Lsf Franchise Reo I v. Emporia Restaurants, 93,622.

• Decision Date: 02 February 2007
• Docket Number: No. 93,622.,93,622.
• Citation: 152 P.3d 34
• Parties: LSF FRANCHISE REO I, LLC, Plaintiff/Appellant, v. EMPORIA RESTAURANTS, INC., and North Star Holdings of Missouri, L.L.C. Defendants, and Polaris Restaurants, Inc., Defendant/Appellee.
• Court: Kansas Supreme Court

152 P.3d 34

LSF FRANCHISE REO I, LLC, Plaintiff/Appellant, v. EMPORIA RESTAURANTS, INC., and North Star Holdings of Missouri, L.L.C. Defendants, and Polaris Restaurants, Inc., Defendant/Appellee.

No. 93,622.

Supreme Court of Kansas.

February 2, 2007.

Thomas A. Krueger, of Krueger Law Offices, of Emporia, argued the cause and was on the briefs for appellant.

Cynthia F. Grimes, of Grimes & Rebein, L.C., of Lenexa, argued the cause, and Jeffry J. Larson, of Miller & Larson, Chtd., of

Emporia, was with her on the brief for appellee.

The opinion of the court was delivered by DAVIS, J.:

LSF Franchise REO I, LLC (LSF), filed a nonearnings garnishment action attempting to collect on its civil judgment against Polaris Restaurants, Inc. (Polaris). The trial court granted Polaris' motion to quash the garnishment of two bank accounts held in Polaris' name, ruling that the accounts were held in trust for withholding taxes and not subject to garnishment. The Court of Appeals affirmed the trial court's ruling. LSF Franchise REO I v. Emporia Restaurants, 35 Kan.App.2d 189, 130 P.3d 1212 (2006). We granted LSF's petition for review and now reverse.

FACTS

In September 2003, LSF filed a "Petition to Foreclose Mortgage and for Other Relief" against defendants Emporia Restaurants, Inc., Polaris Restaurants, Inc., and North Star Holdings of Missouri, LLC. A journal entry of judgment and foreclosure was entered for LSF against the defendants on March 18, 2004, for over $2,600,000. In an effort to collect this judgment, LSF filed on July 23, 2004, a request for a nonearnings garnishment on Commerce Bank (Commerce), with whom LSF believed that Polaris held accounts. On July 28, 2004, Commerce answered the order, stating that "$33,686.73 IS THE AMOUNT GARNISHEE IS HOLDING."

Commerce amended this answer on August 3, 2004, stating that Polaris had two checking accounts with Commerce as of the date of service of the order of garnishment: Account No. 49 and Account No. 50, both titled in Polaris' name. Neither account was "special" or specifically held apart for a particular purpose, although Account No. 50 had the description "`Payroll Account'" in its address line.

Commerce's answers to interrogatories explained that, at the time of service, Account No. 49 had a balance of $24,069.66. However, two items deposited in that account totaling $17,400 were returned for insufficient funds after the service of garnishment, leaving a balance of $6,669.66 in Account No. 49. Similarly, Account No. 50 had a balance of $9,617.07 at the time of service of the garnishment order. Two deposits were also returned from that account, totaling $7,200, leaving a balance of $2,417.07 in Account No. 50 as of August 3, 2004. According to Commerce's amended answer, Polaris' combined balance from the two accounts available to be garnished was $9,086.73.

On August 9, 2004, Polaris filed a "Motion to Quash Garnishment," alleging that at the time of service of the order of garnishment, Account No. 49 consisted of its "operating funds" and Account No. 50 consisted of "earned wages and payroll taxes known as a payroll account." Polaris stated that it had scheduled for payroll taxes in the amount of $8,791.64 to be taken out of its payroll account via electronic funds transfers, and that it was its "intent to transfer the funds from the operating account to the payroll account to cover the electronic funds transfers for payroll tax purposes." The electronic funds transfer was denied after the order of garnishment was served on Commerce.

Polaris alleged that the correct tax amount owed was $8,791.64 ($8,610.28 for 941 [employment] taxes and $181.36 for 940 [unemployment] taxes). LSF apparently understood the total taxes due to be $8,610.28. The trial judge made no finding as to the amount due, and the record contains no documentation or other evidence as to the dollar amount of taxes due.

Polaris expressed no objection to garnishment of its operating bank account (Account No. 49), "exclusive of those funds necessary to satisfy the payroll taxes." Using the figure of $8,791.64, the balance in the operating account, after deduction for taxes, would be $297.11. However, Polaris did object to any garnishment of the payroll account, Account No. 50, because it asserted that "the funds in such account do not constitute the property or assets of Defendant." According to Polaris, the earned wages were the property of its employees, and the payroll taxes were held for the federal and state taxing authorities.

