks v. ARA Serv., 869 F. Supp. 194, 195 (S.D.N.Y. 1994). In Wilton Enterprise v. Cook's Pantry, 552 In Fast Food Sys., Inc. v. Ducotey, 837 P.2d 910 (Okla. A.2d 1031 (N.J. 1988), the garnishee bank claimed that it did 1992), the Oklahoma Supreme Court was also faced with a not know the time a certain check was paid on the date a “snapshot” statute and a garnishee bank whose computers did garnishment order was served. The court held that “absent not instantly reflect credits and debits. A bank customer any specific proof of the exact time of payment of the check deposited a check for over $8,000.00, and less than two hours by the bank, a permissible inference can and shall be drawn later, a garnishment order was served on the customer's that final payment of the check occurred after the levy was account. See id. at 911. Because the computer did not yet served. . . .” Id. at 1034. We agree and find this situation reflect the check, the bank denied that it had any of the analogous. Thus, we hold that the Bank is liable to McMahan customer's monies. See id. The court ruled against the bank, for the entire amount of the judgment. holding that “a bank customer has sufficient property right in any check the customer deposits to his bank account to IV. Intentional Manipulation of Accounts require the bank to account for it in its answer to a garnishee summons. This is so even if the bank's computer records do McMahan next argues that the district court erred in not reflect the deposit when the bank receives the garnishment dismissing its claim that the Bank intentionally manipulated summons.” Id. at 913. The court in Fast Food noted that the Po Folks' accounts to avoid garnishment. We agree. bank would routinely suspend processing on accounts subject to garnishments for 24 hours to allow time to identify A. transactions that may have occurred previously. See id. This allowed the bank to learn the exact balance of the account at In dismissing McMahan's claim for intentional the moment the bank was served with a garnishee summons. manipulation, the district court noted that the “zero balance” structure of Po Folks' accounts had been in place for 3. approximately one year before any of the garnishment orders were served, and concluded that this precluded any We agree with the reasoning of the Oklahoma Supreme manipulation on the part of the Bank to help Po Folks' avoid Court and hold that the Bank had an obligation to determine garnishment. However, there is additional evidence that bears whether on the date and time a garnishment order was served on this determination as well. First, although most of Po it possessed any property belonging to Po Folks. See KY. Folks' accounts were structured as “zero-balance” prior to any REV. STAT. ANN. § 425.501(5). Merely checking a computer garnishment orders were served, immediately after the receipt record, known to reflect only the balance from the end of of the first two garnishment orders, the Bank acquiesced to Po business the previous day, is insufficient under the “snapshot” Folks' request that the Bank change its only non-“zero requirement of the Kentucky statute which mandates that balance” account to a “zero balance” account, with the property be identified as of the moment that the garnishment understanding that such a change was being made to prevent order is presented, not merely as of close of business the any further garnishment orders from being honored. See JA previous day. See id. (“If the court finds that the garnishee 8 McMahan & Co. v. Po Folks, Inc., et al. No. 99-5012 No. 99-5012 McMahan & Co. v. Po Folks, Inc., et al. 9

was, at the time of service of the order upon him, possessed B. of any property. . . .”) In light of the above, we conclude that the Bank violated If this means that banks must all implement time-stamping the garnishment orders if they were returned unsatisfied when into their business procedures, or freeze an account subject to any of Po Folks' accounts showed a positive net balance at the a garnishment order to meet this requirement, then so it does. time of service.6 Under Kentucky law, a violation of a A holding any other way would create an exception to KY. garnishment order imposes liability in the amount of the REV. STAT. ANN. § 425.501(5) allowing a garnishee to avoid judgment. See Holbrook v. Fyffe, 175 S.W. 977 (Ky. 1915). the operation of a garnishment order by mirroring the account structure created for Po Folks and reward sloppy accounting 1. and garnishment procedures. With respect to the Credit Card account, the Bank admitted Additionally, from a policy standpoint, the rule is sound. that deposits were made every morning before the bank As this case illustrates, much can occur in one day and to opened. See JA at 534. Credits in the form of credit card allow banks to rely solely on information from the close of payments, and debits in the form of checks were business the previous day can lead to misleading inaccuracies. electronically transmitted to the Bank and processed between Furthermore, by structuring its accounts in this fashion, 9:00-10:00 a.m. every morning. See JA at 534. The Bank's although perhaps completely legal from a banking employee, Mr. Baker, testified that on the dates of 17 standpoint,4 Po Folks took advantage of the Bank's internal garnishment orders, the Credit Card account, after7subtracting procedures to effectively evade virtually all garnishment of its the debits, yielded a surplusage of $114,830.16. This fact property,5 yet still maintain all of the benefits of the deposits. effectively eliminates the Bank's argument that it did not Fundamental fairness does not permit such a result. possess any property of Po Folks' prior to the dates and times the garnishment orders were served since the garnishments Moreover, what the statute requires is not an unreasonable were obviously not served until the bank opened and by then, burden on the Bank because, as was testified to by an the electronic transfer amounts were already sitting in the employee of the Bank, the Bank generally receives only Credit Card account. approximately 6 garnishment orders a month, and putting a “hold” on an account is routinely done in numerous contexts. 2. As to Po Folks' other accounts, the Bank admits that it has no way of determining at what time the deposits or debits occurred because it did not time-stamp any of them. Contrary to the Bank's argument, the absence of specific proof of the

4 We express no comment on the legality of an account structure such 6 as here. The court appointed expert's report did not indicate whether at the time the garnishment orders were served, any of Po Folks' accounts may 5 have had a positive balance. For example, although McMahan successfully garnished $5,660.37 on April 4-5, 1995 from Po Folks' MTS-01 account, immediately after the 7 garnishment Po Folks changed the MTS-01 account to a “zero balance” Prior to being “swept” into the general account, as per the “zero” account. account structure.