Challenging Postjudgment Garnishment Actions Against Insurers

A judgment creditor seeking to garnish a judgment debtor's insurance policy must establish two things: 1) the judgment in favor of the judgment creditor and against the judgment debtor, and 2) the insurer's obligation to the judgment debtor by proving the existence of a policy providing coverage for the judgment creditor's claim(s). See Butterfield, 670 A.2d at 651.

Garnishments Are Governed By Statute

Because garnishments are governed by statute, the specific statutory requirements for garnishing insurance proceeds or other property from a garnishee vary from jurisdiction to jurisdiction. Consequently, insurers must thoroughly familiarize themselves with the statutory requirements of the jurisdiction at issue before responding to a garnishment action.

Garnishments Statutes Generally Must Be Strictly Followed

In addition to recognizing that the specific procedures required to garnish insurance proceeds or other property vary from jurisdiction to jurisdiction, it also is important to recognize that garnishment statutes must be strictly followed and that garnishment is not to be extended beyond the provisions of the statute. See e.g., Thompson v. Commercial Union Ins. Co. of N.Y., 267 So. 2d 18, 20 (Fla. 1st DCA 1972). Therefore, to ensure that judgment creditors are not seeking assets beyond their reach, insurers should scrutinize the limitations of the applicable statutes that provide judgment creditors with garnishment rights.

A Denial of a Debt Due Is Not a Contingency

State statutes generally provide that the subject of a writ of garnishment must not be contingent. See Tomlin v. Anderson, 413 So. 2d 79 (Fla. 5th DCA 1982); Fla. Stat. Ann. '77.01 (West 2008) (provides that a judgment creditor may garnish any “debt due” to the judgment debtor by a third person). If there is anything contingent to be done by a person before the liability of another becomes fixed, no debt is due. West Fla. Grocery Co. v. Teutonia Fire Ins. Co., 74 Fla. 220, 225-26 (1917).

An insurer cannot create a contingency merely by denying liability under the policy. Therefore, an insurer's denial of liability does not preclude a judgment creditor from prosecuting a garnishment action. Even though the insurer may have a valid argument that its policy provides no coverage for the asserted claim, “[w]hen the garnishee denies liability, one of the objects of the garnishment suit is to ascertain whether there is a debt due from the garnishee to the judgment debtor. Thus, the denial of liability by the garnishee does not create a contingency which will prevent garnishment.” See e.g., Pippin, 845 F. Supp. at 852 (internal quotations and citations omitted). The Pippin court noted that if an insurer's denial of liability was held to be a contingency, the “garnishment process by a creditor could be defeated in every case ' ” Id.

Separate Suit or Not

How a judgment creditor seeks garnishment of insurance proceeds is state specific. For instance, in Maryland, although a writ of garnishment is filed in the underlying action, Rule 2-645(g) states “the matter shall proceed as if it were an original action between the judgment creditor as plaintiff and the garnishee as defendant and shall be governed by the rules applicable to civil actions.” Md. R. '2-645(g) (West 2008). In contrast, under Illinois law, “a garnishment proceeding is a remedial measure designed to reach assets belonging to the judgment debtor ' It is not a separate suit but an ancillary step in the original action.” Chandler v. Doherty, 731 N.E.2d 1007, 1010 (Ill. App. Ct. 2000) (“Chandler“); 735 Ill. Comp. Stat. Ann. 5/12-701 (West 2008). Consequently, insurers should determine whether the state law at issue considers a garnishment proceeding to be a separate action or an ancillary step in the original action and should analyze how the answer affects their procedural rights.

Postjudgment Garnishment Statute Example '
Maryland

Although the language in garnishment statutes differs from jurisdiction to jurisdiction, the purpose of the statutes is the same ' to allow a judgment creditor to recover a debt owed to it by a judgment debtor by obtaining payment of the debt from a third party that is indebted to the judgment debtor. To illustrate the type of language found in these statutes, Maryland's garnishment statute is quoted below in pertinent part:

(a) Availability. This Rule governs garnishment of any property of the judgment debtor, other than wages subject to Rule 2-646 and a partnership interest subject to a charging order, in the hands of a third person for the purpose of satisfying a money judgment.
Property includes any debt owed to the judgment debtor, whether immediately payable or unmatured.

(b) Issuance of writ. The judgment creditor may obtain issuance of a writ of garnishment by filing in the same action in which the judgment was entered a request that contains (1) the caption of the action, (2) the amount owed under the judgment, (3) the name and last known address of each judgment debtor with respect to whom a writ is requested, and (4) the name and address of the garnishee. Upon the filing of the request, the clerk shall issue a writ of garnishment directed to the garnishee. '

(g) When answer filed. If the garnishee files a timely answer, the matters set forth in the answer shall be treated as established for the purpose of the garnishment proceeding unless the judgment creditor files a reply contesting the answer within 30 days after its service. If a timely reply is not filed, the court may enter judgment upon request of the judgment creditor, the judgment debtor, or the garnishee. If a timely reply is filed to the answer of the garnishee, the matter shall proceed as if it were an original action between the judgment creditor as plaintiff and the garnishee as defendant and shall be governed by the rules applicable to civil actions.

Md. R. '2-645 (West 2008).

