A garnishment proceeding is a method by which a judgment creditor can collect money owed by the judgment debtor directly from a third party who holds the debtor’s property (a garnishee). The proceeding is only effective to the extent of the debtor’s interest in the property attached. The garnishee served with garnishment is only liable to the extent the garnishee held the judgment creditor’s property at the time the notice of garnishment was served, but failed to deliver the property to the sheriff. If the garnishee does not hold the debtor’s property, then the garnishee has nothing to deliver to the judgment creditor seeking the garnishment.
In this case, a law firm was served with a praecipe of execution for funds held on behalf of the debtor and his spouse. The firm disclosed that it had once held funds on behalf of the debtor, but that the trust account had been cleared for over a year, so the firm did not have possession of any of the debtor’s property. The firm also disclosed that it held funds on behalf of the spouse who was not liable for the judgment, so she was not a debtor. No further action was taken by the judgment creditor until a second creditor obtained a judgment against both the debtor and his spouse. Upon execution of the second judgment, the law firm sent funds held on behalf of the spouse to the second creditor.
The plaintiff creditor filed an objection to the firm’s payment of the spouse’s property to the second creditor. After review, the trial court held that the firm fully complied with Iowa law and that it did not hold any funds of the debtor to distribute to the plaintiff. The plaintiff creditor appealed. On appeal, the plaintiff argued the firm should be liable for the amount of the funds held on behalf of the spouse because the firm failed to provide the spouse’s funds to the sheriff for proper execution. The court disagreed.
On appeal, the court agreed that the creditor’s garnishment action applied only to the assets of the judgment creditor or anyone possessing property of the debtor (or who is indebted to the debtor). The law firm held funds belonging to the spouse, but the spouse was not a judgment debtor of the plaintiff. The plaintiff, in this situation, had no right to the spouse’s assets. The court also found that the firm provided full and unequivocal written answers to the plaintiff’s questions. On appeal, the plaintiff argued the debtor’s assets may have been fraudulently transferred to the spouse. The court noted that the plaintiff, however, never sought further appearance by the firm or questioned the firm’s response, so there was no evidence of any transfer or other fraud. Based on these facts, the appellate court agreed the firm had no obligation to transfer funds to the plaintiff, and the firm could not be held liable for transferring the spouse’s assets to a second creditor. The trial court’s judgment was affirmed.
When served with a notice of garnishment, it is imperative to recognize who the judgment debtor is. In this case, the spouse had no liability for her husband’s debt, so the law firm holding her funds in trust was correct in not turning over the spouse’s assets to the plaintiff. Liberty Bank, FSB v. Luksetich, No. 2-445/11-1926, 2012 Iowa App. LEXIS 690 (Iowa Ct. App. Aug. 22, 2012).