Stock Certificate Garnishments
I am not a lawyer, I am a debt and judgment expert (Judgment and Collection Agency Broker)
. This article is my opinion, from my experience in California, and laws vary in each state. If you want legal advice or a strategy to use, please contact a lawyer. Usually, judgments are not easy to recover. The most popular and cost-effective methods to enforce judgments are employment (wage) or bank levies/garnishments.
Many debtors have assets, but some place their assets in brokerage accounts. Most of the time, bonds, stocks, commodities, and similar assets; are not reachable with a common levy.
Brokerage account companies include Merrill Lynch, Ameritrade, Ameriprise, Scottrade, Etrade, and Charles Schwab. Like banks, some accept a levy at any branch or office, others require levies to be served at the office the account was opened at. Some insist you to domesticate a judgment to a state where they conduct business, others do business in every state, etc.
How does one figure out if your judgment debtor has assets at a brokerage account? 3 ways to find this type of information are:
1) Tips from an ex-spouse, ex-partner, or ex-friend of the debtor.
2) Hire an asset search firm, or a private investigator. This is not cheap.
3) Conduct a court-based judgment debtor exam (OEX) with subpoenas issued for the production of tax, financial, or business records of the debtor, their bank, spouse, and/or business associates. If you find tips to debtor assets at a brokerage firm, then subpoena them for any records pertaining to the judgment debtor. Plan on reimbursing brokerages and banks for their costs in complying with your document requests.
In most situations and states, you can't usually garnish retirement or other protected accounts, or distributions from them; even when they have a judgment for fraud, which makes very little sense to most people.
What happens after a levy is served on a brokerage, as a third party possessing the debtor's assets, is usually very different from a regular bank levy. When a bank is garnished, the judgment debtor's assets are cash, a very fungible asset; that is held, then turned over to the sheriff. Then, after a waiting period, the sheriff passes the money onto the creditor.
At a brokerage, after the garnishment is served, they freeze the judgment debtor's account, at least as much as is required to satisfy the levy. However, if the judgment debtor's assets are not in cash, the brokerage does not send any funds to the sheriff automatically. Instead, they wait for a creditor-initiated court order, specifying the brokerage to liquidate the debtor's stocks and other assets.
When a levy is served, the brokerage confirms the assets that are in the debtor's name, such as stocks. Then, they wait for a court order, instructing them to sell stocks and other assets. Once the court order is received, the debtor's assets are sold for cash, and the cash is sent to the sheriff.
As brokerage companies are not banks, they are not regulated by Departments of Financial Institutions. Brokerages are regulated primarily by the Office of the Comptroller of the Currency ("OCC"), located in Houston, Texas at http://www.occ.treas.gov.
In certain circumstances, long-arm laws may be used to levy accounts far away from the creditor or the court where the judgment was entered.
Long-arm statues permit local courts have jurisdiction over a non-local entity or person (who is for example, a debtor). The typical test is, whether the judgment debtor or 3rd party (for example, a brokerage or bank) holding the judgment debtor's assets, did or does business local to the creditor or court.
The debtor's stock is usually held in "street name", for example "Charles Schwab & Co., Inc., for the benefit of Joe Debtor".
Uniform Commercial Codes, section 8-317, defines creditor's possible rights to judgment debtor's assets in brokerages. Especially if the judgment is large, it is a good idea to hire an attorney, especially if you have not attempted to levy on a brokerage account before.
What if the brokerage is served and named as the garnishee and ignores, and will not answer your sheriff's levy? I know judgment recovery specialists, that in this situation, sued the brokerage for the amount they should have held and released to the sheriff, pending a court order.
The brokerage, after being served notice of the creditor's lawsuit, didn't show up in court, or file an answer, so a default judgment was obtained against the brokerage.
The judgment enforcer waited for the default judgment to become final. Then, they sent the brokerage a demand letter, telling them that they may either pay, or the judgment would be domesticated to their state, and the sheriff would seize their assets. The brokerage paid, however there is no guarantee this would work in your situation.
An alternative to garnishing the brokerage where the debtor has an account, is to get a turnover order for all shares of stock owned at a brokerage, as of the date of the turnover order. One problem is that many judgment debtors will move their assets, as soon as they are served a copy of the court-approved turnover order, violating the court's order.
Prior to, or at the same time the turnover order is served, one could serve a court-approved temporary restraining order (TRO), preventing the debtor from doing anything, except for withdrawing funds and sending them to the sheriff.
Then, if the debtor does not obey the court order, you can request an order to show cause "re: contempt". If your judgment debtor violates the turnover order or the restraining order, what happens next depends on what state you are in, and which judge you get.
Way too often, contempt of civil court orders have very little ramifications for the contemptee. Once again, especially if the assets or judgment are large, it's a good idea to retain a lawyer.
by: Mark Shapiro
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