Garnishment Actions in Federal Court

State garnishment statutes apply when private parties litigate garnishment actions in state courts or, pursuant to diversity or supplemental jurisdiction, in federal courts. When the federal government is the judgment creditor, however, federal garnishment statutes apply, and federal courts have federal question jurisdiction. 28 U.S.C. '3205 et seq. Regarding procedural rules, the Federal Rules of Civil Procedure may supplant state law procedural rules applicable to garnishment actions when private parties are in federal court. See Mid-Continent Cas. Co. v. Everett, 340 F.2d 65, 69 (10th Cir. 1965) (ruling that “where garnishment proceedings are had in federal court, the Federal Rules of Civil Procedure, rather than general provisions of state practice and procedure, control with respect to the matter [sic] and method of service ' “)

Potentially Significant Exposure for Insurers

Postjudgment garnishment actions expose insurers to a number of potentially adverse consequences, which include:

• Litigating coverage issues more than once;
• Litigating the coverage action in one forum and the garnishment action in another;
• Losing the ability to pursue a declaratory judgment action;
• Paying policy benefits more than once;
• Losing federal court diversity jurisdiction;
• Shifting of the burden of proof;
• Burdensome discovery issues;
• Enforcement of Coblentz agreements; and
• Joinder of bad faith claims.

Litigating Coverage Issues More Than Once

An insurer that seeks an anticipatory declaratory judgment against an insured regarding policy coverage issues needs to be aware that it may have to relitigate the coverage issues with a future judgment creditor. This can result in increased insurer litigation expenses and, worse yet, inconsistent coverage decisions. Thus was the case in Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556 (Colo. 1996). The claimant sued the insured mortgagee for breach of contract involving the sale and financing of real estate. While the suit was ongoing, the insurer filed a declaratory judgment action against the insured and the claimant seeking a declaration that the policy did not cover the claimant's claims against the insured. The claimant counterclaimed, but the insurer was granted summary judgment on the counterclaim on the ground that claimant lacked standing to determine the rights and obligations of the insurer toward the insured because claimant had not received a judgment against the insured and there was no contractual link between claimant and insurer. Id. at 559 n. 3.

The Colorado Supreme Court disagreed. The court reasoned that “[s]ince a declaratory judgment action cannot bind nonparties, any entity or person with an existing or potential interest in the outcome should be named as a party in order to fully and finally resolve the controversy at issue.” Id. at 562. Otherwise, the insurer may be required to relitigate the coverage issues with the claimant after the conclusion of the underlying action. Id. Consequently, insurers seeking an anticipatory declaratory judgment should consider adding as a defendant the potential judgment creditor. Otherwise, insurers face the uncertainty of potentially having to relitigate coverage issues should the insured be found liable to claimant in the underlying action.

The Coverage Action in One Forum, the Garnishment Action in Another

In some instances, an insurer that denies that it is indebted to its insured with respect to a particular insurance claim may have to litigate coverage in one forum, and, at the same time, litigate the garnishment action in another forum. This can result in confusion and a significant duplication of work and will, at a minimum, increase an insurer's litigation expenses.

For example, in the Pippin case, the insured and the judgment creditor agreed to a $4 million settlement of a tort case arising from the shooting of the judgment creditor during a robbery that occurred while the judgment creditor was working at the insured's retail store. Following the settlement, the judgment creditor brought a garnishment action against the insurer in federal district court in Florida. However, before the judgment creditor brought that action, the insured filed an action against the insurer in Arizona state court, seeking a declaration that the insurer's umbrella policy covered the judgment creditor's claim against the insured.

The insurer requested that the court summarily dismiss the garnishment action in Florida on the ground that the insurer's liability had not yet been established in the coverage action in Arizona. Pippin, 845 F. Supp. at 851. The federal district court in Florida rejected that argument, reasoning that the insurer's denial of liability in both actions did not create a contingent liability on the insurer's part because all events that would fix the insurer's liability had occurred. Id. at 852. The court ruled that the insurer's denial of liability served only to create a question of fact, which precluded entry of summary judgment in the garnishment action. Id. The court concluded that its ruling was “consistent with the well settled rule in Florida 'that a plaintiff who has obtained a judgment against a defendant may proceed in garnishment against the defendant's insurer immediately upon entry of final judgment by the trial court.'” Id. (quoting Grange Mut. Cas. Co. v. Stroud, 173 So. 2d 171, 172 (Fla. 2d DCA 1965)).

Inability to Pursue a Declaratory Judgment Action

When faced with a difficult coverage determination, it is often advisable for an insurer to seek a judicial determination of whether coverage is afforded for the claims at issue by filing and prosecuting a declaratory judgment action. To be as useful as possible, a declaratory judgment action should be pursued as soon as the insurer becomes aware of the coverage issue. Waiting until a judgment has been rendered against the insured to file a declaratory judgment action may be too late if the judgment creditor attempts to collect the judgment through garnishment.

The filing of a garnishment action by a judgment creditor may prevent an insurer from litigating the coverage issues via a subsequently filed declaratory judgment action because when a coverage suit and a garnishment suit are proceeding concurrently, courts sometimes will stay or dismiss one of the suits. A Washington state appellate court recently invoked the priority of action rule to preclude the concurrent litigation of a garnishment action and a declaratory judgment coverage action. Atlantic Cas. Ins. Co. v. Or. Mut. Ins. Co., 153 P.3d 211, 215 (Wash. Ct. App. 2007) (“Atlantic Casualty“). In that case, after the judgment creditor filed a garnishment action against the insurer to enforce a default judgment against the insured, the insurer filed a declaratory judgment action, seeking an expedited declaration that its insured had not received proper notice of the injured party's lawsuit and that the policy at issue provided no coverage for the claim on the ground that the insured had breached the insurance contract. Id. at 213-14.

