Legal Blog

Garnishing a Lawyer’s Trust Account

Lawyers hold money in trust for a client. They render an account for their fees, which is unpaid. The client’s judgment creditor issues a garnishment against the lawyers. Must the lawyers honour the garnishment before paying their fees from trust even though, after paying the garnished amount, there will be no or insufficient money left to pay their fees? This question was decided (we think) in Richter LLP v. Big Truck TV Productions Inc., a 2015 decision of the Ontario Court of Appeal.

Tax Credit

Debtor (or “client”) was a media company eligible for tax credits. Creditor #1 was a professional firm who prepared client’s 2010 tax credit application. Creditor #2 was the assignee of a different professional firm who prepared client’s 2011 tax credit application. Client’s lawyers defended client when creditor #1 sued for payment of its fees. The lawyers ultimately negotiated a settlement between client and creditor #1.

Pursuant to the settlement, client gave an irrevocable direction to the lawyers authorising them, upon receipt of a tax credit refund from Canada Revenue Agency, to pay the monies due to each creditor and themselves and pay the balance to client. The expected $265,000 refund was to be paid as follows: creditor #1 ($52,000), the lawyers ($95,000), creditor #2 ($90,000), and client ($13,000). Unfortunately, the refund was only $150,000, enough to pay creditor #1 and the lawyers in full, but only $3,000 to creditor #2.

Before the lawyers received the tax refund, creditor #2 obtained judgment against client and issued a garnishment against the lawyers. The lawyers responded, noting that they did not owe a debt to client, but rather were trustees, and a creditor, of client. They also informed creditor #2 of client’s direction and indicated that, unless creditor #2 obtained a court order to the contrary, they would honour that direction. That is exactly what they did.

Creditor #2 brought a motion for a garnishment hearing, arguing that the lawyers ought to have paid it pursuant to the garnishment, before making any payments under the direction. In effect, creditor #2 wanted to leapfrog the priority that client had set out in its direction.

 

Debt

Rule 60.08(1) provides the authority for a garnishment. It allows a creditor to garnish for “debts payable to the debtor by other persons.” Accordingly, the first question the hearing judge had to answer was whether the CRA refund was a debt that creditor #2 could garnish. The judge acknowledged that the lawyers did not owe any money to client, but stated that creditor #2 “wasn’t trying to garnish money owed by (the lawyers) to (client)”; rather, it “was trying to garnish monies to be paid pursuant to a direction to (the lawyers) for (client’s) benefit.” The judge keyed in on the cheque rather than the money it represented. He said that the garnishment was attempting to intercept the CRA monies and that the direction “did not convert the tax cheque into a debt from (client) to the (lawyers). If this analysis seems a little convoluted to you, we can assure you that it dumbfounded us.

The judge held that there was a debt that was validly garnished.

 

Setoff

The lawyers also argued that they were entitled to set off any money that client owed them in fees against the money that they held in trust. The judge went into the usual analyses of whether it was a legal setoff (i.e. mutual debts) or an equitable setoff. He correctly determined that there was no mutuality of obligations between the lawyers and creditor #2. He then looked at the equities between creditor #2 and the lawyers and held that it would be inequitable for the lawyers to take their fees first because (i) the lawyers and creditor #2 were each unsecured creditors and (ii) the lawyers used self-help rather than moving for a garnishment hearing to determine the parties’ rights.

These analyses were even scarier than the debt analysis. The judge analysed the relationship between the lawyers and creditor #2. However, the lawyers’ setoff was not against creditor #2; the setoff was against client. Creditor #2 could not garnish a debt if the lawyers owed no money to client and, because of both legal and equitable setoff, any money that the lawyers owed to client was reduced by the fees that client owed to the lawyers.

Regardless, the judge ordered the lawyers to pay to the sheriff the full amount set out in the notice of garnishment less the amount the lawyers had previously remitted to creditor #2. The lawyers appealed.

 

Appeal

 The Court of Appeal limited its analysis to the first issue: was there a debt to be garnished? It interpreted the reasons of the hearing judge, but the reasons were as unintelligible to us when the Court re-stated them as when we reviewed them the first time.

In any case, the Court held that the refund cheque was not a debt owed by the lawyers to client and the notice of garnishment therefore had no effect on that cheque. The tax refund represented money that CRA owed to client, which client had directed to be paid in a particular manner. Further, after client executed the direction, the lawyers’ only duty to client and creditor #2 was to carry out the terms of the direction. Once the amount of the refund cheque was known, it became apparent that there would be no excess to be paid to client and therefore no debt from the lawyers to client would arise.

The Court set aside the judge’s order, also noting that, contrary to what the judge had stated, the lawyers did not act improperly.

 

Consequences

The Court did not need to deal with the setoff issue because of its decision regarding the lack of a debt. Accordingly, we do not have the pleasure of seeing that part of the hearing judge’s decision specifically reversed. However, we cannot imagine a subsequent court would follow that reasoning. If client could not have claimed that the lawyers improperly paid themselves for their fees because of a valid setoff, why would a garnishor be in any better position? This was not a bankruptcy situation in which the normal rules can change.

The Court noted that had there been funds left in trust after payment of the money in accordance with the direction, then, assuming that the lawyers’ retainer was completed, the lawyers would have owed the remaining funds to client, funds that were garnishable.

 

Confusion

Just because lawyers have a trust account does not mean that there is a true common law trust, which needs certainties of intention, object, and subject matter. In a normal mixed trust account, there may be certainties of intention and object, but there is no certainty of subject matter. Whose monies are whose in a mixed and intermingled trust account? Conversely, when lawyers hold money in trust in an account with only one client as the sole beneficiary, we have a true common law trust.

Single beneficiary trust accounts cannot be garnished. The lawyers do not owe a debt to their client; rather, they are trustees. Instead, the account can be seized under a writ of seizure and sale.

However, in a mixed, and multiple beneficiary, trust account, the relationship between the lawyers and their clients becomes a debtor-creditor relationship. The monies that the lawyers hold are not technically trust monies; rather, they are debts, which can be garnished.

So why did the Court say that there was no debt?  A direction from a debtor to a garnishee should not be sufficient to allow the garnishee to refuse to honour the garnishment; otherwise, a debtor could easily defeat a prospective garnishment. We can only assume that the irrevocable direction, given pursuant to a settlement agreement, was treated as the equivalent of an assignment so that client had no interest in the money at any time during the garnishment. Otherwise, we cannot answer the question we posed.

 

Image courtesy of DodgertonSkillhause, Creative Commons.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.