Lawyers are responsible for trust funds until the check clears.
"We conclude that Florida law imposes on both bank and non-bank garnishees the duty to retain funds held by the garnishee, even after a check on those funds has been drawn by the garnishee and delivered to the payee," the court held May 1 in Arnold, Matheny, and Eagan v. First American Holdings, case no. SC07-1136. "We hold that the funds remain in the possession or control of an attorney garnishee if service of the writ of garnishment occurs after a check drawn on an attorney's trust account has been written and delivered to a client but before presentment to the attorney's bank."
Accordingly--said Justice Barbara Pariente writing for the unanimous court in upholding a Second District Court of Appeal decision--pursuant to the provisions of the garnishment statute, the attorney in those circumstances has an obligation to inquire of the bank as to the status of the funds in his or her trust account and to issue a stop payment order if he or she has the ability to do so.
The issue in the case involved the interpretation of Florida's garnishment statute and the obligations it imposes on third parties, including attorneys, who are served with writs of garnishment.
In the case, the firm of Arnold, Matheny, and Eagan represented Preclude, Inc., in a lawsuit against Greenleaf Products, Inc., which resulted in AME obtaining a settlement from Greenleaf for Preclude. The settlement reached on June 14, 2002, required Greenleaf to pay these funds into AME's trust account.
Prior to the time of the settlement, First American Holdings, Inc., sought to collect on a judgment it had previously obtained in unrelated proceedings against Preclude.
On June 19, 2002, First American served AME with a writ of garnishment seeking to collect its judgment from the Greenleaf settlement. At that time, AME had not yet received the settlement funds and answered the writ by stating that AME did not currently hold any funds belonging to Preclude. Two days later, on June 21, 2002, AME received the proceeds of the settlement and deposited the funds into its trust account. On that same date, AME issued two trust account checks. AME made the first check payable to its operating account for attorneys' fees and costs--which the court said was not at issue in this case--and the other check for the balance of the funds was made payable to Preclude, which AME hand-delivered to Preclude that same day.
Four days later, on June 25, 2002, First American served a second writ of garnishment on AME, again attempting to collect on the judgment against Preclude. Once again, AME answered the writ by denying that it was in possession or control of any funds that were the property of Preclude. Upon subsequent review of the records, however, First American determined that as of June 25, 2002, the funds represented by the check were still in AME's trust account and that the check was not presented to AME's bank for payment until June 28, 2002, several days after AME had answered the writ of garnishment denying possession of the funds.
First American then filed an action seeking to hold AME responsible for the funds represented by the trust account check issued to Preclude. First American contended that AME was liable because AME had possession and control of the funds until the check cleared. AME defended its actions by arguing that once the check was delivered to Preclude on June 21, 2002, it no longer had possession or control and, therefore, had no duty to stop payment. Alternatively, AME argued that any stop payment duty applied only to banks and thus was not applicable to AME as a nonbank garnishee.
"The specific determination we must make is whether an attorney is in 'possession or control' of funds as those terms are used in [section] 77.01, when a check has been written and delivered to the client but not yet been presented to the attorney's bank for payment," Pariente said.
The court said simply because a check has been issued does not necessarily result in the payor losing possession and control of the funds.
The court said it is not until the check has been presented for payment to the payor's bank that the payor ceases to have possession or control of the funds represented by the check. Until that point, a payor may issue a stop payment order on the check, transfer the funds to another account, or even liquidate the bank account.
"Thus, a payor of a check may issue a stop payment order after the check has been written in an attempt to prevent the check from being paid and the funds from being transferred to the payee," the court said. "This 'right to stop payment' is strongly indicative of the 'possession or control' one has over funds in an account. In other words, we would be hard pressed to deny that a payor was still in control over funds in his or her account if the payor could actually take steps to stop payment of the check."
The court also said attorneys are not exempt from any stop payment duty because of the nature of attorney trust account checks and the Rules Regulating The Florida Bar.
"Furthermore, because attorneys and their trust accounts are subject to the same provisions of the garnishment statute as any other bank or nonbank garnishee, we cannot discern a principled basis for holding that funds located in an attorney's trust account warrant any greater protection from creditors than funds located in the client's personal account," the court said.
The court said AME had an obligation to inquire of the bank as to whether the check had been presented for payment and, if not, to issue a stop payment order if it had the ability to do so.
By Mark D. Killian
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|Author:||Killian, Mark D.|
|Publication:||Florida Bar News|
|Date:||Jun 1, 2008|
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