The Atlantic Casualty court found that the two suits involved the same parties, subject matter, and relief. Id. at 213. It also concluded that the insurer could raise all of its defenses in the garnishment action. Id. at 215-16. Consequently, based on the priority of action rule, the court held that the judgment creditor's summary judgment motion seeking dismissal of the declaratory judgment action in favor of the garnishment action should have been granted. Id. at 217. By being required to litigate all of its defenses in the garnishment action, the insurer may have lost the opportunity to litigate its coverage defenses in a more favorable forum.

Paying Policy Benefits More Than Once

An insurer needs to be careful not to pay proceeds on a proof of loss if the insurer has received a writ of garnishment. If an insurer pays the proof of loss, it may open itself to having to pay benefits twice: once to the insured and once later to the judgment creditor. For example, in Am. Ins. Co. v. Black, 168 S.E. 85 (Ga. Ct. App. 1933), the judgment creditor served the insurer with a garnishment action summons after the occurrence of a property loss, but before the insured filed a proof of loss. The insurer paid the insured when a proof of loss was made, but denied any responsibility to the judgment creditor because at the time the creditor filed the writ of garnishment, the liability was contingent ' no proof of loss had been filed. The court rejected the insurer's argument, holding that the interest of the insured under the policy vested after the occurrence of the loss, and as such, that interest was subject to garnishment. Id. at 86-87.

Similarly, in Fleming v. Pan Am. Fire & Cas. Co., 495 F.2d 535 (5th Cir. 1974), the court required the insurance company to pay the judgment creditor even after the claim had been paid to the insured. The basis for the ruling was: 1) Alabama statutes provided for garnishment; and 2) the terms of the policy itself made the judgment creditor a third-party beneficiary. The insurer could not defeat the judgment creditor's vested interest in the policy by settlement with the named insured.

Losing Federal Court Diversity Jurisdiction

Having a federal court decide a garnishment action is often advantageous to the insurer. Therefore, the first action often taken by insurers served with a writ of garnishment is to remove the action to federal court. Typically the removal is based upon diversity of citizenship of the parties. Despite having actual diversity with respect to the judgment creditor and the insurer, some federal courts have denied removal on diversity grounds when the insured was a nondiverse party because they reasoned that a judgment creditor stands in the shoes of the insured for jurisdictional purposes when defending against a garnishment action. See, e.g., Liberty Mut. Ins. Co. v. Wheelwright Trucking Co. Inc., 851 So. 2d 466 (Ala. 2002) (“Wheelwright Trucking“). Consequently, an insurer may be unable to remove a garnishment action if the insured is not diverse from the judgment creditor.

Shifting of the Burden of Proof

Ordinarily, in a garnishment action, the judgment creditor has the burden to show that a consent judgment between the judgment creditor and the insured was made in good faith, especially when the insured consents only to the extent that the judgment will be paid by the insurers. See Steil v. Florida Physicians' Ins. Reciprocal, 448 So. 2d 589 (Fla. 2d DCA 1984). Some courts, however, shift the burden of proof to the insurer. For example, in Wheelwright Trucking, the Supreme Court of Alabama found that because the insurers were informed of the consent settlement and had an opportunity to contest the settlement before it was finalized, the burden of proof to show collusion shifted away from the judgment creditor and to the insurers. 851 So. 2d at 478-79. Thus, an insurer seeking to avoid garnishment should closely monitor any settlement discussions between the future creditor and the insured. Otherwise, a court may find the settlement, and the garnishment amount, presumptively valid.

Burdensome Discovery Issues

Insurers also need to be aware that garnishment actions can amount to full-scale litigation, which sometimes includes lengthy and costly discovery. For example, under the laws of Hawaii, a judgment creditor has a statutory right to examine a garnishee who has denied indebtedness to the judgment debtor. See Haw. Rev. Stat. ”652-1, 652-10. The discovery will be taken pursuant to the rules of civil discovery. See Employees' Ret. Sys. of the State of Haw. v. Real Estate Fin. Corp., 793 P.2d 170, 172 (Haw. 1990). Consequently, insurers should be aware of garnishment discovery rules in the jurisdiction and factor litigation costs into the decision of whether to contest a writ of garnishment.

In addition to the fact that insurers face the possibility of full discovery in garnishment actions, they also are not immune to an order of expedited discovery. See e.g., Rolls Royce Indus. Power (India) v. M.V. Fratzis M. Stratilatis Navigation Ltd., No. 95 Civ. 2630 (csh), 1995 WL 314635 (S.D.N.Y. May 24, 1995) (granting expedited discovery against garnishee because of the substantial risk that plaintiff would not be able to locate sufficient assets to satisfy its claims). Although Rolls Royce involves the garnishment of a bank account, the same reasoning for expedited discovery can be applied to insurer garnishees.

