Guy M. Turner Inc. v. KLO Acquisition LLC ( 2022 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
2022-NCCOA-53
No. COA21-118
Filed 1 February 2022
Guilford County, No. 19 CVS 1115
GUY M. TURNER INCORPORATED, Plaintiff,
v.
KLO ACQUISITION LLC, separately and doing business as KL Outdoor LLC,
Defendant,
and
JPMORGAN CHASE BANK, N.A., Garnishee.
Appeal by garnishee from judgment entered 10 November 2020 by Judge John
O. Craig, III in Guilford County Superior Court. Heard in the Court of Appeals 17
November 2021.
Keziah Gates, LLP, by Andrew S. Lasine, for Plaintiff-Appellee.
Womble Bond Dickinson (US) LLP, by Jonathon D. Townsend, for Garnishee-
Appellant.
CARPENTER, Judge.
¶1 Garnishee JPMorgan Chase Bank, N.A. (“Chase Bank”) appeals from the trial
court’s entry of summary judgment (the “Order”) in favor of Plaintiff Guy M. Turner
Incorporated (“GMT”) as to GMT’s right to recover from Chase Bank as garnishee.
After careful review, we reverse and remand the Order.
GUY M. TURNER INC. V. KLO ACQUISITION LLC
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Opinion of the Court
I. Factual & Procedural Background
¶2 In January 2019, GMT and Defendant KLO Acquisition, LLC (“KLO”) 1 entered
into a contract pursuant to which GMT would “provide labor, equipment, and
materials to rig or remove KLO’s manufacturing equipment from a KLO facility in
Georgia, transport the equipment to KLO’s vendor in Michigan for repairs, and then
transport the equipment back to KLO’s facility in Georgia and reinstall it in KLO’s
manufacturing line.” On 16 October 2019, GMT filed suit against KLO in Guilford
County Superior Court for breach of contract and quantum meruit. A few days later,
on 29 October 2019, GMT served an order of attachment, summons to garnishee, and
notice of levy on Chase Bank, with which KLO maintained two deposit accounts: the
“Cash Collateral Account,” and the “Operating Account” (together, the “Deposit
Accounts”). Prior to the institution of GMT’s suit, Chase Bank made substantial
loans to KLO on which KLO defaulted, owing Chase Bank over twelve million dollars.
That same day, Chase Bank exercised its right of setoff against the funds in the
garnished accounts and debited the entire balance of the Cash Collateral Account, a
total of $328,243.14. However, Chase Bank did not debit any funds from the
garnished Operating Account and continued to allow KLO to actively draw upon the
1 KLO is not a party to this appeal.
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account after Chase Bank’s receipt of the garnishment summons and notice of levy.
By 28 February 2020, the Operating Account had a balance of $115,897.60, with
significant activity by KLO during February 2020, including an opening balance of
$8,357.73, deposits and credits of $1,163,724.90, and withdrawals and debits of
$1,056,185.03.
¶3 On 12 October 2020, GMT moved for entry of default against KLO, which the
clerk entered the same day. GMT also moved for summary judgment against KLO
as the defendant in the contract action and against Chase Bank as garnishee.
¶4 GMT’s motion for summary judgment came on for hearing on 2 November 2020
before the Honorable John O. Craig, III in Guilford County Superior Court. On 3
November 2020, Chase Bank moved for leave to amend its answer to the garnishment
summons and notice of levy in order to assert that it had a perfected security interest
in both of the Deposit Accounts.
¶5 On 10 November 2020, the trial court entered its summary judgment Order
granting, inter alia, Chase Bank’s motion for leave to amend its answer, GMT’s
motion for summary judgment as to GMT’s right to recovery from Chase Bank
pursuant to the garnishment summons and notice of levy, and GMT’s motion for
summary judgment as to its breach of contract claim against KLO. The trial court
entered judgment against KLO in the amount of $168,712.59 plus interest and
attorneys’ fees, and it entered judgment against Chase Bank in the amount of
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Opinion of the Court
$209,614.47 to satisfy GMT’s demand as of the date of issuance of the garnishment
summons and notice of levy directed to Chase Bank. Chase Bank gave timely notice
of appeal.
II. Jurisdiction
¶6 This Court has jurisdiction to address Chase Bank’s appeal from the order of
summary judgment as a final judgment pursuant to N.C. Gen. Stat. § 7A-27(b)(1)
(2019).
