Opinion
No. 132477
Decided October 16, 1970.
Attachment — Purpose of writ — Effect — Judgment satisfied from property seized — Collection of deficiency — Right or title of defendant must exist at time of attachment — Contract liability not changed by garnishment — Rights and lien of attaching or garnishing creditor — Negotiable promissory note — Transfer vests title in endorsee — Garnishment of debt evidenced by negotiable paper.
1. The office of a writ of attachment is to hold the property to satisfy the judgment to be obtained; it binds the property from the time of service; the property seized is in the custody of the law until discharged by a prescribed mode.
2. Judgment rendered for the plaintiff shall be satisfied out of the property seized by the attachment, and if there is not sufficient for that purpose execution may issue as in other cases to collect the residue of the judgment.
3. Garnishment does not change or convert a contract liability into another kind of liability, the sole effect being to work a contingent transfer of alleged indebtedness from the creditor to the garnishor without change in the nature of liability.
4. The transfer of a negotiable promissory note by endorsement, either before or after maturity, vests title in the endorsee.
5. As a general rule the right or title of the principal defendant in an attachment or garnishment proceeding must exist at the time of the levy or attachment or at the time of service of the writ of attachment or the garnishment process.
6. An attaching or garnishing creditor stands in the shoes of the defendant and is in no better position with regard to the attached or garnished property than the defendant.
7. The lien of an attaching or garnishing creditor attaches to the real or actual interest of the defendant; if no actual interest of the defendant is shown, the creditor gets nothing by such levy.
8. In order for a debt evidenced by negotiable paper to be subjected to garnishment, there must exist between the garnishee and the principal defendant the relation of debtor and creditor.
Messrs. Pickrel, Schaeffer Ebeling, for plaintiffs.
Messrs. Froug Froug, for defendants John Froug and Jake Froug, dba Froug and Froug.
Messrs. Coolidge, Wall, Wood Matusoff, for defendant Facility Finance Company.
Plaintiffs, Holly and Podes, having successfully prosecuted this cause in foreclosure proceedings, moved for confirmation of the sale of the land and for a determination of the validity and priority of liens.
The parties were duly notified as to the date, time and place of the hearing on the motions. Parties making an appearance and presenting evidence to such motions were the plaintiffs and one of the defendants, namely, Froug and Froug. These parties also filed extensive briefs and counterbriefs on the evidence and their respective propositions of law and authorities.
The court finds the sale of the land regular and all proceedings had thereon to be in accordance with law and the sale thereof should be confirmed.
The primary issue has to do with the distribution of the proceeds derived from the sale of the land.
The court finds from the record made that Dayton View Terrace, Inc., held the legal title to certain land in Montgomery County, Ohio, on July 20, 1966, and on that date sold and transferred the land to Dayton View Terrace Improvement Corporation. As a part of the transaction the vendee delivered to the vendor its note in the sum of $300,000.00 secured by a mortgage on the land so transferred. The vendee took the land subject to a duly recorded mortgage in favor of Facility Finance Company. The court in its judgment of foreclosure has heretofore found that the plaintiffs are the assignee of Facility Finance Company and that the mortgage lien of the Facility Finance Company recorded on December 14, 1964, is the first and best lien on the real estate, the subject matter of the foreclosure.
On December 9, 1967, the plaintiffs loaned Dayton View Terrace, Inc., the sum of $100,000.00 and as security for the same, took an assignment of the note of Dayton View Terrace Improvement Corporation and the mortgage securing the $300,000.00. This assignment was recorded by the plaintiffs on December 14, 1967.
Dayton View Terrace Improvement Corporation defaulted on its obligation and thereupon the plaintiffs as assignees of the note instituted the foreclosure action. Subsequent thereto, the plaintiffs became the assignees of Facility Finance Company.
Defendants, Froug and Froug, claim a lien by reason of an attachment and judgment in the amount of $15,000 in case number 130438 on the dockets and records of this court. This claim has been created in a suit for legal services rendered Dayton View Terrace, Inc. On August 28, 1967, the order of attachment on which Froug and Froug rely was issued and on that date it was served upon John Froug, statutory agent for Dayton View Terrace Improvement Corporation. The order commanded the sheriff to attach the money and effects, rights, credits and other property belonging to and due Dayton View Terrace, Inc., then in the hands of Dayton View Terrace Improvement Corporation.