Enforcement of Coblentz Agreements

A Coblentz agreement consists of: 1) a stipulated consent judgment for a sum certain entered into between an insured and an alleged injured third-party claimant, admitting the insured's tort liability to the claimant and settling the claim following the insurer's denial of the insured's request for a defense and indemnity; 2) a covenant by the claimant not to collect the judgment from the insured; and 3) an assignment of the insured's rights under its liability policy and, sometimes, the insured's rights to a bad faith claim to the claimant. Some courts call this type of settlement agreement a Coblentz agreement based on the decision in Coblentz v. Am. Sur. Co. of N.Y., 416 F.2d 1059 (5th Cir. 1969). Courts in other jurisdictions refer to these agreements by other names. In some other jurisdictions, courts refer to these types of consent judgments as a Damron agreement, based on the decision in Damron v. Sledge, 460 P.2d 997 (Ariz. 1969), or a Miller-Shugart agreement, based on the decision in Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). See, e.g., Safeway Ins. Co. v. Guerrero, 106 P.3d 1020, 1022 n.1 (Ariz. 2005) (en banc), and Wangler v. Lerol, 670 N.W.2d 830, 837-38 (N.D. 2003), respectively. In other jurisdictions, courts may refer to it by different names.

Although courts use different terminology to identify this type of settlement agreement, the insured's and the claimant's goal remains the same: shift all or part of the loss from the insured to its insurer after the insurer has denied the insured's claims and has refused to defend the insured. If the court enters the consent judgment, the claimant becomes a judgment creditor and is positioned to bring a postjudgment garnishment action against the insurer. See, e.g., Gallagher v. Dupont, 918 So. 2d 342 (Fla. 5th DCA 2005) (ruling that a judgment creditor that has settled a case by entering a Coblentz agreement and that shows that the amount of the agreement was reasonable and that the agreement was not tainted by bad faith or collusion can bring a garnishment action to collect the judgment from the insurer).

An insurer's damages exposure in the cases in which a judgment creditor is attempting to enforce a Coblentz agreement potentially is high because the amount of the stipulated consent judgment may exceed the true settlement value of the case and the amount that a court or a jury may have awarded at trial.

Bad Faith Claims

The states are split with regard to whether a judgment creditor can use a garnishment action to recover extra-contractual damages arising from alleged bad faith claims handling by the insurer. Some states, such as Pennsylvania, permit it. Others, like Illinois, do not.

Under Pennsylvania law, courts have held that “bad faith claims against a tort defendant's insurer may be raised in garnishment proceedings.” Scanlin v. Utica First Ins. Co., 426 F. Supp. 2d 243, 247 (M.D. Pa. 2006) (citing Shearer v. Reed, 428 A.2d 635 (Pa. Super. Ct. 1981)) (“Scanlin“). For example, in Scanlin, a judgment creditor sought to enforce a Coblentz agreement in its garnishment action against the tort defendant's insurer. The court observed that the only issues to be decided in the garnishment action were whether the garnishee insurer had acted in bad faith in denying its insured a defense and in failing to indemnify the insured. Scanlin, 426 F. Supp. 2d 243, 250. The court permitted those issues to be decided in the garnishment action.

In contrast, an Illinois court of appeals affirmed a trial court's holding that, under Illinois law, “claims of bad faith against insurance companies may not be brought in garnishment proceedings.” Chandler, 731 N.E.2d at 1011. In Chandler, a judgment creditor had obtained a $1,618,530 judgment against the insured tortfeasor. Later, the judgment creditor brought a garnishment action against the tortfeasor's insurer, seeking the $300,000 policy limits plus interest for breach of contract and the remainder of the judgment, without regard to policy limits, for the insurer's alleged bad faith denial of the duty to defend. Applying Illinois law, the appellate court ruled that a bad faith claim is a claim for unliquidated damages and, therefore, cannot be the subject of a garnishment proceeding:

Claims for a liquidated amount of damages such as the Chandlers' claim for the amount up to American Fire's policy limits found to be due the Chandlers in their original suit against Doherty are properly the subject of a garnishment proceeding. Claims beyond the policy limits for an unknown amount of damages for American Fire's bad faith in failing to defend Doherty in the original personal injury suit are not.

Id. at 1010 (citing Stevenson v. Samkow, 491 N.E.2d 1318, 1320-21 (Ill. App. Ct. 1986); Powell v. Prudence Mut. Cas. Co., 232 N.E.2d 155, 158-59 (Ill. App. Ct. 1967)).

Next month's installment will address response strategies and substantive defenses.

Donald O. Johnson, Seth F. Kirby and Kristin H. Landis are with McKenna Long & Aldridge LLP. They represent companies in the insurance industry in a wide range of complex coverage and bad faith litigation. The opinions expressed in this article are those of the authors and do not express the views of the firm or it clients. This article is intended to provide information, not legal advice.

After resolving a case against an insured defendant through settlement or trial and obtaining a judgment for money damages, plaintiff's attorneys sometimes seek to collect the judgment directly from the defendant's insurer. The strategy involves the postjudgment garnishment of insurance policies of the insured (as the judgment debtor) by the claimant (as a judgment creditor) through a proceeding against the insurer (as a garnishee).

What is a garnishment? “Garnishment is a remedy created and controlled by statute ' It is a statutory proceeding whereby a [judgment debtor's] money or property in possession of another [ i.e. , the garnishee] are applied to payment of the former's debt to a [judgment creditor].” Mayor and City Council of Baltimore v. Utica Mut. Ins. Co ., 802 A.2d 1070, 1081 (Md. Ct. Spec. App. 2002) (internal citations omitted) (“ Mayor “). Garnishment can either be prejudgment or postjudgment. The principle difference between the two is that in postjudgment garnishment, the creditor has obtained judgment. As a result, many of the procedural impediments faced by a creditor seeking a prejudgment writ of garnishment are in large part removed. See Schneidler v. Feeder's Grain and Supply, Inc. , 24 S.W.3d 739 (Mo. Ct. App. E.D. 2000).

