Legal Blog

Uncooperative

Garnishment is a relatively simple concept. A debtor does not pay its judgment debt to a creditor; the creditor issues a notice of garnishment to a third party (the garnishee) who owes a debt to the debtor; and the garnishee pays to the Sheriff that debt. The Sheriff then distributes that amount rateably to all execution creditors. Garnishment works well until the garnishee balks at paying the money. A garnishee will not pay for many reasons: the garnishee does not actually owe the money to the debtor or at least believes that it does not; the garnishee owes the money, but does not have it readily available; the garnishee owes the money, but is in cahoots with the debtor and does not want to pay, etc.

What does the creditor do when the garnishee gives a negative response or no response? That question was answered in Couper v. Vitaquest International, a 2017 decision of the Ontario Superior Court of Justice.

Remedy

Rule 60.08(11) of the Rules of Civil Procedure states that a garnishee is liable to pay to the Sheriff a debt due to the debtor. Rule 60.08(15) allows a garnishee the right to dispute the garnishment by serving and filing a garnishee’s statement.

Then we get to the remedial sections. Rule 60.16 allows any interested party the right to bring a motion to the court to determine the validity of the garnishee’s statement. This section is used when the garnishee at least plays by the Rules and responds to the garnishment. Rule 60.17 is used when the garnishee does not play by the Rules and ignores the notice of garnishment. It allows the creditor to bring a motion to the court for an order that the garnishee owes the creditor the lesser of (i) the amount the debtor owes the creditor and (ii) the amount that the garnishee owes the debtor. If the creditor obtains an order against the garnishee, the creditor then has all of the collection tools available against the garnishee that it had under its judgment against the debtor. This may be beneficial (if the garnishee has exigible assets or is earning money that the creditor can garnish) or not (if the garnishee has no exigible assets or income).

Hearing

The original judgment debt was $1.7 million arising out of an employment contract between two friends whose friendship ended abruptly. The judgment was upheld on appeal. The debtor did not pay the judgment debt and the creditor issued a notice of garnishment for the judgment amount to two garnishees, who were customers of the debtor. The garnishees did not provide a statement according to the Rules and did not pay to the Sheriff the debts that they may have owed to the debtor.

After the notices of garnishment had been ignored, the creditor sent demand letters advising the garnishees that, if they continued to ignore the garnishments, the creditor would bring the appropriate motion. The garnishees refused to accept those letters when sent by courier. The creditor then arranged for the letters to be served personally, but, after the garnishees received them, their principal “ran back outside with the letters and threw them in the air.” The garnishees did not play nicely in the sandbox.

True to his word, the creditor brought a motion under Rule 60.17 seeking a judgment against the garnishees for failing to comply with their obligations after they received the notices of garnishment. To eliminate any possibility that the garnishees could later claim ignorance of the motion, the creditor’s lawyer, in addition to serving the motion materials, called the garnishees’ representative and again notified him of the upcoming motion.

There was not much going for the garnishees. As the Master stated, “the purpose of garnishment proceedings is to put the garnishee on notice that debts that it owes to the debtor are to be paid instead to the creditor…” Not only did the garnishees have notice of the garnishments, they actively attempted to evade service. The Master also stated that “if the garnishees refuse to comply with their obligations under notices of garnishment, they can render a judgment futile. This is particularly so here where the debtor is located in New Jersey.” In effect, the Master was not going to allow Ontario corporations, in bed with a foreign debtor, to stonewall the process.

How Much

The next question in these types of cases, after proving that there is some debt owed, is how much is owed. Usually, a creditor would have no real knowledge of the debt unless it had some source of information. In this case, the creditor had been a senior employee of the debtor and knew about the debtor’s business, at least until his termination.

The creditor delivered an affidavit in which he swore that the garnishees purchased product from the debtor in the amount of approximately $300,000 to $600,000 per month and were continuously indebted to debtor, assumedly by way of a revolving account. That was enough for the Master to conclude, without any specifics, that the garnishees were jointly and severally indebted to the creditor for at least the $1.7 million judgment debt.

The evidence as to quantum was scant, but the evidence of the garnishees’ active attempt to stymie the creditor was sufficiently strong that the Master overlooked the scant evidence. When you do not play nicely in the sandbox, you have to expect sand being thrown in your face.

Image courtesy of jmiltenburg.

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