Ladd v. Motor City Plastics Co.

• Decision Date: 31 October 2013
• Docket Number: Docket No. 303018.
• Citation: 303 Mich.App. 83,842 N.W.2d 388
• Parties: LADD v. MOTOR CITY PLASTICS CO.
• Court: Court of Appeal of Michigan — District of US

303 Mich.App. 83

842 N.W.2d 388

LADD

v.MOTOR CITY PLASTICS CO.

Docket No. 303018.

Court of Appeals of Michigan.

Submitted Sept. 4, 2013, at Detroit.

Decided Oct. 31, 2013, at 9:00 a.m.

Lyden, Liebenthal & Chappell, Ltd. (by Erik G. Chappell and Julie A. Douglas), for David C. Ladd.

Robison, Curphey & O'Connell, LLC (by Jean Ann S. Sieler), for United Bank and Trust.

Before: MURPHY, C.J., and JANSEN and Murray, JJ.

MURRAY, J.

Plaintiff David C. Ladd appeals by right the circuit court's order (1) denying his motion for amount due on judgment and contempt sanctions, (2) determining that garnishee United Bank & Trust (“UBT” or “the bank”) was not required to actually exercise its claimed right of setoff against the deposit accounts of defendant Motor City Plastics Company (“Motor City”), (3) determining that UBT followed proper procedures and was not in contempt, and (4) denying UBT's request for attorney fees. UBT cross-appeals the same order. We affirm.

I. FACTUAL BACKGROUND

Following trial in the underlying employment litigation, plaintiff received a judgment against Motor City in the amount of $113,200, plus statutory interest. On January 22, 2010, believing that Motor City had funds on deposit at UBT, plaintiff served a writ of nonperiodic garnishment on UBT. The writ of garnishment stated that the total amount due on the unsatisfied judgment against Motor City was $119,555.23.

On January 29, 2010, UBT submitted a garnishee disclosure stating that it was “not indebted to [Motor City] for any amount” and did not “possess or control [Motor City's] property, money, etc.” Instead, UBT asserted that it was claiming a right of “setoff” against any money that Motor City had on deposit at the bank. UBT attached a short supplement to its garnishee disclosure, explaining that Motor City was in default with respect to certain loans that were payable to UBT and that Motor City was “indebted to UBT under [the] loan documents in an amount in excess of the value of [Motor City's] accounts with UBT.”

At a debtor's exam, Motor City's president, Keith Ruby, testified that UBT never exercised its claimed right of setoff against Motor City's accounts. Ruby confirmed that Motor City continued to use its accounts and withdraw funds, even after the writ of garnishment was served on UBT.

In an affidavit, UBT's executive vice president, John Wanke, averred that “[o]n January 29, 2010, [Motor City] was indebted to UBT under multiple loan documents in an amount in excess of the value of [Motor City's] accounts with UBT” and that “[p]ursuant to certain of the above referenced loan documents, UBT had rights of setoff....” Citing UBT's “confidentiality policies,” Wanke refused to confirm the specific amount that Motor City had on deposit with the bank.

At his deposition, Wanke testified that Motor City had defaulted on its loan obligations to UBT as of July 2009. A letter from UBT to Motor City, dated July 16, 2009, indicated that Motor City was in default on three different loans, totaling more than $1.5 million.¹ Wanke confirmed that Motor City had a business checking account with UBT, as well as a smaller “sweep account.”

When the writ of garnishment was served on January 23, 2010, Wanke instructed bank employee Annette Kurowicki to delay releasing any funds from Motor City's deposit accounts until he could first obtain advice from UBT's legal counsel.² Wanke confirmed that Motor City had money on deposit in its accounts when the writ of garnishment was served. Banking records showed that a payment of $107,000 was deposited into Motor City's business checking account on January 29, 2010, only one week after the writ of garnishment was served.

After several additional discovery requests, Wanke submitted a second affidavit in which he confirmed that on January 23, 2010, the balance in Motor City's business checking account was $36,045.50, and the balance in Motor City's sweep account was $5,255.87. Wanke explained that UBT had initially intended to exercise its right of setoff, but “[t]he Bank was advised by counsel that it had a superior right to setoff and ... was not required to withhold funds under the court rules; thus, the funds were not physically removed from the account.”

On October 6, 2010, plaintiff filed a motion for amount due on the judgment and for contempt sanctions. Plaintiff pointed out that UBT had never exercised its claimed right of setoff and argued that UBT had knowingly provided false answers on its garnishee disclosure. Plaintiff contended that UBT was liable to it in the full amount due on the underlying judgment against Motor City. ³ Plaintiff argued that, given the allegedly misleading statements in UBT's garnishee disclosure, the circuit court should hold UBT in contempt and award sanctions, including reasonable attorney fees, pursuant to MCR 3.101(S).