It is well-settled law that judgment creditors generally may collect on a judgment from the judgment debtor's insurer. Butterfield v. Giuntoli , 670 A.2d 646, 651 (Pa. Super. 1995) (“ Butterfield “). It is in essence, an action by the judgment creditor brought against an insurer that holds assets of the judgment debtor. Mayor , 802 A.2d at 1081. “An attaching judgment creditor is subrogated to the rights of the judgment debtor and can recover [from the garnishee] only by the same right and to the same extent that the judgment debtor might recover.” Id. (quoting Bragunier Masonry Contractors, Inc. v. The Catholic Univ. of Am., 796 A.2d 744, 752 (2002)); see also Pippin v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. , 845 F. Supp. 849, 851 (M.D. Fla. 1994) (“ Pippin “) (“The [judgment creditor] gets no greater right than that of the [judgment] debtor.”).

A judgment creditor seeking to garnish a judgment debtor's insurance policy must establish two things: 1) the judgment in favor of the judgment creditor and against the judgment debtor, and 2) the insurer's obligation to the judgment debtor by proving the existence of a policy providing coverage for the judgment creditor's claim(s). See Butterfield, 670 A.2d at 651.

Garnishments Are Governed By Statute

Because garnishments are governed by statute, the specific statutory requirements for garnishing insurance proceeds or other property from a garnishee vary from jurisdiction to jurisdiction. Consequently, insurers must thoroughly familiarize themselves with the statutory requirements of the jurisdiction at issue before responding to a garnishment action.

Garnishments Statutes Generally Must Be Strictly Followed

In addition to recognizing that the specific procedures required to garnish insurance proceeds or other property vary from jurisdiction to jurisdiction, it also is important to recognize that garnishment statutes must be strictly followed and that garnishment is not to be extended beyond the provisions of the statute. See e.g., Thompson v. Commercial Union Ins. Co. of N.Y., 267 So. 2d 18, 20 (Fla. 1st DCA 1972). Therefore, to ensure that judgment creditors are not seeking assets beyond their reach, insurers should scrutinize the limitations of the applicable statutes that provide judgment creditors with garnishment rights.

A Denial of a Debt Due Is Not a Contingency

State statutes generally provide that the subject of a writ of garnishment must not be contingent. See Tomlin v. Anderson , 413 So. 2d 79 (Fla. 5th DCA 1982); Fla. Stat. Ann. '77.01 (West 2008) (provides that a judgment creditor may garnish any “debt due” to the judgment debtor by a third person). If there is anything contingent to be done by a person before the liability of another becomes fixed, no debt is due. West Fla. Grocery Co. v. Teutonia Fire Ins. Co. , 74 Fla. 220, 225-26 (1917).

An insurer cannot create a contingency merely by denying liability under the policy. Therefore, an insurer's denial of liability does not preclude a judgment creditor from prosecuting a garnishment action. Even though the insurer may have a valid argument that its policy provides no coverage for the asserted claim, “[w]hen the garnishee denies liability, one of the objects of the garnishment suit is to ascertain whether there is a debt due from the garnishee to the judgment debtor. Thus, the denial of liability by the garnishee does not create a contingency which will prevent garnishment.” See e.g., Pippin, 845 F. Supp. at 852 (internal quotations and citations omitted). The Pippin court noted that if an insurer's denial of liability was held to be a contingency, the “garnishment process by a creditor could be defeated in every case ' ” Id.

Separate Suit or Not

How a judgment creditor seeks garnishment of insurance proceeds is state specific. For instance, in Maryland, although a writ of garnishment is filed in the underlying action, Rule 2-645(g) states “the matter shall proceed as if it were an original action between the judgment creditor as plaintiff and the garnishee as defendant and shall be governed by the rules applicable to civil actions.” Md. R. '2-645(g) (West 2008). In contrast, under Illinois law, “a garnishment proceeding is a remedial measure designed to reach assets belonging to the judgment debtor ' It is not a separate suit but an ancillary step in the original action.” Chandler v. Doherty , 731 N.E.2d 1007, 1010 (Ill. App. Ct. 2000) (“ Chandler “); 735 Ill. Comp. Stat. Ann. 5/12-701 (West 2008). Consequently, insurers should determine whether the state law at issue considers a garnishment proceeding to be a separate action or an ancillary step in the original action and should analyze how the answer affects their procedural rights.

Postjudgment Garnishment Statute Example '
Maryland

Although the language in garnishment statutes differs from jurisdiction to jurisdiction, the purpose of the statutes is the same ' to allow a judgment creditor to recover a debt owed to it by a judgment debtor by obtaining payment of the debt from a third party that is indebted to the judgment debtor. To illustrate the type of language found in these statutes, Maryland's garnishment statute is quoted below in pertinent part:

(a) Availability. This Rule governs garnishment of any property of the judgment debtor, other than wages subject to Rule 2-646 and a partnership interest subject to a charging order, in the hands of a third person for the purpose of satisfying a money judgment.
Property includes any debt owed to the judgment debtor, whether immediately payable or unmatured.