Upon hearing of Polaris' motion to quash, LSF first argued for dismissal because both accounts were titled in Polaris' name and no account was specifically set apart or held in trust as payroll taxes. The trial judge rejected LSF's argument, finding that "the garnishment statutes allow for challenges to garnishments" upon an allegation that the property in question does not belong to the judgment debtor.

Polaris' president, Mary Leonida, whose primary role was overseeing "operations and the accounting," was the only witness called at the hearing. She explained that Account No. 50 was used for "payroll and payroll taxes at certain times" and Account No. 49 was used for "general operations and payroll taxes as well, sometimes." When Polaris' counsel asked her why Polaris would use funds from Account No. 49 for payroll taxes, she replied that

"[s]ometimes it was a matter of which one [account] had the most money for transferring so we would have to transfer a lesser amount from one to another. If the payroll account had more money [in] it, sometimes we would transfer from [the] general [Account No. 49] into payroll [Account No. 50] and sometimes it was visa versa."

The president also explained that an employee had set up an electronic funds transfer through the Electronic Federal Tax Payment System (EFTPS) on Friday, July 23, 2004, before the garnishment action was filed. EFTPS was directed to pull the designated funds out of defendant's Account No. 50 on Tuesday, July 27, 2004. At the time of her testimony, an EFTPS form was shown on an overhead screen, but that form is not admitted into evidence and does not appear in the record. Referring to some business notes taken by the employee who purportedly called in the transfer, Polaris' president testified that Polaris intended to instruct Commerce to transfer funds from Account No. 49 prior to July 27 because Account No. 50 did not contain sufficient funds to cover the EFTPS withdrawal. However, no one made any attempt to actually transfer funds between the accounts because of the garnishment action. EFTPS notified Polaris on July 29 that the scheduled July 27 withdrawal of funds for taxes transfer did not go through.

At the conclusion of the hearing, the trial court made several findings of fact and legal conclusions on the record. First, the trial court found that "the funds that were in this account, at least to the extent identified in the documents, were, or most of the funds in these accounts were actually payroll taxes withheld . . . to be paid into the Internal Revenue Service" and "that apparently is not disputed." The Court of Appeals agreed that there was no conflicting evidence offered on this point. However, as indicated in the discussion below, LSF very much disputed this finding. Second, the trial court concluded that these payroll taxes were "held in trust" for the taxing authorities. Finally, the trial court concluded that the failure to transfer funds from Account No. 49 (the general operating account) to Account No. 50 (the payroll account) had no effect on its decision because "once the court determines that those funds are employees funds held in trust by Polaris, it doesn't really matter what account it comes from as long as it goes to the Federal Government."

The trial court noted that holding funds in Polaris' Restaurant accounts instead of a separate trust account made no difference because employers hold employee taxes "`in Trust for the United States.'" According to the trial court, the money was "actually not necessarily Polaris's money but actually money held in trust by Polaris to pay their employees' income and social security taxes because it is their withholding." Because Polaris had arranged the electronic funds transfer before Commerce was served with an order of garnishment, the trial court held that the accounts were not subject to garnishment. The trial court therefore ruled that the money should be returned to Polaris for the purpose of paying its employees' taxes and that the remaining balance after taxes be paid to LSF to be put toward the judgment. The court then stayed its order so that LSF could appeal, on the condition that LSF post a $20,000 bond.

The Court of Appeals affirmed the trial court's decision in LSF Franchise REO I, 35 Kan.App.2d 189, 130 P.3d 1212. Finding no Kansas case "where a debtor claimed the money being garnished from a bank account was being held in trust for someone else," the appellate court drew analogy to joint tenancy cases. 35 Kan.App.2d at 192, 130 P.3d 1212. Because the garnishment statutes allow joint tenants to rebut the presumption of equal ownership in joint bank accounts, the court reasoned, so too should a debtor be allowed to prove that money held in its accounts actually belongs to another entity. 35 Kan.App.2d at 193, 130 P.3d 1212. In addition, the court did not find the lack of notice to either Commerce or LSF to be determinative because "[i]f the money truly did not belong to Polaris, LSF was not entitled to garnish the funds." 35 Kan.App.2d at 193, 130 P.3d 1212.

The Court of Appeals concluded it "was not presented with any conflicting evidence" and the trial court's findings that the money in Polaris' account was held for tax purposes is "supported by substantial competent evidence." 35 Kan.App.2d at 194, 130 P.3d 1212.

DISCUSSION

While not designated by the trial court as findings of fact and conclusions of law, ...