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Can a Judgment Creditor Garnish a Contractual Obligation?

On Behalf of | Nov 19, 2019 | Business Litigation, Contract Disputes |

If you think a commercial contract can protect you from a garnishment, you may well be wrong. While proper wording of a contract is essential to safeguard your interests and provide a path to recovery in the event of a default, the courts have made it clear that a debt arising out of a contract is the proper subject of a garnishment.

Here is a real-world example to consider. You and a business partner are members of a limited liability company called Vanilla LLC that enters into a commercial lease with a landlord. Your business partner guarantees the lease. However, Vanilla LLC’s operating agreement includes a provision to indemnify and hold harmless any member who guarantees a company obligation.

So, what happens when Vanilla LLC defaults on its lease? The landlord would then sue Vanilla and the guarantor. Let’s say the landlord obtains a judgment against Vanilla and your business partner. Under the agreement your partner has a contractual right to proceed against you in regard to your obligation to indemnify him. At that point, can the landlord the garnish your contractual obligation to indemnify your partner?

The answer is yes, because the courts have said contractual obligations are the proper subject of a garnishment. “Garnishment is available to subject any debt due to a judgment debtor by third person to the claims of the judgment creditor. 77.01, Fla. Stat. (1979),” as stated in Coleman Music and Games Co., Inc. v. McDaniel, 411 So.2d 193 (Fla. 5th DCA 1981).

Coleman Music involved a garnishment against the maker of a promissory note arising from the garnishor’s unsatisfied judgment against the holder of the note. The rationale for allowing the judgment creditor to pursue the garnishee directly is based on the concept of stepping into the shoes of the judgment debtor and asserting all the debtor’s rights against the garnishee.

Similarly, in Capital Factors, Inc. v. Alba Rent-A-Car, Inc., 965 So.2d 1178 (Fla. 4th DCA 2007), the court held an unconfirmed arbitration award could be the basis for a garnishment. The issue in the case was whether an unconfirmed arbitration award could qualify as a “debt due” subject to garnishment pursuant to Florida statutes. The award did not require judicial confirmation to be collectible. The court reasoned the award is of a liquidated amount and on its face was final. Of significance is the court’s rationale:

Confirmation merely transforms the arbitral award into a judgment of the court; however, nothing in the garnishment statute mandates transformation of an outstanding debt to a judgment in order to be garnishable. § 77.01, Fla. Stat. At the times the two sets of garnishment writs were served on Avalon, Avalon owed the award to Alba/Olivieri contractually, and, at all times, the amounts that Avalon owed to Alba/Olivieri more than covered CFI’s judgment against Alba/Olivieri.

The significance of Capital Factors is its recognition of a contractual indebtedness upon which a garnishment could proceed without requiring a judgment against the third party obligor of the judgment debtor. In other words, a disputed debt due is still subject to garnishment. Every member of a limited liability company or similar structure should be aware of this possibility before signing any commercial contract involving a guaranty and/or indemnification.

Miami attorney Harry A. Payton holds dual Florida Bar board certifications in Business Litigation and Civil Trial. He is the founder of Payton & Associates, which serves domestic and international clients, including businesses and high-net-worth individuals, in complex litigation matters.