(b) Issuance of writ. The judgment creditor may obtain issuance of a writ of garnishment by filing in the same action in which the judgment was entered a request that contains (1) the caption of the action, (2) the amount owed under the judgment, (3) the name and last known address of each judgment debtor with respect to whom a writ is requested, and (4) the name and address of the garnishee. Upon the filing of the request, the clerk shall issue a writ of garnishment directed to the garnishee. '

(g) When answer filed. If the garnishee files a timely answer, the matters set forth in the answer shall be treated as established for the purpose of the garnishment proceeding unless the judgment creditor files a reply contesting the answer within 30 days after its service. If a timely reply is not filed, the court may enter judgment upon request of the judgment creditor, the judgment debtor, or the garnishee. If a timely reply is filed to the answer of the garnishee, the matter shall proceed as if it were an original action between the judgment creditor as plaintiff and the garnishee as defendant and shall be governed by the rules applicable to civil actions.

Md. R. '2-645 (West 2008).

Garnishment Actions in Federal Court

State garnishment statutes apply when private parties litigate garnishment actions in state courts or, pursuant to diversity or supplemental jurisdiction, in federal courts. When the federal government is the judgment creditor, however, federal garnishment statutes apply, and federal courts have federal question jurisdiction. 28 U.S.C. '3205 et seq. Regarding procedural rules, the Federal Rules of Civil Procedure may supplant state law procedural rules applicable to garnishment actions when private parties are in federal court. See Mid-Continent Cas. Co. v. Everett , 340 F.2d 65, 69 (10th Cir. 1965) (ruling that “where garnishment proceedings are had in federal court, the Federal Rules of Civil Procedure, rather than general provisions of state practice and procedure, control with respect to the matter [sic] and method of service ' “)

Potentially Significant Exposure for Insurers

Postjudgment garnishment actions expose insurers to a number of potentially adverse consequences, which include:

• Litigating coverage issues more than once;
• Litigating the coverage action in one forum and the garnishment action in another;
• Losing the ability to pursue a declaratory judgment action;
• Paying policy benefits more than once;
• Losing federal court diversity jurisdiction;
• Shifting of the burden of proof;
• Burdensome discovery issues;
• Enforcement of Coblentz agreements; and
• Joinder of bad faith claims.

Litigating Coverage Issues More Than Once

An insurer that seeks an anticipatory declaratory judgment against an insured regarding policy coverage issues needs to be aware that it may have to relitigate the coverage issues with a future judgment creditor. This can result in increased insurer litigation expenses and, worse yet, inconsistent coverage decisions. Thus was the case in Constitution Assocs. v. N.H. Ins. Co. , 930 P.2d 556 (Colo. 1996). The claimant sued the insured mortgagee for breach of contract involving the sale and financing of real estate. While the suit was ongoing, the insurer filed a declaratory judgment action against the insured and the claimant seeking a declaration that the policy did not cover the claimant's claims against the insured. The claimant counterclaimed, but the insurer was granted summary judgment on the counterclaim on the ground that claimant lacked standing to determine the rights and obligations of the insurer toward the insured because claimant had not received a judgment against the insured and there was no contractual link between claimant and insurer. Id. at 559 n. 3.

The Colorado Supreme Court disagreed. The court reasoned that “[s]ince a declaratory judgment action cannot bind nonparties, any entity or person with an existing or potential interest in the outcome should be named as a party in order to fully and finally resolve the controversy at issue.” Id. at 562. Otherwise, the insurer may be required to relitigate the coverage issues with the claimant after the conclusion of the underlying action. Id. Consequently, insurers seeking an anticipatory declaratory judgment should consider adding as a defendant the potential judgment creditor. Otherwise, insurers face the uncertainty of potentially having to relitigate coverage issues should the insured be found liable to claimant in the underlying action.

The Coverage Action in One Forum, the Garnishment Action in Another

In some instances, an insurer that denies that it is indebted to its insured with respect to a particular insurance claim may have to litigate coverage in one forum, and, at the same time, litigate the garnishment action in another forum. This can result in confusion and a significant duplication of work and will, at a minimum, increase an insurer's litigation expenses.

For example, in the Pippin case, the insured and the judgment creditor agreed to a $4 million settlement of a tort case arising from the shooting of the judgment creditor during a robbery that occurred while the judgment creditor was working at the insured's retail store. Following the settlement, the judgment creditor brought a garnishment action against the insurer in federal district court in Florida. However, before the judgment creditor brought that action, the insured filed an action against the insurer in Arizona state court, seeking a declaration that the insurer's umbrella policy covered the judgment creditor's claim against the insured.

The insurer requested that the court summarily dismiss the garnishment action in Florida on the ground that the insurer's liability had not yet been established in the coverage action in Arizona. Pippin, 845 F. Supp. at 851. The federal district court in Florida rejected that argument, reasoning that the insurer's denial of liability in both actions did not create a contingent liability on the insurer's part because all events that would fix the insurer's liability had occurred. Id. at 852. The court ruled that the insurer's denial of liability served only to create a question of fact, which precluded entry of summary judgment in the garnishment action. Id. The court concluded that its ruling was “consistent with the well settled rule in Florida 'that a plaintiff who has obtained a judgment against a defendant may proceed in garnishment against the defendant's insurer immediately upon entry of final judgment by the trial court.'” Id. (quoting Grange Mut. Cas. Co. v. Stroud , 173 So. 2d 171, 172 (Fla. 2d DCA 1965)).

Inability to Pursue a Declaratory Judgment Action

When faced with a difficult coverage determination, it is often advisable for an insurer to seek a judicial determination of whether coverage is afforded for the claims at issue by filing and prosecuting a declaratory judgment action. To be as useful as possible, a declaratory judgment action should be pursued as soon as the insurer becomes aware of the coverage issue. Waiting until a judgment has been rendered against the insured to file a declaratory judgment action may be too late if the judgment creditor attempts to collect the judgment through garnishment.