III. Issues
¶7 The issues before this Court are whether: (1) Chase Bank waived or
undermined its security interest by allowing KLO access to its deposit accounts held
at Chase Bank, and (2) the trial court erred by granting summary judgment in favor
of GMT and against Chase Bank.
IV. Standard of Review
¶8 “Our standard of review of an appeal from summary judgment is de novo; such
judgment is appropriate only when the record shows that there is no genuine issue
as to any material fact and that any party is entitled to a judgment as a matter of
law.” In re Will of Jones, 362 N.C. 569, 573, 669 S.E.2d 572, 576 (2008) (citation and
internal quotation marks omitted) (emphasis added).
V. Order of Summary Judgment
¶9 On appeal, Chase Bank argues the trial court erred in granting summary
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judgment for GMT because: (1) Chase Bank’s perfected security interest in the
Deposit Accounts shielded the funds from garnishment, and (2) Chase Bank did not
waive or undermine its security interest by allowing KLO access to the Deposit
Accounts. We agree.
A. Security Interest
¶ 10 Chase Bank argues it had a perfected security interest in KLO’s deposit
account before 29 October 2019, the date on which the garnishment summons was
served on Chase Bank, and interest superseded any interest held by GMT. GMT does
not dispute Chase Bank had a security interest in the Deposit Accounts. For the
reasons set forth below, we agree Chase Bank had a perfected security interest in
KLO’s Deposit Accounts.
¶ 11 Since the parties do not dispute Chase Bank had an enforceable security
interest in KLO’s Deposit Accounts, we need not consider whether Chase Bank’s
security interest attached. Therefore, we discuss perfection and priority of Chase
Bank’s security interest in the Deposit Accounts.
¶ 12 Section 25-9-304(a) of the North Carolina Uniform Commercial Code provides
that “[t]he local law of a bank’s jurisdiction governs perfection, the effect of perfection
or nonperfection, and the priority of a security interest in a deposit account
maintained with that bank.” N.C. Gen. Stat. § 25-9-304(a) (2019). A bank and its
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customer may dictate by agreement which jurisdiction’s law will govern. N.C. Gen.
Stat. § 25-9-304(b)(1).
¶ 13 Chase Bank argues that “[b]ecause [Chase Bank and KLO’s Amended and
Restated] Credit Agreement specifies that New York law governs, New York is the
‘local law’ for purposes of determining the perfection of Chase’s security interest in
the deposit accounts.” GMT makes no argument with respect to which law governs
perfection, the effect of perfection or nonperfection, nor the priority of Chase Bank’s
security interests in the Deposit Accounts maintained by Chase Bank. There is no
other evidence in the record to indicate the law of a state other than New York
governs. Because the Amended and Restated Credit Agreement (the “Agreement”)
between KLO and Chase Bank indicates that New York is the “bank’s jurisdiction,”
we turn to New York law to determine whether Chase Bank has a perfected security
interest in the Deposit Accounts and the priority of such interest.
¶ 14 Under New York’s version of the Uniform Commercial Code, “a security
interest in a deposit account may be perfected only by control . . . .” N.Y. U.C.C. Law
§ 9-312(b)(1) (McKinney 2021); see N.Y. U.C.C. Law § 9-314 (McKinney 2021). A
secured party may exercise control over a deposit account as “the bank with which
the deposit account is maintained . . . .” N.Y. U.C.C. Law § 9-104(a)(1) (McKinney
2021).
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Opinion of the Court
¶ 15 Here, Chase is a secured party with respect to KLO as evidenced by the
Agreement, and Chase Bank exercised control over KLO’s Deposit Accounts as “the
bank with which the [Deposit Accounts are] maintained.” See N.Y. U.C.C. Law § 9-
104(a)(1). Thus, Chase Bank had a perfected security interest in KLO’s Deposit
Accounts pursuant to N.Y. U.C.C. Law § 9-312.
¶ 16 We next consider the priority dispute between Chase Bank and GMT with
respect to the funds in KLO’s Deposit Accounts. New York’s Uniform Commercial
Code provides: “[a] security interest held by a secured party having control of the
deposit account under Section 9-104 has priority over a conflicting security interest
held by a secured party that does not have control.” N.Y. U.C.C. Law § 9-327(a)
(McKinney 2021). Additionally, a lien creditor would only have superior rights over
a secured party if the lien creditor acquired its lien before the security interest of the
secured party was perfected. N.Y. U.C.C. Law § 9-317(a)(2)(A) (McKinney 2021). “A
security interest in deposit accounts . . . is perfected by control under Section [9-104]
when the secured party obtains control and remains perfected by control only while
the secured party retains control.” N.Y. U.C.C. Law § 9-314(b). Upon default, a
secured party may enforce the obligations of an account debtor by “apply[ing] the
balance of the deposit account to the obligation secured by the deposit account” if the
secured party “holds a security interest in a deposit account perfected by control
under Section 9-104(a)(1).” N.Y. U.C.C. Law § 9-607(a)(4) (McKinney 2021).