Defendants, Froug and Froug, claim that the attachment was valid and that they are entitled to share in the proceeds of the sale of the land by reason that the writ of attachment was served prior to the recording of the assignment of the mortgage of Dayton View Improvement Corporation to Dayton View Terrace, Inc. These defendants contend further that Holly and Podes are not holders in due course of the promissory note of Dayton View Terrace Improvement Corporation and thereby it is subject to the same defenses as if it were non-negotiable.
It is true, plaintiffs are assignees and stand in the shoes of Dayton View Terrace, Inc., and unless they are bona fide holders in due course, they are subject to the same defenses as against Dayton View Terrace, Inc.
Before indulging in this latter contention, it appears that a determination of the status and rights of Froug and Froug as an attachment creditor must first be made. In making this determination the question arises as to what did Froug and Froug effectuate by their attachment proceedings in case number 130438. The document relied upon is the order of attachment which is defendant's exhibit "E" which purports to be a copy of the original in case 130438. It would appear that this order of attachment was prepared and issued pursuant to R.C. 2715.05. Obviously, this section contemplates the attachment of property, real and personal, rights and credits and effects of the defendant and the defendant in case number 130438 was Dayton View Terrace, Inc. There is no evidence in this cause number 132477 that there was any compliance by the sheriff with R.C. 2715.09. In fact, defendant's exhibit "E" does not contain the return of the sheriff on the order of attachment. Nevertheless, the court is of the opinion that it may judicially notice the details of another case pending in this court. Handler v. Department of Commerce, 42 O.O.2d 198; Rosser v. Hochwalt, 12 Ohio App.2d 129. An examination of the original order of attachment in case 130438 reveals that the return of the sheriff on the order is contained and subscribed by the sheriff on the back of the order of attachment. The return states only that the writ was served on Dayton View Terrace Improvement Corporation by handing a true copy thereof personally to John Froug, statutory agent, the president and other chief officers of said corporation not found in this county. Obviously, by this order, the sheriff did not attach anything. It would appear that Dayton View Terrace, Inc., may have had an equitable interest in the real estate involved in this litigation, however, there is no evidence that the sheriff left a copy of the order with the occupant thereof or if no occupant, that he posted the order in a conspicuous place on such property.
The court is of the opinion that in the prosecution of case number 130438 and the instant case, that Froug and Froug proceeded on the theory that they had made Dayton View Terrace Improvement Corporation a garnishee. It is, therefore, incumbent to ascertain whether compliance has been had with R. C. 2715.11. This section specifically states that the affidavit in attachment must describe the property of the defendant that the purported garnishee has in its possession. The section provides further that if the officer cannot get possession of such property, he must leave with such garnishee a copy of the order of attachment with a written notice that he appear in court and answer as provided in R. C. 2715.29. The section provides further, if the garnishee is a corporation, a copy of the order and notice shall be left with the president or other principal officer of the corporation or with its secretary, cashier or managing agent. This court may certainly conclude from the evidence and the records before it that compliance with the garnishment section of the Code was not had. No specific property was described, no notice to appear in court and answer was served, the only thing that was done was that the order of attachment was served upon the statutory agent of the garnishee. This, then, presents the question as to whether or not there has been substantial compliance with R. C. Chapter 2715 in order to give effect to R. C. 2715.19, and thereby conclude that there has been a valid attachment.
R. C. 2715.18 provides that the officer shall return upon every order of attachment what he has done under it. It provides further that when garnishees are served, their names and the time each was served must be stated. There is some authority that garnishment proceedings are vitiated unless they show due service upon the garnishee. Bristol v. Brent, 36 Utah 108; 103 P. 1076. The order of attachment required the officer to attach property of Dayton View Terrace, Inc., in the hands of Dayton View Terrace Improvement Corporation. By the return of the officer, he left a copy of the order with the statutory agent of the foreign corporation. If the attachment order itself as issued is a valid, lawful order, it would appear that the fact of service as was had in the particular case under consideration would invoke the provisions of R. C. 2715.19 heretofore referred to. Even though strict compliance with R. C. 2715.11 was not had, that is, absence of a written notice that the garnishee appear in court and answer, this court would be of the opinion that the better practice would be to adhere and conform to the provisions of the applicable sections of the attachment code. We must be ever mindful that this is substantive law and it should be administered in accordance with the provisions creating it.
