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Garnishment is perhaps the most common tool of anyone trying to collect payment on a judgment in their favor.  Garnishment of an employee’s wages allows the creditor to take a regular chunk of the debtor’s wages whenever they’re paid.  But what if the creditor owns the employer?

A complicated garnishment was the issue in The Elliott Law Group, P.A. v. Five Star Credit Union.  Despite some creative corporate structuring, the Alabama Supreme Court saw through a debtor’s tricks and upheld a garnishment.

Garnishing a limited liability company owned by the debtor

The debtor in Five Star Credit (technically the “judgment-debtor” – they were a mere “debtor” before there was a judgment against them) owed the creditor (technically the “judgment-creditor” for the same reason) about a million dollars.  When the debtor didn’t pay up the creditor garnished his employer in an attempt to collect some of his wages to satisfy the judgment.

The debtor was employed by a law firm.  The debtor was employed by his own law firm, of which he had complete control.  As expected he was reluctant to garnish his own wages.  However, the courts saw through the tricks he put in place to avoid the garnishment.

A corporate loan looks a lot like wages

The debtor’s strategy to avoid garnishment a trick and the court saw through it.  However it was creative.  He created an employment agreement that paid him a certain amount, and then extended himself a loan about 6 times as large.  Finally, he secured his loan to himself by using his wages as collateral.

If it had worked as designed, the lien against the wages would have prevented their collection.  It would have been a good trick but it didn’t work.  Basically, the trial court found the loan was just for the purpose of avoiding creditors (like the one in this case).  It ordered the lawyer’s company to garnish the lawyer.  More importantly it ordered him to show up every month with accounting records to show how he came up with the garnishment amount.

Court can require regular account records as part of garnishment

The most important part of the Supreme Court opinion comes at the end.  Saving the best for last, the Supreme Court blessed the trial court’s practice of requiring the debtor (and his employer) to show their work.  In essence the employer was ordered to submit accounting records to the clerk to support the monthly garnishment.

The trial court’s power to require an accounting of a garnishment is an excellent tool against tricks and fraudulent transfers.  Where applicable, a court can put the burden on the garnishee to show that they are withholding any paying the correct amount into the clerk’s office.  Requiring the garnishee to “show their work” will make it harder to submit falsified information and should thereby have the effect of discouraging frauds and other tricks.

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