The filing of a garnishment action by a judgment creditor may prevent an insurer from litigating the coverage issues via a subsequently filed declaratory judgment action because when a coverage suit and a garnishment suit are proceeding concurrently, courts sometimes will stay or dismiss one of the suits. A Washington state appellate court recently invoked the priority of action rule to preclude the concurrent litigation of a garnishment action and a declaratory judgment coverage action. Atlantic Cas. Ins. Co. v. Or. Mut. Ins. Co. , 153 P.3d 211, 215 (Wash. Ct. App. 2007) (“ Atlantic Casualty “). In that case, after the judgment creditor filed a garnishment action against the insurer to enforce a default judgment against the insured, the insurer filed a declaratory judgment action, seeking an expedited declaration that its insured had not received proper notice of the injured party's lawsuit and that the policy at issue provided no coverage for the claim on the ground that the insured had breached the insurance contract. Id. at 213-14.

The Atlantic Casualty court found that the two suits involved the same parties, subject matter, and relief. Id. at 213. It also concluded that the insurer could raise all of its defenses in the garnishment action. Id. at 215-16. Consequently, based on the priority of action rule, the court held that the judgment creditor's summary judgment motion seeking dismissal of the declaratory judgment action in favor of the garnishment action should have been granted. Id. at 217. By being required to litigate all of its defenses in the garnishment action, the insurer may have lost the opportunity to litigate its coverage defenses in a more favorable forum.

Paying Policy Benefits More Than Once

An insurer needs to be careful not to pay proceeds on a proof of loss if the insurer has received a writ of garnishment. If an insurer pays the proof of loss, it may open itself to having to pay benefits twice: once to the insured and once later to the judgment creditor. For example, in Am. Ins. Co. v. Black , 168 S.E. 85 (Ga. Ct. App. 1933), the judgment creditor served the insurer with a garnishment action summons after the occurrence of a property loss, but before the insured filed a proof of loss. The insurer paid the insured when a proof of loss was made, but denied any responsibility to the judgment creditor because at the time the creditor filed the writ of garnishment, the liability was contingent ' no proof of loss had been filed. The court rejected the insurer's argument, holding that the interest of the insured under the policy vested after the occurrence of the loss, and as such, that interest was subject to garnishment. Id. at 86-87.

Similarly, in Fleming v. Pan Am. Fire & Cas. Co. , 495 F.2d 535 (5th Cir. 1974), the court required the insurance company to pay the judgment creditor even after the claim had been paid to the insured. The basis for the ruling was: 1) Alabama statutes provided for garnishment; and 2) the terms of the policy itself made the judgment creditor a third-party beneficiary. The insurer could not defeat the judgment creditor's vested interest in the policy by settlement with the named insured.

Losing Federal Court Diversity Jurisdiction

Having a federal court decide a garnishment action is often advantageous to the insurer. Therefore, the first action often taken by insurers served with a writ of garnishment is to remove the action to federal court. Typically the removal is based upon diversity of citizenship of the parties. Despite having actual diversity with respect to the judgment creditor and the insurer, some federal courts have denied removal on diversity grounds when the insured was a nondiverse party because they reasoned that a judgment creditor stands in the shoes of the insured for jurisdictional purposes when defending against a garnishment action. See, e.g. , Liberty Mut. Ins. Co. v. Wheelwright Trucking Co. Inc. , 851 So. 2d 466 (Ala. 2002) (“ Wheelwright Trucking “). Consequently, an insurer may be unable to remove a garnishment action if the insured is not diverse from the judgment creditor.

Shifting of the Burden of Proof

Ordinarily, in a garnishment action, the judgment creditor has the burden to show that a consent judgment between the judgment creditor and the insured was made in good faith, especially when the insured consents only to the extent that the judgment will be paid by the insurers. See Steil v. Florida Physicians' Ins. Reciprocal , 448 So. 2d 589 (Fla. 2d DCA 1984). Some courts, however, shift the burden of proof to the insurer. For example, in Wheelwright Trucking, the Supreme Court of Alabama found that because the insurers were informed of the consent settlement and had an opportunity to contest the settlement before it was finalized, the burden of proof to show collusion shifted away from the judgment creditor and to the insurers. 851 So. 2d at 478-79. Thus, an insurer seeking to avoid garnishment should closely monitor any settlement discussions between the future creditor and the insured. Otherwise, a court may find the settlement, and the garnishment amount, presumptively valid.

Burdensome Discovery Issues

Insurers also need to be aware that garnishment actions can amount to full-scale litigation, which sometimes includes lengthy and costly discovery. For example, under the laws of Hawaii, a judgment creditor has a statutory right to examine a garnishee who has denied indebtedness to the judgment debtor. See Haw. Rev. Stat. ”652-1, 652-10. The discovery will be taken pursuant to the rules of civil discovery. See Employees' Ret. Sys. of the State of Haw. v. Real Estate Fin. Corp. , 793 P.2d 170, 172 (Haw. 1990). Consequently, insurers should be aware of garnishment discovery rules in the jurisdiction and factor litigation costs into the decision of whether to contest a writ of garnishment.