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¶ 17 In addition, Chase Bank and KLO’s Agreement expressly contemplated that
Chase Bank would have the right of setoff of mutual debts:
SECTION 9.08. Right of Setoff. If an Event of Default shall
have occurred and be continuing, each Lender and each of
its Affiliates is hereby authorized at any time and from
time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time
or demand, provisional or final) . . . at any time held and
other obligations at any time owing by such Lender or
Affiliate to or for the credit or the account of any Loan
Party against any of and all the due and payable Secured
Obligations held by such Lender. The applicable Lender
shall notify the Borrower Representative and the
Administrative Agent of such set-off or application,
provided that any failure to give or any delay in giving such
notice shall not affect the validity of any such set-off or
application under this Section. The rights of each Lender
under this Section are in addition to other rights and
remedies (including other rights of setoff) which such
Lender may have.
¶ 18 In the instant case, it is undisputed that Chase Bank held a perfected security
interest in KLO’s Deposit Accounts before it was served with the garnishment
summons and notice of levy by GMT. There is no evidence to suggest Chase Bank’s
control over the Deposit Accounts was not continuous. See N.Y. U.C.C. Law § 9-
314(b). Because GMT cannot show that it became a lien creditor before Chase Bank’s
security interest was perfected, we conclude any claim of GMT with respect to the
Deposit Accounts is subordinate to Chase Bank’s perfected security interest obtained
by control. See N.Y. U.C.C. Law § 9-317(a)(2)(A). Chase Bank, as a secured party
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that holds a perfected security interest in the Deposit Accounts, is allowed to “apply
the balance of the [D]eposit [A]ccount[s] to the obligation secured by the [D]eposit
[A]ccount[s].” See N.Y. U.C.C. Law § 9-607(a)(4). Moreover, the express terms of the
Agreement gave Chase Bank a right of setoff against KLO’s deposits.
B. Garnishment
¶ 19 We now determine the effect of Chase Bank’s perfected security interest as it
pertains to the rights that GMT obtained under North Carolina’s garnishment
statute. Chase Bank argues that under North Carolina law, the right of setoff
asserted by Chase Bank “supersede[d] any interest accrued by GMT[,]” and therefore
precluded GMT from “us[ing] the garnishment statute to force Chase [Bank] to
surrender possession of the funds in the [D]eposit [A]ccounts.” On the other hand,
GMT contends it “stood in KLO’s shoes and should have enjoyed the same right to
the funds in the Operating Account as KLO.” GMT further maintains that “[s]ince
KLO accessed and used millions from the account over a period of months following
service of the garnishment summons on Chase, GMT’s garnishment summons
attached to sufficient funds to satisfy GMT’s claim because Chase never exercised its
rights as secured creditor by exercising the right of setoff.” We conclude Chase Bank
asserted its right to setoff and asserted its security interest in the Deposit Accounts
as statutorily allowed.
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¶ 20 “Garnishment is not an independent action but is a proceeding ancillary to
attachment and is the remedy for discovering and subjecting to attachment . . . [a]ny
indebtedness to the defendant and any other intangible personal property belonging
to him.” N.C. Gen. Stat. § 1-440.21(a)(2) (2019).
¶ 21 N.C. Gen. Stat. § 1-440.28 provides in pertinent part:
(f) [i]n answer to a summons to garnishee, a garnishee may
assert any right of setoff which he may have with respect to
the defendant in the principal action.
(g) [w]ith respect to any property of the defendant which
the garnishee has in his possession, a garnishee, in answer
to a summons to garnishee, may assert any lien or other
valid claim amounting to an interest therein. No garnishee
shall be compelled to surrender the possession of any
property of the defendant upon which the garnishee
establishes a lien or other valid claim amount to an interest
therein, which lien or interest attached or was acquired
prior to service of the summons to garnishee, and such
property only may be sold subject to the garnishee’s lien or
interest.
N.C. Gen. Stat. § 1-440.28(f)–(g) (2019) (emphasis added).
¶ 22 “Under our canons of statutory interpretation, where the language of a statute
is clear, the courts must give the statute its plain meaning. However, where [a]
statute is ambiguous or unclear as to its meaning, the courts must interpret the
statute to give effect to the legislative intent.” N.C. State Bar v. Brewer, 183 N.C.
