A federal district court in Michigan has held that JPMorgan waived its defense of set-off to a garnishment action because of actions it took after it exercised the setoff. See C&H Sugar Company, Inc. v. Solstice Industries, Inc., No. 05-CV-74265 (E.D. Mich., Aug. 14, 2006).

C&H Sugar Co., a judgment creditor of Solstice Industries, caused of a writ of garnishment to be issued against JPMorgan for the funds Solstice maintained in a commercial checking account with JPMorgan. JPMorgan responded that no funds were available to be garnished, and then set-off almost the entire account against the debts Solstice owed to JPMorgan, leaving an account balance of $761.

Within days of exercising the setoff, JPMorgan permitted Solstice to draw on the account and honored checks written on the account. JPMorgan acknowledged that it continued to do business with Solstice by allowing it to borrow additional funds, write checks, use the ATM, and deposit funds in the same account. JPMorgan insisted, however, that it did not permit Solstice to draw any of the amounts JPMorgan had setoff against the Debtor’s commercial loan obligations. C&H Sugar Co. argued that JPMorgan’s actions following the setoff were inconsistent with a creditor’s efforts to setoff against debt, and that JPMorgan, therefore, waived its right of setoff.

The court agreed. Under Michigan law, a garnishee bank with which a deposit account is maintained may exercise any right of recoupment or setoff against a secured party that holds a security interest in the deposit account. The court determined, however, that a garnishee bank’s treatment of a debtor’s assets that is inconsistent with the claimed setoff constitutes a waiver of the setoff right in the face of the garnishor’s claim. While there are several ways for a garnishee to waive its right of setoff, the most obvious and usual situation is to permit the debtor to draw on the account and to honor checks drawn on the account following service of the writ of garnishment. Such conduct infers an admission by the garnishee of indebtedness to its depositor inconsistent with the assertion of setoff.

JPMorgan argued that actions taken after an account is frozen or setoff against are no longer subject to garnishment statutes, and therefore JPMorgan was not liable to C&H Sugar Co. JPMorgan also argued that its actions did not rise to the level of fraud or contempt necessary to waive its right to setoff.

In dismissing these arguments, the court noted that courts uniformly have held that actions subsequent to the garnishment can act as a waiver of a setoff   defense. The court determined that fraud and contempt are not necessary to reveal that the garnishee bank acted inconsistent with an asserted setoff. The court also concluded that JPMorgan failed to properly setoff against the account and comply with the garnishment. The bank only partially setoff against the amounts in the account, and instead of paying the balance to C&H Sugar Co., permitted Solstice to continue to access and use the funds.

The court also dismissed JPMorgan’s alternative argument that its security interest in the deposited funds as collateral for repayment of the commercial loans trumped C&H Sugar Co.’s rights as a judgment creditor. While the court acknowledged that JPMorgan correctly stated the laws of priority among 4secured creditors, the court held that nothing in Michigan law provides that a perfected security interest alone is a valid defense against a Writ of Garnishment. Therefore, the court concluded that JPMorgan was liable to C&H Sugar Co. on the writ of garnishment.