Obviously service of garnishment process upon a corporation in the manner prescribed by law charges it with full knowledge thereof. As a general proposition, a writ of garnishment is served upon a foreign corporation by service thereof upon its officer or agent in the state. R. C. 2715.19 provides in part: "A garnishee shall be liable to the plaintiff in attachment for all property of the defendant in his hands, and money and credits due from him to the defendant, from the time he is served with the written notice mentioned in R. C. 2715.11." R. C. 2715.11 provides in part: "If the officer cannot get possession of such property (as described), he must leave with such garnishees a copy of the order of attachment, with a written notice that he appear in court and answer," further "If the garnishee is a corporation a copy of the order and notice shall be left with the president or other principal officer of the corporation or with its secretary, cashier or managing agent." The garnishment section of the attachment code makes no provision for garnishment process to be served upon the statutory agent. R. C. 1703.041, Divison A, provides in part: "Every foreign corporation for profit which is licensed to transact business in this state * * * shall have and maintain an agent (sometimes referred to as the "designated agent") upon whom process upon such corporation may be served within this state." Further, Division H of this section provides that process may be served upon a foreign corporation by delivering a copy thereof to its designated agent. It would appear, then, that regardless of R. C. 2711.11, a writ of garnishment may be made upon the "statutory agent" of a foreign corporation although there is authority to the contrary. National Bank v. Furtick, 2 Marv. (Del.) 35; 42 A. 479.
Garnishment has been considered as an assignment of property or credits of the defendant, and has also been regarded in effect as an action by the defendant in the plaintiff's name against the garnishee, the purpose and the result of which are to subrogate the plaintiff to the right of the defendant against the garnishee. Lewis v. Barnett, 139 Kan. 821; 33 P.2d 331; 93 A.L.R. 1082. The proceeding reaches out for the tangible property of the defendant to be levied on directly by the officer or obtained by garnishee process served on one who may have property of defendant in his possession which the officer cannot get at or may be owing the defendant. Buckeye Pipeline Co. v. Fee, 62 Ohio St. 543.
The Ohio courts have characterized the attachment lien under Ohio law as an "execution in advance." Rempe and Son v. Ravens, 68 Ohio St. 113; Green v. Coit, 81 Ohio St. 280; Shorten v. Drake, 38 Ohio St. 76. The Ohio courts treat an attachment lien as perfected at the time the attachment is made. U.S. v. Acri, 109 F. Supp. 943. It is also said in Liebman v. Ashbacker, 36 Ohio St. 94, that a writ of attachment is in the nature of an execution, being against the property of the debtor. Its office is to hold the property to satisfy the judgment to be obtained. It binds the property from the time of service. The property seized is in the custody of the law until discharged by one of the modes prescribed. If judgment is rendered for the plaintiff, it shall be satisfied out of the property seized and if there is not sufficient for that purpose, execution may issue as in other cases to collect the residue of the judgments. See, also, Horn v. Lamblin, 106 Ohio App. 215.
In the case before the court there was no seizure of any tangible property. The most that can be said of the garnishment process in this case is that it was a levy upon any payments of funds from Dayton View Terrace Improvement Corporation to Dayton View Terrace, Inc., on the obligation of the $300,000 note. There is some evidence that Dayton View Terrace Improvement Corporation did make some payments after such levy to one Irving Kantor, a previous assignee of the $300,000 note and mortgage. Regardless of this fact, it has no bearing upon the rights of Holly and Podes in the instant case. This is a matter between the attaching creditor, Froug and Froug, and the garnishee, Dayton View Terrace Improvement Corporation.