App. 229, 236, 644 S.E.2d 573, 577, disc. rev. denied, 361 N.C. 695, 652 S.E.2d 649(2007) (citations and internal quotation marks omitted).
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¶ 23 We find the language of N.C. Gen. Stat. § 1-440.28 to be “clear”; hence, we do
not need to go any further than giving the statute its plain meaning. See N.C. State
Bar, 183 N.C. App. at 236, 644 S.E.2d at 577. In this case, Chase Bank answered
GMT’s garnishment summons and notice of levy addressed to it by stating,
“JPMORGAN CHASE BANK NA HAS TAKEN THE RIGHT OF SETOFF. FUNDS
NOT AVAILABLE.” On 3 November 2020, Chase Bank moved to amend its answer
in response to the garnishment summons and notice of levy to assert it had a
perfected security interest in KLO’s Deposit Accounts at Chase Bank prior to Chase
Bank being served with the summons. In the trial court’s 10 November 2020
summary judgment Order, it granted Chase Bank’s motion for leave to amend its
answer and granted GMT’s motion for summary judgment in GMT’s favor. Thus,
Chase Bank both “assert[ed its] right of setoff” and “assert[ed a] lien or other valid
claim amounting to an interest” in its answer and amended answer. See N.C. Gen.
Stat. § 1-440.28(f)–(g).
C. Exercise and Waiver of Right of Setoff
¶ 24 In its next argument, Chase Bank contends it protected its interest in the
Operating Account by claiming the right of setoff in answer to GMT’s garnishment
summons and notice of levy, and that it “did not waive or undermine its security
interest by allowing KLO access” to the Operating Account after claiming its right of
setoff. GMT argues Chase Bank’s security interest does not defeat GMT’s claim
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where Chase Bank never enforced its security interest through setoff and allowed
KLO to operate using the funds in its Operating Account. As discussed below, we
hold Chase Bank neither waived its right to setoff nor undermined its security
interest in the Deposit Accounts.
¶ 25 In the instant case, as the bank with which KLO maintained the Deposit
Accounts, Chase Bank could have exercised its right of setoff against all of the funds
in the Cash Collateral Account and the Operating Account, despite the garnishment.
See N.C. Gen. Stat. § 1-440.28(f); see also N.Y. U.C.C. Law § 9-607(a)(4). As GMT
concedes, Chase Bank promptly exercised its right of setoff regarding the Cash
Collateral Account; after receiving GMT’s garnishment summons and notice of levy
on 29 October 2019, Chase Bank debited the entire Cash Collateral Account,
acquiring $328,243.14 from the account on 6 November 2019 and notifying GMT of
the setoff the same day.
¶ 26 The only evidence of Chase Bank’s assertion of its right to setoff against the
Operating Account is its statement, in response to GMT’s garnishment summons and
notice of levy, that “JPMORGAN CHASE BANK NA HAS TAKEN THE RIGHT TO
SETOFF. FUNDS NOT AVAILABLE.” In fact, the Operating Account statements
reveal the funds in that account remained untouched by Chase Bank for months after
it was served with GMT’s garnishment summons and notice of levy, and the account
had a balance of $115,897.60 on 28 February 2020.
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¶ 27 Relying on this Court’s decision in Killette v. Raemell’s Sewing Apparel for
support, Chase Bank nonetheless argues it did not waive its right of setoff by failing
to take any action regarding the Operating Account. 93 N.C. App. 162, 377 S.E.2d 73(1989). In Killette, this Court determined that a “waiver,” in the context of the right
of setoff against a garnished account, “is an intentional and permanent
relinquishment of a known right that usually must be manifested in a clear and
unequivocal manner.” 93 N.C. App. at 164, 377 S.E.2d at 74 (citations omitted). The
Killette Court concluded the garnishee-bank did not “waive its setoff right by honoring
some of the company’s checks after the note became due.” Id. at 164, 377 S.E.2d at
74.
¶ 28 We acknowledge the facts of Killette are distinguishable from the instant case.
Rather than “honoring some of the company’s checks after the note became due[,]” see
id. at 164, 377 S.E.2d at 74, here, Chase Bank did not exercise its right of setoff
against the garnished Operating Account by debiting the account after KLO defaulted
on its loan obligations and after Chase Bank’s service with garnishment summons
and notice of levy. Nevertheless, our Court’s reasoning in Killette is similarly
applicable to the case at bar. The North Carolina garnishment statute does not set
out the time period by which Chase Bank was required to exercise its right to setoff.
