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Collection Actions Gone Awry: Michigan Court of Appeals Upholds Attorney’s Fee Award against Plaintiff for “Frivolous” Collection Efforts

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Patricia J. Scott
Foster Swift Finance, Real Estate & Bankruptcy News
November 25, 2014

A lesson that many plaintiffs learn - the hard way - is that winning a judgment in a lawsuit is not the end of the battle. In many ways it’s just the beginning. The judgment simply gives license to pursue recovery of damages. And obtaining recovery can often be as, if not more, difficult than obtaining the judgment itself. Sometimes, as in a decision that was recently upheld by the Michigan Court of Appeals, judgment creditors can find themselves on the wrong side of collection efforts by adopting an overzealous approach to collect their judgment.[1]

The Trial Court

The underlying case involved a lawsuit brought by an individual (“Plaintiff”) against his uncle (“Defendant”) in which the Plaintiff obtained a judgment in the amount of $100,000. In his efforts to collect the judgment, Plaintiff attempted to garnish the $100,000 from a limited liability company called Total G Services, LLC (“TGS”). Plaintiff’s cousin owns TGS and is also its resident agent. TGS filed garnishee disclosures stating that it was not indebted to Defendant, did not possess or control Defendant’s property, and Defendant was not an employee. After some discovery and motion practice in connection with the garnishment action, Plaintiff took no further action in the proceeding.

Over a year later, Plaintiff again attempted to garnish the $100,000 plus interest and costs, from TGS. TGS’s resident agent refused service because the writs of garnishment misspelled his name. Plaintiff then obtained a default judgment against TGS after it failed to file its garnishee disclosures.

TGS then filed its garnishee disclosures (stating facts consistent with those asserted in the initial action) and filed a motion to set aside the default and default judgment. It argued that the resident agent believed that service of the writs of garnishment was not proper because his name was misspelled and that corrected papers would subsequently be served. TGS also asserted two meritorious defenses to the underlying garnishment action - namely that it was not indebted to Defendant because he was neither an owner nor employee of TGS. TGS also argued that setting aside the default and default judgment was appropriate because:

(1) plaintiff was not prejudiced by the short delay, (2) this case was the result of a family feud and personal vendetta which had existed for years, (3) plaintiff and the underlying defendant, his uncle, were in collusion against garnishee defendant, and (4) it would be manifestly unjust to hold garnishee defendant liable on defendant’s judgment debt considering the strength of its meritorious defenses and its showing of good cause.

Plaintiff opposed the motion, and submitted affidavits from Defendant, as well as other family members, asserting that Defendant was, in fact, an owner of TGS.

The trial court granted TGS’s motion to set aside the default and default judgment. Thereafter, following discovery, TGS filed a motion for summary disposition, arguing that there was no genuine issue of material fact that Defendant was neither a member nor employee of TGS and, thus, it was not required to make any garnishment payments to Plaintiff on behalf of the Defendant. TGS also requested that the trial court impose sanctions against Plaintiff, arguing that Plaintiff’s action was frivolous, as its primary purpose was to perpetuate a family feud and there was no basis to believe that Defendant was an owner or employee of TGS. The trial court granted the motion for summary disposition, and concluded that the action was frivolous and took the issue of sanctions under advisement. It subsequently granted TGS’s request for $10,800 in attorney fees.

The Appeal

Plaintiff appealed all aspects of the lower court’s decision to: (1) set aside the default and default judgment, (2) grant the motion for summary disposition, and (3) award attorney fees. The Michigan Court of Appeals upheld the lower court’s ruling.

It found that TGS established “good cause” for setting aside the default and default judgment, stating that TGS’s resident agent’s belief that service was improper constituted sufficient good cause, in that it was a substantial defect or irregularity in the proceeding, or a reasonable excuse, in accordance with applicable standards established by case law. The fact that TGS had timely complied with its obligation to file garnishee disclosures when a writ of garnishment was first served in the case also weighed in favor of setting aside the default and default judgment. Finally, the defenses asserted by TGS in its motion to set aside, namely that Defendant was neither an owner nor employee, would be absolute if proven.

Next, the Court of Appeals reviewed, and upheld, the trial court’s decision to grant TGS’s motion for summary disposition. The Court of Appeals analyzed the Michigan Limited Liability Company Act, in particular the requirements related to the manner in which a person may be admitted as a “member” of an LLC. It found, in accordance with TGS’s arguments, that Defendant never became a member of TGS. No corporate formation or other documents, tax returns, or bank statements ever identified Defendant as a member.

Moreover, the fact that TGS’s sole member had made payments to Defendant in the past - payments which Plaintiff characterized as “distributions” from the LLC – had no relevance because there was no evidence that Defendant was ever a member and, as a result, could not have received “distributions.” Testimony and affidavits offered by Plaintiff as to Defendant’s membership interest were found to be unsupported by any legal documents and were inconsistent with applicable LLC statutory law. The Court of Appeals also found that there was no evidence presented by Plaintiff that Defendant was an employee of TGS.

The Court of Appeals then considered and rejected Plaintiff’s argument that Michigan’s Traxler-McCauley-Law-Bowman Bingo Act (Bingo Act), MCL 432.118, did not prohibit “a person with a gambling-related conviction from owning an equitable membership interest in a licensed charitable gaming entity.” Because Defendant was not a “member” of the LLC, the Court of Appeals held that the Bingo Act’s dictates were irrelevant.

Plaintiff’s final argument on appeal was that his garnishment action was not “frivolous” and, thus, the award of attorney’s fees was not warranted. MCL 600.2591 defines an action as frivolous - giving rise to costs and fees - as one where at least one of the following conditions is met:

  • The party’s primary purpose in initiating the action or asserting the defense was to harass, embarrass, or injure the prevailing party.
  • The party had no reasonable basis to believe that the facts underlying that party’s legal position were in fact true.
  • The party’s legal position was devoid of arguable legal merit.

The trial court concluded that Plaintiff’s primary purpose in the action was to harass TGS, and also that Plaintiff had no reasonable basis to believe that TGS was indebted to Defendant. The Court of Appeals agreed and held that the trial court did not abuse its discretion by concluding that Plaintiff’s garnishment action was frivolous. Finally, the Court of Appeals upheld the trial court’s award of $10,800 to TGS.

The Lessons

There are a few lessons that litigants, or potential litigants, can learn from this case:

  1. Obtaining a judgment is just the first step to recovery. Once a party obtains a judgment, it becomes a judgment creditor - but the judgment is simply a piece of paper (albeit an important one) that orders the defendant to pay a sum of money. Smart, strategic collection activity must then follow.
  2. There are risks that judgment creditors face during collection. Indeed, there can be serious consequences for violating bankruptcy and debtor-protection laws. As we learned in this case, even taking an action as routine as garnishment must be done carefully.
  3. It’s important to work with experienced counsel. Beyond mitigating the risks of collection, increasing the likelihood of collection success often hinges on choosing the right creditor’s attorney. Engaging an attorney who knows how to assess a case, conduct appropriate discovery, and implement a strategy that may involve negotiation and proceedings supplemental to judgment, such as garnishment, is critical to turning a judgment into recovery.

If you have any questions about this case, or creditor’s rights issues in general, please contact a Foster Swift collection attorney.

[1] Haddad v Haddad and Total G Services, LLC, unpublished opinion per curium of the Court of Appeals, decided Sept 23, 2014 (Docket Nos 315686 and 316492).