A contract liability is not changed or converted by garnishment into another kind of liability; the sole effect of the garnishment is to work a contingent transfer of the alleged indebtedness from the creditor to the garnishor, without any change in the nature of the liability. Clyne v. Easton, E and Co., 148 Cal. 287; 83 P. 36. The only claim of Froug and Froug is to payments from Dayton View Terrace Improvement Corporation on the note. Dayton View Terrace, Inc., assigned the $300,000 note and mortgage to Holly and Podes after the levy of the garnishment. The $300,000 note certainly was transferred to Holly and Podes for value and this was a negotiation as proscribed by R. C. 1303.23 (U. C. C. 3-202) and thereby Holly and Podes became a holder. The fact that a note is overdue does not destroy its negotiability. The note was negotiable and it was endorsed to Holly and Podes. See Knisely v. Evans, 34 Ohio St. 158. Thus, where a negotiable promissory note is transferred by endorsement either before or after maturity, the legal title is thereby vested in the endorsee.
On August 28, 1967, at the time the garnishment process was served upon Dayton View Terrace Improvement Corporation, the legal title to the $300,000 note and the mortgage securing the same was in one Irving Kantor by virtue of an assignment from Dayton View Terrace, Inc., therefore, it would appear that at the time of the alleged perfection of the garnishment process, the defendant in the attachment proceeding had no ownership in and to the note and mortgage in question. By reassignment, Dayton View Terrace, Inc., again became the owner of the note and mortgage on November 22, 1967, and recorded same on December 14, 1967.
The security for the obligation of the $300,000 note was the mortgage from Dayton View Terrace Improvement Corporation to Dayton View Terrace, Inc., dated July 20, 1966 and properly recorded on July 21, 1966, in mortgage records, volume 2422, page 581, Recorder's Office, Montgomery County, Ohio, which mortgage is against the real estate, the subject of the foreclosure action herein. This mortgage was a lien upon the real property of Dayton View Terrace, Inc., and was a matter of record and notice to the world long before Froug and Froug initiated their suit in attachment and the garnishment proceedings therewith. The land in question was never attached by Froug and Froug. Now that the real estate has been sold to satisfy the mortgage indebtedness against it, can Froug and Froug claim a lien, by virtue of the very questionable garnishment proceedings, prior to and paramount to the lien of the mortgage now held by Holly and Podes, assignees of Dayton View Terrace, Inc. This court is of the opinion that they may not so claim. The evidence is clear that Holly and Podes acted in good faith and relied upon the records in Montgomery County, Ohio, as affecting the real estate in this county. It would seem to this court incredible and a travesty upon justice to permit a garnishment levy upon no specific, tangible or intangible property and where there was no notice to the garnishee to appear and answer and no order upon the garnishee at the time of the service of the order of attachment to hold all monies due and owing the defendant in the attachment and garnishment action to have any priority whatsoever as an attachment lien upon the real estate in question. Further, this court is of the opinion that such garnishment proceedings as are before this court have not ripened into a lien against the real estate foreclosed, thereby enabling Froug and Froug to share in the proceeds of the foreclosure on a priority basis.
It is clear that at the time Froug and Froug instituted the attachment action against Dayton View Terrace, Inc., and the garnishment proceedings against Dayton View Terrace Improvement Corporation that Dayton View Terrace, Inc., had no rights or credits then in the hands of Dayton View Terrace Improvement Corporation. At least there is nothing in the record before this court to so indicate. It is equally clear that the rights and credits with respect to the $300,000 note and mortgage securing the same were owned by Irving Kantor as assignee of Dayton View Terrace, Inc., at the time of the execution and service of the garnishment.
As a general rule, the right or title of the principal defendant in the attachment or garnishment proceedings must exist at the time of the levy of the attachment or at the time of the service of the writ of attachment or the garnishment process. 59 A.L.R. 766. Furthermore, it is also generally held that an attachment covers only the interest of the defendant in the property levied on existing at the time of the levy and that it does not extend to property previously transferred or to an interest in property subsequently acquired by the defendant. 128 A.L.R. 1389. Similarly, it is generally held that a garnishment reaches only the property or credits of the principal debtor in possession of or owing by the garnishee at the time of the service of garnishment and that it does not bind property or credits which have been previously transferred or assigned to another nor reach property or debts subsequently acquired or owed by the garnishee. Malone v. Moore, 204 Iowa 625, 215 N.W. 625; Gibson v. Arkansas Southern Production Co., 230 Ark. 115, 320 S.W.2d 932; Everson v. Atlas Tie Co., 73 Id. 91, 245 P.2d 773, 56 A.L.R. 94, 126 A.L.R. 771, 60 A.L.R. 881.