In response, UBT argued that plaintiff had failed to follow the proper steps under MCR 3.101(L) and (M). UBT maintained that it had properly filed its garnishee disclosure in accordance with MCR 3.101(H) and that it had not misstated any facts on the disclosure form. UBT alleged that it had properly claimed its right of setoff in accordance with MCR 3.101(H)(1)(a). Citing an unpublished opinion of this Court, UBT asserted that “[i]f the garnishee claims a right to setoff which exceeds the amount of any debt owing to the defendant, then the garnishee is not indebted to the defendant.” UBT also asserted that Michigan law did not require it to actually remove or withhold funds from Motor City's deposit accounts in order to claim its setoff rights. UBT sought judgment in its favor, arguing that there was no genuine issue of material fact, that no law required it to actually exercise the setoff, that it had properly complied with the requirements of MCR 3.101, and that the statements on its garnishee disclosure had not been designed to mislead plaintiff.

Trial was held on December 14 and 15, 2010.⁴ Wanke testified that Kurowicki received the writ of garnishment on Saturday, January 23, 2010. Wanke's initial inclination was to immediately exercise UBT's right of setoff. However, Wanke decided to first seek the opinion of UBT's legal counsel. Wanke confirmed that no money was ever physically removed from Motor City's deposit accounts or applied to Motor City's outstanding loan debt. In fact, Motor City continued to have unrestricted access to its deposit accounts at UBT.⁵ Wanke was concerned that, by actually removing funds from Motor City's accounts and applying those funds toward the loan debt, UBT might inadvertently destroy its collateral by forcing Motor City out of business. Wanke believed that UBT could best preserve its collateral by declining to exercise the setoff.

The loan documents originally executed by Motor City and UBT specifically authorized UBT to remove funds from Motor City's deposit accounts to offset any sums owing on Motor City's loans. The total amount in Motor City's deposit accounts was about $41,000 on the morning of Saturday, January 23, 2010. On that same day, the total amount owed to UBT by Motor City was in excess of $1.5 million. UBT did not receive any objections or discovery requests from plaintiff for several months after the garnishee disclosure was submitted. By the time UBT finally received a subpoena from plaintiff on May 4, 2010, Motor City's loans had been discounted and sold to a third party.

Following the presentation of testimony, counsel for UBT orally moved for a directed verdict. Counsel argued that the bank's right of setoff was superior to any right that plaintiff had as a garnishor. Relying on MCR 3.101(H)(1), Sears, Roebuck & Co. v. AT&G Co., Inc., 66 Mich.App. 359, 239 N.W.2d 614 (1976), and Carpenters Southern California Admin. Corp. v. Mfr. Nat'l Bank of Detroit, 910 F.2d 1339 (C.A.6, 1990), counsel also argued that “there is no requirement in Michigan that the funds actually be removed and applied against a loan in order to claim your right of setoff and protect your right to control the use of those funds....”

With respect to plaintiff's request for contempt sanctions and attorney fees, UBT argued that it had not knowingly or willfully provided false answers on its garnishee disclosure. Counsel pointed out that plaintiff had not objected to the garnishee disclosure or served additional discovery requests within 14 days as required by MCR 3.101(L)(1). Counsel contended that plaintiff had severely prejudiced UBT by waiting more than three months, until after Motor City's outstanding loans had already been discounted and sold, to object to the garnishee disclosure and subpoena additional bank records.

Plaintiff's attorney responded by arguing that “there is no case, rule, or statute that says that a bank simply has to claim a right of setoff and then can do whatever [it] want[s] to do with the funds that are on ... deposit.” Plaintiff's counsel noted that, according to the plain text of MCR 3.101(G)(1), a garnishee's liability is subject to “any setoff permitted by law”—not any claimed setoff permitted by law. Based on this language, plaintiff's counsel argued that a garnishee must actually exercise a right of setoff in order to claim it on a garnishee disclosure.

Plaintiff's counsel also argued that UBT's garnishee disclosure was “patently false” because it stated that the bank did not “possess or control” any of Motor City's property, money, or assets. The evidence showed that there was approximately $41,000 on deposit in Motor City's accounts at the time the writ of garnishment was served. Plaintiff contended that UBT had knowingly provided misleading answers on its garnishee disclosure and that the court should find UBT in contempt under MCR 3.101(S)(2).

The circuit court delivered its ruling from the bench on December 22, 2010. The court first concluded that UBT had not intentionally lied on its garnishee disclosure. The court observed that the language of the preprinted garnishee disclosure...