But see Normand Josef Enters. v. Connecticut Nat’l Bank, 230 Conn. 486, 507, 646
A.2d 1289, 1300 (1994) (holding a garnishee-bank failed to effectuate its right of setoff
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within the applicable, statutorily set midnight deadline). To the contrary, Chase
Bank as a garnishee was not “compelled to surrender the possession of any property
of the defendant upon which [Chase Bank] establishe[d] a lien or other valid claim
amounting to an interest” because Chase Bank established its perfected security
interest in KLO’s accounts held at Chase Bank in its amended answer. See N.C. Gen.
Stat. § 1-440.28(g). The North Carolina garnishment statute and case law neither
required Chase Bank to claim the full amount on deposit in KLO’s Operating Account
while the garnishment action was pending nor to act with respect to the Operating
Account. Such actions would have surely been detrimental to KLO’s ability to pay
back its debts owed to its creditors, including Chase Bank and GMT. See Killette,
N.C. App. at 164, 377 S.E.2d at 74–75. (“The law does not discourage leniency to
one’s debtors, and in our opinion the mere honoring of a depositor’s checks after its
note is due manifests only an intention by the bank to accommodate the depositor at
that time; it does not indicate an intent to continue doing so in the future. If such
indulgences were held to be a permanent waiver of the right of setoff it could only
encourage banks to immediately offset their matured notes against the checking
account balances of their depositor-debtors, a practice bound to embarrass if not ruin
many hard pressed debtors.”). Therefore, we conclude Chase Bank did not waive its
right to setoff or undermine its perfected security interest in the Deposit Accounts.
Other jurisdictions have also declined to find waiver of the right to setoff under
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similar factual circumstances, based in part on the language of the respective
garnishment statutes. See Ladd v. Motor City Plastics Co., 303 Mich. App. 83, 102,
842 N.W.2d 388, 399 (2013) (declining to find waiver of right to setoff where the
garnishee-bank properly “declare[d] the right to a setoff that it would have,” although
it was not required to “actually exercise that right” under the applicable garnishment
statute); Myers v. Christensen, 278 Neb. 989, 996–97, 775 N.W.2d 201, 207 (2009)
(holding a bank’s perfected security interest in a debtor’s deposit account was
superior to that of a bankruptcy trustee’s claim by garnishment, and the bank did not
waive its security interest in the account by making a “calculated business decision
to honor certain checks drawn” on the account). Accordingly, we hold the trial court
erred in granting summary judgment as to GMT’s right to recovery from Chase Bank
pursuant to the garnishment summons and notice of levy. Therefore, we reverse and
remand the Order.
VI. Conclusion
¶ 29 Chase Bank had a perfected security interest in KLO’s Deposit Accounts,
which had priority over GMT’s claim by garnishment to the account funds. Chase
Bank asserted its right to setoff and asserted its security interest in KLO’s bank
account as allowed by the garnishment statute. The language of N.C. Gen. Stat. § 1-
440.28 did not require Chase Bank to exercise its right to setoff; thus, Chase Bank
did not waive its right to setoff or undermine its security interest in KLO’s accounts
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by allowing KLO to continue to use its Operating Account after receipt of the
garnishment summons. Accordingly, we reverse the Order granting summary
judgment in favor of garnishor GMT and remand the matter to the superior court for
further proceedings if needed, and the entry of any necessary orders.
REVERSED AND REMANDED.
Judge GRIFFIN concurs.
Judge ZACHARY dissents by separate opinion.
No. COA21-118 – Guy M. Turner, Inc. v. KLO Acquisition LLC
ZACHARY, Judge, dissenting.
¶ 30 Chase Bank, the bank with which the judgment-debtor KLO maintained its
accounts, could have exercised the right of setoff against both the Operating Account
and the Cash Collateral Account, thereby insulating the Deposit Accounts from
garnishment. Indeed, on 6 November 2019, Chase Bank responded in defense to
GMT’s garnishment summons and notice of levy regarding the Deposit Accounts that
“JPMORGAN CHASE BANK NA HAS TAKEN THE RIGHT TO SETOFF. FUNDS
NOT AVAILABLE.” That same day, Chase Bank exercised its right of setoff against
the funds in the garnished Cash Collateral Account, debiting the entire account, a
total of $328,243.14. However, Chase Bank did not exercise its right of setoff against
the funds in the garnished Operating Account, debiting no funds from that account.