In addition to the fact that insurers face the possibility of full discovery in garnishment actions, they also are not immune to an order of expedited discovery. See e.g., Rolls Royce Indus. Power (India) v. M.V. Fratzis M. Stratilatis Navigation Ltd., No. 95 Civ. 2630 (csh), 1995 WL 314635 (S.D.N.Y. May 24, 1995) (granting expedited discovery against garnishee because of the substantial risk that plaintiff would not be able to locate sufficient assets to satisfy its claims). Although Rolls Royce involves the garnishment of a bank account, the same reasoning for expedited discovery can be applied to insurer garnishees.

Enforcement of Coblentz Agreements

A Coblentz agreement consists of: 1) a stipulated consent judgment for a sum certain entered into between an insured and an alleged injured third-party claimant, admitting the insured's tort liability to the claimant and settling the claim following the insurer's denial of the insured's request for a defense and indemnity; 2) a covenant by the claimant not to collect the judgment from the insured; and 3) an assignment of the insured's rights under its liability policy and, sometimes, the insured's rights to a bad faith claim to the claimant. Some courts call this type of settlement agreement a Coblentz agreement based on the decision in Coblentz v. Am. Sur. Co. of N.Y. , 416 F.2d 1059 (5th Cir. 1969). Courts in other jurisdictions refer to these agreements by other names. In some other jurisdictions, courts refer to these types of consent judgments as a Damron agreement, based on the decision in Damron v. Sledge , 460 P.2d 997 (Ariz. 1969), or a Miller-Shugart agreement, based on the decision in Miller v. Shugart , 316 N.W.2d 729 (Minn. 1982). See, e.g., Safeway Ins. Co. v. Guerrero , 106 P.3d 1020, 1022 n.1 (Ariz. 2005) (en banc), and Wangler v. Lerol , 670 N.W.2d 830, 837-38 (N.D. 2003), respectively. In other jurisdictions, courts may refer to it by different names.

Although courts use different terminology to identify this type of settlement agreement, the insured's and the claimant's goal remains the same: shift all or part of the loss from the insured to its insurer after the insurer has denied the insured's claims and has refused to defend the insured. If the court enters the consent judgment, the claimant becomes a judgment creditor and is positioned to bring a postjudgment garnishment action against the insurer. See, e.g., Gallagher v. Dupont , 918 So. 2d 342 (Fla. 5th DCA 2005) (ruling that a judgment creditor that has settled a case by entering a Coblentz agreement and that shows that the amount of the agreement was reasonable and that the agreement was not tainted by bad faith or collusion can bring a garnishment action to collect the judgment from the insurer).

An insurer's damages exposure in the cases in which a judgment creditor is attempting to enforce a Coblentz agreement potentially is high because the amount of the stipulated consent judgment may exceed the true settlement value of the case and the amount that a court or a jury may have awarded at trial.

Bad Faith Claims

The states are split with regard to whether a judgment creditor can use a garnishment action to recover extra-contractual damages arising from alleged bad faith claims handling by the insurer. Some states, such as Pennsylvania, permit it. Others, like Illinois, do not.

Under Pennsylvania law, courts have held that “bad faith claims against a tort defendant's insurer may be raised in garnishment proceedings.” Scanlin v. Utica First Ins. Co. , 426 F. Supp. 2d 243, 247 (M.D. Pa. 2006) (citing Shearer v. Reed , 428 A.2d 635 (Pa. Super. Ct. 1981)) (“ Scanlin “). For example, in Scanlin, a judgment creditor sought to enforce a Coblentz agreement in its garnishment action against the tort defendant's insurer. The court observed that the only issues to be decided in the garnishment action were whether the garnishee insurer had acted in bad faith in denying its insured a defense and in failing to indemnify the insured. Scanlin, 426 F. Supp. 2d 243, 250. The court permitted those issues to be decided in the garnishment action.

In contrast, an Illinois court of appeals affirmed a trial court's holding that, under Illinois law, “claims of bad faith against insurance companies may not be brought in garnishment proceedings.” Chandler, 731 N.E.2d at 1011. In Chandler, a judgment creditor had obtained a $1,618,530 judgment against the insured tortfeasor. Later, the judgment creditor brought a garnishment action against the tortfeasor's insurer, seeking the $300,000 policy limits plus interest for breach of contract and the remainder of the judgment, without regard to policy limits, for the insurer's alleged bad faith denial of the duty to defend. Applying Illinois law, the appellate court ruled that a bad faith claim is a claim for unliquidated damages and, therefore, cannot be the subject of a garnishment proceeding:

Claims for a liquidated amount of damages such as the Chandlers' claim for the amount up to American Fire's policy limits found to be due the Chandlers in their original suit against Doherty are properly the subject of a garnishment proceeding. Claims beyond the policy limits for an unknown amount of damages for American Fire's bad faith in failing to defend Doherty in the original personal injury suit are not.

Id . at 1010 (citing Stevenson v. Samkow , 491 N.E.2d 1318, 1320-21 (Ill. App. Ct. 1986); Powell v. Prudence Mut. Cas. Co. , 232 N.E.2d 155, 158-59 (Ill. App. Ct. 1967)).

Next month's installment will address response strategies and substantive defenses.

Donald O. Johnson, Seth F. Kirby and Kristin H. Landis are with McKenna Long & Aldridge LLP. They represent companies in the insurance industry in a wide range of complex coverage and bad faith litigation. The opinions expressed in this article are those of the authors and do not express the views of the firm or it clients. This article is intended to provide information, not legal advice.