Monday, October 10, 2011

FYI: Cal App Ct Holds Calif Garnishee Liability Statute Applies to Financial Institutions and National Banks

The California Court of Appeal for the Fifth District recently reversed a
trial court's ruling in favor of a national bank in a judgment creditor's
action against the garnishee bank for failure to comply with California's
Enforcement of Judgments Law ("EJL"), because the bank is a "person" for
purposes of the EJL and is thus subject to the EJL's provisions pertaining
to "third persons."

The Court of Appeal also held that the judgment creditor's complaint
against the bank sufficiently alleged all the elements of a claim for
conversion of property, but that the complaint failed to sufficiently
allege a violation of the Uniform Fraudulent Transfer Act ("UFTA") or a
general fraud claim.

A copy of the opinion is available at:

A judgment creditor served two writs of execution and levy on a national
bank (the "garnishee bank") in an attempt to obtain the funds held in
certain certificates of deposit ("CDs") in the garnishee bank's possession
that were allegedly property of a judgment debtor. The judgment creditor
also sought to obtain funds representing interest accrued on the CDs,
which the garnishee bank had previously turned over to a second creditor
pursuant to a competing levy.

In response to the writs, the garnishee bank stated that there were no
assets in its possession responsive to the writs. No CDs or interest
funds were delivered to the judgment creditor.

The judgment creditor then sued the garnishee bank, alleging that the
garnishee bank violated its duties under the EJL, Cal. Code Civ. Proc.
§§680.010-724.260, and that the garnishee bank participated in a
conspiracy to fraudulently transfer the CDs in order to thwart the
judgment creditor's efforts to collect on the judgment. After a series
of rulings favorable to the defendant garnishee bank, the trial court
dismissed the judgment creditor's action with prejudice and denied a
motion for a new trial, in part because in its view: (1) a claim alleging
a violation of the EJL could not be brought against a financial
institution; and (2) there was no allegation of an underlying fraudulent
transfer to support the conspiracy claim. The judgment creditor appealed.

As to whether the garnishee bank violated the EJL by failing to turn over
the accrued interest and funds represented by the CDs, the Court of Appeal
first noted the EJL's liability provision for failure of a third person to
make payment to a levying officer. As to the funds represented by the
CDs, the Court concluded that, because the judgment debtor had no right to
draw on the CDs at the time of the levies, the garnishee bank was not
required to deliver the funds represented by the CDs.

The Court then focused on the accrued interest and the complaint's
allegations that at the time of the levy, the judgment debtor owned about
$14,000 in accrued interest in the possession of the garnishee bank, which
the garnishee bank failed to pay to the levying officer. The garnishee
bank argued that the judgment creditor's own lawyer created "dueling"
levies, which thus absolved the garnishee bank of liability under the EJL.

However, the Court stated that these arguments neither negated an
essential element of the claim that the garnishee bank violated its duty
under the EJL to pay the levying officer, nor presented a recognized
affirmative defense that would relieve the garnishee bank from liability.
Accordingly, the appellate court held that the trial court erred in
granting the motion for summary judgment as to the allegations related to
a purported violation of the EJL's requirement that a third person make
payment to a levying officer.

In addition, based on its conclusion that the allegations in the complaint
were sufficient to state a claim for failing to pay the accrued interest
to the levying officer, the Court also concluded that the complaint's
allegations were sufficient to state a violation of the garnishee bank's
duty to provide information about the interest on the CDs in its response
to the levy.

The Court next analyzed whether a national banking association is a
"person" for purposes of the EJL. The Court disagreed with the trial
court's conclusion that a financial institution was not a "person" under
the EJL based on the EJL's separate statutory definitions of "person" and
"financial institution." Instead, agreeing with the judgment creditor,
the appellate court concluded that the EJL applies to all garnishees
regardless of whether the garnishee is a financial institution. See Cal.
Code Civ. Pro. §§680.200; 680.280. The Court noted that the term
"financial institution" is not excluded from the definition of "person"
and that the EJL's definition of "person" includes a "corporation" without
any exclusions, exceptions, or qualifiers. Further, after examining such
terms as "national association," "unincorporated association," and
"incorporated association," the Court also concluded that, as a "national
association," the garnishee bank meets the EJL's definition of a "person."
Accordingly, the garnishee bank is subject to the duties and liabilities
imposed on a "third person," including the duties of a garnishee,
liability for noncompliance, and the duty associated with a garnishee's
response to a notice of levy.

The judgment creditor also argued that the garnishee bank participated in
a conspiracy by violating UFTA, Cal. Civ. Code §3439-3439.12, and that its
complaint also stated a tort claim for fraud and conversion. On the UFTA
issue, the Court noted that the judgment creditor could not show that the
trial court erred on this particular point, partly because UFTA refers to
transfers by debtors, not third parties. Thus, the Court concluded that
the complaint did not allege sufficient facts to state a claim under UFTA.

The Court also held that the judgment creditor failed to meet the strict
pleading requirements for fraud and deceit based on false representation
or concealment, because the complaint did not include (1) an allegation
that the judgment creditor justifiably relied on a false statement by one
of the alleged co-conspirators, or (2) a specific allegation that a
co-conspirator was under a duty to disclose a fact that had been

Finally, as to the conversion claim, the Court noted that the tort of
conversion can be pled with general factual allegations. Consequently,
the Court held that the judgment creditor's allegations stating that: (1)
it had the right to the accrued interest; (2) the garnishee bank
wrongfully disposed of the funds; and (3) the judgment creditor suffered
damages as a result, were sufficient to state a claim for conversion.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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