Instead, Chase Bank continued to allow KLO to actively draw upon the account for
months, to the tune of millions of dollars, after Chase Bank’s receipt of the
garnishment summons and notice of levy.
¶ 31 The majority concludes that Chase Bank was not required, under N.C. Gen.
Stat. § 1-440.28, to exercise its right to setoff after asserting its right to setoff against
the Deposit Accounts. I respectfully disagree. By failing to take any affirmative action
in furtherance of its right of setoff against the garnished Operating Account, Chase
Bank waived its right to do so. Thus, under North Carolina law, Chase Bank rendered
itself liable to GMT for the garnished amount. Accordingly, I would affirm the trial
court’s entry of summary judgment in favor of GMT, and I respectfully dissent.
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Discussion
I. Security Interest and Garnishment
¶ 32 Chase Bank asserts that its perfected security interest in the garnished
Deposit Accounts “supersede[d] any interest accrued by GMT[,]” and therefore
precluded GMT from “us[ing] the garnishment statute to force Chase [Bank] to
surrender possession of the funds in the [D]eposit [A]ccounts.”
¶ 33 Section 25-9-304(a) of the North Carolina Uniform Commercial Code (“UCC”)
provides that “[t]he local law of a bank’s jurisdiction governs perfection, the effect of
perfection or nonperfection, and the priority of a security interest in a deposit account
maintained with that bank.” N.C. Gen. Stat. § 25-9-304(a) (2019). Parties may dictate
by agreement which jurisdiction’s law will govern. Id. § 25-9-304(b)(1). Because the
Amended and Restated Credit Agreement (the “Agreement”) between KLO and
Chase Bank specifies that New York law governs, New York law determines whether
Chase Bank has a perfected security interest in the Deposit Accounts.
¶ 34 Under New York’s version of the UCC, a secured party may exercise control
over a deposit account as “the bank with which the deposit account is maintained[.]”
N.Y. U.C.C. Law § 9-104(a)(1) (McKinney 2021). In addition, the parties’ Agreement
expressly contemplated that Chase Bank would have the right of setoff of mutual
debts:
SECTION 9.08. Right of Setoff. If an Event of Default shall
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ZACHARY, J., dissenting
have occurred and be continuing, each Lender and each of
its Affiliates is hereby authorized . . . to set off and apply
any and all deposits (general or special, time or demand,
provisional or final) . . . at any time held and other
obligations at any time owing by such Lender or Affiliate
to or for the credit or the account of any Loan Party against
any of and all the due and payable Secured Obligations
held by such Lender. The applicable Lender shall notify the
Borrower Representative and the Administrative Agent of
such set-off or application, provided that any failure to give
or any delay in giving such notice shall not affect the
validity of any such set-off or application under this
Section. The rights of each Lender under this Section are
in addition to other rights and remedies (including other
rights of setoff) which such Lender may have.
¶ 35 Accordingly, after KLO defaulted on its loan obligations, by the express terms
of the Agreement, Chase Bank could have applied the proceeds of both of the Deposit
Accounts to KLO’s loan obligations.
¶ 36 Chase Bank’s security interest would have shielded the Deposit Accounts from
garnishment under North Carolina law, had Chase Bank exercised its right of setoff.
¶ 37 “Garnishment is not an independent action but is a proceeding ancillary to
attachment and is the remedy for discovering and subjecting to attachment . . . [a]ny
indebtedness to the defendant and any other intangible personal property belonging
to him.” N.C. Gen. Stat. § 1-440.21(a)(2).
¶ 38 “In answer to a summons to garnishee, a garnishee may assert any right of
setoff which he may have with respect to the defendant in the principal action.” Id.§ 1-440.28(f). “As debtors of their general depositors[,] banks have long had the right
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to setoff against the deposits any matured debts the depositors owe them,” including
“the right to assert the setoff ‘in answer to a summons to garnishee’ . . . .” Killette v.
Raemell’s Sewing Apparel, 93 N.C. App. 162, 163–64, 377 S.E.2d 73, 74 (1989)
(quoting N.C. Gen. Stat. § 1-440.28(f)).
