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Secured Creditor Setoff Rights Clarified in Garnishment Context

The Michigan Court of Appeals, in a 2-1 panel decision, gave some clarity to a question bank lawyers have litigated in Michigan trial courts for years: whether a garnishee bank can trump the garnishing creditor of a bank's borrower by claiming -- versus actually taking -- a setoff against funds held on deposit. The court held that claiming the right of setoff in response to the garnishment is sufficient. The case is Ladd v. Motor City Plastics Co., 2013 Mich. App. Lexis 1773 (October 31, 2013). The court held that the garnishee-bank was not required to exercise its right of setoff or to seize the funds in the defendant's deposit accounts to deny the release of funds under the plaintiff's writ of garnishment. In reaching its decision, the court focused on the language of the Michigan Court Rule governing garnishments and the rule's requirement that a garnishee file a disclosure setting forth "any setoff that the garnishee would have against the [judgment debtor] . . . ." (Emphasis in original). The court also held that the bank did not waive its right to a setoff or its perfected security interest in the deposit accounts by authorizing defendant to continue to withdraw account funds.
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