The Ohio Supreme Court has held that no judgment can be rendered against a garnishee indebted upon a negotiable note to whomsoever holds it, when, before it matured, and before service was made upon the garnishee, the note had been endorsed and transferred for value to an innocent third person by the defendant. Secor v. Witter, 39 Ohio St. 218. There is also some authority that the maker of a negotiable note which has matured cannot be charged as a garnishee of the payee unless it is affirmatively shown to have belonged to such payee when the writ was served. Edney v. Willis, 23 Neb. 56, 36 N.W. 300; Bassett v. Garthwaite, 22 Tex. 230. It is also to be noted that generally where the principal defendant has, previously to the garnishment, assigned his claim against the garnishee so that the garnishee is liable to the assignee of the defendant, defeats garnishment proceedings. Fenton v. Edwards, 126 Cal. 43, 58 P. 320; Russell v. Pohl Co., 7 N. J. 32, 80 A.2d 191.
The attaching or garnishing creditor does not stand in the position of a bona fide purchaser for value but is in the position of a purchaser with notice. The attaching or garnishing creditor stands in the shoes of the defendant and is in no better position with regard to the attached or garnished property or debt than the defendant. The lien, if any, attaches to the real or actual and not the apparent interest of the defendant. If no actual interest of the defendant is shown, the attaching creditor gets nothing by his levy. Converse v. Hawse, 326 Pa. 1, 190 A. 899; Henry v. General Forming Ltd., 33 Cal.2d 233, 200 P.2d 785; Southwestern Bell Telephone Co. v. Crown Ins. Co., 416 S.W.2d 705; B-Line Transport Co. v. Poitevin, 59 Wn.2d 581, 369 P.2d 310.
The court concludes that for a debt evidenced by negotiable paper to be subjected to garnishment, there must exist between the garnishee and the principal defendant the relation of debtor and creditor. In the instant case, at the time the alleged garnishment process was served, there was nothing owing by the garnishee, Dayton View Terrace Improvement Corporation, to the defendant in attachment, Dayton View Terrace, Inc.
It may be contended that inasmuch as Dayton View Terrace, Inc., again acquired ownership of the $300,000 mortgage when it was reassigned to it on November 22, 1967, that the alleged garnishment lien then attached. The fallacy of this argument is that Froug and Froug had not reduced their claim on which the garnishment was based to judgment and had not further prusued the garnishee. Further, after the reassignment of November 22, 1967, Dayton View Terrace, Inc., assigned the $300,000 mortgage to the plaintiffs on December 9, 1967, recording the same on December 14, 1967. The only right, if any, that Froug and Froug ever had was the right to receive after judgment any payments still due from the garnishee, the Dayton View Terrace Improvement Corporation, to Dayton View Terrace, Inc., the defendant in the garnishment proceedings. There has been no showing that any money was ever due or owed to Dayton View Terrace, Inc., from the time of the inception of the alleged garnishment process.
It therefore follows that Froug and Froug are merely general creditors of Dayton View Terrace, Inc., by virtue of their judgment in the sum of $15,000 in case number 130438.
By reason of the findings of fact and conclusions of law aforesaid, it is not necessary to consider the alleged issues as to holders in due course of the note sued upon, notice of infirmity thereof, notice of prior attachment claim and partial assignment.
Wherefore, distribution of the proceeds on foreclosure should be as follows and in the order stated:
1. Payment of taxes due the Treasurer of Montgomery County, Ohio.
2. Payment of costs herein.
3. Payment to plaintiffs the amount of the judgment as assignees of the first mortgage of Facility Finance Company.
4. Payment to plaintiffs as assignees of the note and mortgage sued upon, to wit, that of the Dayton View Terrace Improvement Corporation.
5. Payment, if any funds remain, to Chase Manhattan Bank as assignee of the third mortgage by virtue of an assignment from Francis Brown and Brown Engineering.
Counsel for the plaintiffs shall draft the appropriate judgment for approval and journalization.
This decision was served by the court upon all counsel, by ordinary mail on October 16, 1970.