¶ 39 A bank’s right of setoff is a defense to a garnishment action in which it is served
as garnishee. See, e.g., Moore v. Greenville Banking & Tr. Co., 173 N.C. 227, 231, 91
S.E. 793, 795 (1917) (holding that the garnishee-bank was “entitled to have its
defense [of setoff] considered” in a garnishment proceeding). If, after service with a
garnishment summons and notice of levy, a garnishee-bank does not exercise its right
of setoff against a depositor’s account, the trial court shall enter judgment against
the garnishee-bank for the lesser of the following amounts: “(1) [a]n amount equal to
the value of the property in question, or (2) [t]he full amount for which the plaintiff
has prayed judgment against the defendant, together with such amount as in the
opinion of the clerk will be sufficient to cover the plaintiff’s costs.” N.C. Gen. Stat. § 1-
440.28(d)(1)–(2).
¶ 40 In the present case, Chase Bank plainly had the right of setoff against the
garnished Deposit Accounts, as it claimed upon service with the garnishment
summons and notice of levy. Indeed, its exercise of the right of setoff against the Cash
Collateral Account after receiving GMT’s garnishment summons and notice of levy
was clearly appropriate. See id. § 1-440.28(f). However, Chase Bank’s interest in the
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Operating Account did not, in and of itself, secure the account from garnishment;
rather, Chase Bank could protect its interest in the garnished Operating Account by
exercising its right of setoff, as outlined in N.C. Gen. Stat. § 1-440.28(f).
II. Exercise and Waiver of Right of Setoff
¶ 41 Chase Bank further contends that it protected its interest in the Operating
Account by claiming the right of setoff in answer to GMT’s garnishment summons
and notice of levy, and that it “did not waive or undermine its security interest by
allowing KLO access” to the Operating Account after claiming its right of setoff. I
disagree, and would conclude that by failing to take any action in exercise of its right
of setoff against the Operating Account, Chase Bank waived the right of setoff as to
that garnished account.
¶ 42 As the bank with which KLO maintained the Deposit Accounts, Chase Bank
could have exercised its right of setoff against all of the funds in the Cash Collateral
Account and the Operating Account, despite the garnishment. See id. As GMT
concedes, Chase Bank promptly exercised its right of setoff with regard to the Cash
Collateral Account; after receiving GMT’s garnishment summons and notice of levy
on 22 October 2019, Chase Bank debited the entire Cash Collateral Account,
acquiring $328,243.14 from the account on 6 November 2019 and notifying GMT of
the setoff that day.
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¶ 43 By contrast, the only evidence of Chase Bank’s assertion of its right to setoff
against the Operating Account is its statement, in response to GMT’s garnishment
summons and notice of levy, that “JPMORGAN CHASE BANK NA HAS TAKEN
THE RIGHT TO SETOFF. FUNDS NOT AVAILABLE.” In fact, the Operating
Account statements reveal that the funds in that account remained untouched by
Chase Bank for months after it was served with GMT’s garnishment summons and
notice of levy; by the end of February 2020, the Operating Account had a balance of
$115,897.60, with significant activity by KLO during that month, including an
opening balance of $8,357.73, deposits and credits of $1,163,724.90, and withdrawals
and debits of $1,056,185.03.
¶ 44 Relying heavily on this Court’s decision in Killette for support, Chase Bank
nonetheless argues that it did not waive its right of setoff by failing to take any action
regarding the Operating Account. In Killette, this Court determined that a “waiver,”
in the context of the right of setoff against a garnished account, “is an intentional and
permanent relinquishment of a known right that usually must be manifested in a
clear and unequivocal manner.” 93 N.C. App. at 164, 377 S.E.2d at 74 (citation
omitted). The Killette Court concluded that the garnishee-bank did not “waive its
setoff right by honoring some of the company’s checks after the note became due,”
reasoning that “the mere honoring of a depositor’s checks after its note is due
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manifests only an intention by the bank to accommodate the depositor at that time;
it does not indicate an intent to continue doing so in the future.” Id.¶ 45 Killette presents a very different factual scenario than that at bar. Rather than
“honoring some of the company’s checks after the note became due[,]” id. (emphasis
added), here, Chase Bank failed to exercise its right of setoff against the garnished
Operating Account indefinitely, both after KLO defaulted on its loan obligations and
after Chase Bank’s service with garnishment summons and notice of levy. Despite
Chase Bank’s claim of the right of setoff against the Operating Account as a defense
to the garnishment, Chase Bank permitted KLO to have access to millions of dollars
passing through the Operating Account, while simultaneously taking no action in
furtherance of its right of setoff.
