Recently, opinions out of Florida and Illinois have given garnishing lien creditors new life when they garnish a bank account and the financial institution asserts its rights as a first-perfected security interest in the deposit account. Under Section 9-109 of the Uniform Commercial Code, deposit accounts are included as original collateral in which a security interest can be taken except in limited situations. As a result, financial institutions that are served with a writ of garnishment assert their security interest in the deposit account alleging that the financial institution’s security interest was perfected before the garnishing lien creditor’s lien was perfected. In addition, financial institutions often claim a right to set-off because they treat the serving of the writ of garnishment as an event of default and then set-off the amount in the deposit account. Two recent cases, albeit based on Illinois law, puts the financial institutions ability to defeat the garnishing lien creditor’s claim to the funds in question.
In American Home Assurance Co. v. Weaver Aggregate Transport, 84 F. Supp. 3d 1314 (M.D. Fla 2015), the trial court, applying Illinois law, held that a garnishing lien creditor’s interest in funds held in a depository account defeated the depository bank’s UCC security interest and set-off rights because the bank had not declared the loan in default and set off the funds prior to the bank being served with the writ of garnishment. The American Home Assurance Court relied on the prior decision in S.E.I.U. Local No. 4 Pension Fund v. Pinnacle Health Care, 560 F.Supp. 2d 647 (N.D. Ill. 2008). The main issue to be decided was whether the depositor was in default at the time the writ of garnishment was served. The Florida court rejected the financial institution’s argument that default occurred at the time of service of the writ and that such a default was self-executing and did not require a declaration of default.
The lesson of these cases is that a financial institution should not sit on its rights. If a depositor is in default, declare it or beware. When the time comes and a garnishment is served, the financial institution may have waived or lost the right to the funds in the deposit account. Garnishing lien creditors should also closely examine the agreements relied on by the financial institution to determine if these agreements define when and under what conditions a default will arise as to determine if a default has in fact occurred. The opinions of this blog are solely the author’s and any comments, suggestions or replies should be sent to firstname.lastname@example.org.