LENDING UPDATE
Information for Georgia Lenders about legal lending topics of interest presented by the
commercial lending attorneys at Westfall, LLC
Garnishment Chaos No. X/8
For years the Georgia Garnishment Statute has been a significant tool in the legal arsenal for financial institutions when loans turn bad. Unfortunately, on September 8, 2015, the Georgia garnishment statute was declared unconstitutional in the case of Tony Strickland v. Richard Alexander, Clerk of the StateCourt of Gwinnett County. This case involved an individual with a joint bank account that contained funds that were “exempt” from garnishment because they were worker compensation payments which are expressly not subject to a claim by garnishment. It was held that the Georgia garnishment statute violated the constitutional due process clause, by not giving the debtor sufficient notice about the categories of funds that may be exempt from garnishment and the procedure to claim such exemptions. Simply stated, the court found that garnishment statute established a process that deprived debtors of their exempt property for an unconstitutionally long period of time.
Not unexpectedly, the Strickland case has had an immediate impact upon the use of garnishments in Georgia. Many counties are currently not issuing summons for garnishments and are reportedly returning garnishment funds to garnishees. Other courts in Georgia are trying to reconcile the effect of this case by issuing standing orders about garnishment case disposition in those courts’ respective counties.
The decision has also created a great deal of chaos for financial institutions that were either collecting judgments of their own or in the alternative were named garnishees. As has been famously said “out of chaos comes order,” and we believe that some order is emerging from the Strickland decision and that the case is not as formidable as it initially appeared. First, the Judge in Strickland has already issued a modified Order that makes it clear that the decision only applies to garnishments filed against individuals with deposit assets in financial institutions. The rational for this modified Order was that the issue of wage garnishment was not before the court so the decision did not impact that type of garnishment. Second, the Strickland case focused on the procedural aspects of the garnishment process. Specifically the court was concerned that the garnishment debtor was not notified of (i) certain exceptions that existed to protect garnishment property; (ii) the existence of procedures to claim such an exemption; and (iii) the lack of a procedure for adjudicating exemption claims. So the entire statute was not declared unconstitutional, just the procedural process for the administration of the exemptions available to individuals. Third, since commercial garnishment actions against entities would not have the same personal exemptions available, the effect of Strickland on commercial garnishments should be minimal.
The more complex question is what does a financial institution do when confronted with a situation when an individual’s funds are on deposit and the institution is served with a garnishment summons? Although every situation is different, institutions subject to a garnishment summons should consider taking the following non-exhaustive actions: (i) conduct an independent analysis of the deposited funds to independently determine if any obvious exemptions exist (i.e. workers compensation proceeds, social security funds etc.); (ii) notify the account debtors verbally and in writing and request a response from the account debtors within a specified short period of time if he/she will have a claim that the funds are protected by an exemption; and (iii) file an answer to the summons as early as possible to shorten the time period that a debtor could be deprived of his/her funds and to avoid the issuance of a default judgment against the institution. Additional protection is afforded to institutions that make a good faith response under a long standing safe harbor provision in the garnishment statute. Notably, if an exemption is claimed, or no response is forthcoming from the debtor, there are still some options available to an institution. However, considering the evolving nature of this area of law and the multiplicity of situations that could arise we recommend that legal counsel be engaged to assist in exploring those options until new legislation is enacted and judicially interpreted.
Although Strickland has presented new challenges, well-informed financial institutions will realize that with some adaptation they will still be able to utilize the garnishment statute as a significant tool in their legal arsenal.
We will be happy to assist you with any garnishments issues and questions or any future needs.If you need any further information on this issue, or any other lending question, please do not hesitate to contact one of our experienced commercial lending attorneys at Westfall, LLC.
M. Todd Westfall, Esq. (678) 384-7005
Pamela G. Hill, Esq. (678) 384-7024
Kory S. Pryor, Esq. (404) 422-7200
These materials are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of or access to this Lending Update does not create an attorney-client partnership between Westfall, LLC and the reader. The opinions expressed through this Lending Update are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.
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