¶ 46 The parties have not presented any reported North Carolina case law
specifically on point in this regard; however, other jurisdictions have addressed the
issue of waiver of the right of setoff against a garnished account. In Normand Josef
Enterprises, Inc. v. Connecticut National Bank, the Connecticut Supreme Court
concluded that “the act of setoff is not complete until three steps have been taken: (1)
the decision to exercise the right; (2) some action which accomplishes the setoff; and
(3) some record which evidences that the right of setoff has been exercised.” 646 A.2d
1289, 1299 (Conn. 1994) (citation omitted). The Court ultimately held that “as a
matter of law, a bank effectuates its right of setoff only after it has performed some
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binding overt act and has made a record to evidence that action.” Id. Such an act
“must be unequivocal, objectively ascertainable and final in order to be overt and
binding.” Id.¶ 47 The Ohio Court of Appeals has explicitly delineated what a bank must do to
avoid waiver of the right of setoff against a garnished account:
[W]hen a garnishment action is pending, the bank must
either release the amount on deposit to the garnishor or it
must take the full amount on deposit (assuming that the
full amount on deposit does not exceed the amount owed to
the bank by the depositor) as setoff. The failure to exercise
setoff by claiming the full amount on deposit when a
garnishment action is pending can be construed as waiver.
Maines Paper & Food Serv.-Midwest, Inc. v. Regal Foods, Inc., 654 N.E.2d 355, 359
(Ohio Ct. App. 1995) (emphasis added).
¶ 48 I find the reasoning of these courts persuasive and applicable to the present
case: to avoid waiver of its right of setoff against a garnished account, a bank must
take some overt action, beyond a mere assertion of the right of setoff in defense of
garnishment, evidencing the actual exercise of the right of setoff against the
garnished account.
¶ 49 In the present case, although Chase Bank may have made “the decision to
exercise the right” of setoff against the garnished Operating Account, it cannot
demonstrate that it took “some action which accomplishe[d] the setoff[.]” Normand
Josef, 646 A.2d at 1299. Indeed, the Operating Account records establish that KLO
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had uninterrupted control over the garnished account from October 2019 through
February 2020. Chase Bank also failed to provide “some record which evidences that
the right of setoff ha[d] been exercised[,]” as it admitted during discovery. Id.
¶ 50 Additionally, Chase Bank did not “release the amount on deposit [in the
Operating Account] to the garnishor or . . . take the full amount on deposit[.]” Maines
Paper, 654 N.E.2d at 359. Instead, Chase Bank allowed KLO unfettered access to the
Operating Account and processed millions of dollars through the account. This stands
in stark contrast to Chase Bank’s handling of the Cash Collateral Account, from
which Chase Bank debited all funds on the same day that it notified GMT that it had
exercised the right of setoff. Chase Bank’s “failure to exercise setoff by claiming the
full amount on deposit when a garnishment action [wa]s pending[,]” therefore, “can
be construed as waiver.” Id.¶ 51 Finally, Chase Bank’s inaction with regard to the Operating Account meets the
definition of “waiver” propounded by this Court in Killette: “an intentional and
permanent relinquishment of a known right, . . . manifested in a clear and
unequivocal manner.” 93 N.C. App. at 164, 377 S.E.2d at 74 (citation omitted). Chase
Bank was aware that it had the right of setoff in defense to the garnishment action;
indeed, it claimed the right of setoff in its answer to GMT on 6 November 2019, and
it exercised the right of setoff against the Cash Collateral Account that same day.
Nonetheless, Chase Bank allowed KLO to continue to use and access the Operating
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Account for months after claiming its right of setoff. During this period, KLO not only
withdrew funds from the account on the date on which Chase Bank was served with
GMT’s garnishment process, but also subsequently deposited millions of dollars into
that account. Chase Bank’s inaction with regard to the Operating Account was
manifestly inconsistent with its claimed setoff.
¶ 52 The act of setoff against a garnished account is not complete until some action
is taken to accomplish the setoff. Absent any corresponding action, Chase Bank’s
mere claim of a setoff against the Operating Account was insufficient to support its
claim and to defeat GMT’s ability to recover through garnishment. In light of these
facts, Chase Bank’s failure to take any affirmative actions in furtherance of its right
of setoff against the Operating Account in defense of garnishment was “an intentional
and permanent relinquishment of a known right” that was “manifested in a clear and
unequivocal manner.” Id. Where Chase Bank allowed KLO continued access to and
use of the funds in the Operating Account despite the garnishment, Chase Bank
waived the right of setoff with regard to that account, and Chase Bank is therefore
liable to GMT as garnishee.
¶ 53 For the reasons stated herein, I would affirm the trial court’s entry of summary
judgment in favor of GMT’s right to recover from Chase Bank as garnishee.
Accordingly, I respectfully dissent.