Garnishment: where business law & family law intersect

This post captures the final lessons learne from the recently released Kentucky Court of Appeals case of Mickler v. Mickler, 2006-CA-001313-MR (Jan. 25, 2008)(to be published). Many other lessons related to family law exist in the underlying facts and procedure and can be found at this post at Lexington Family Law blog. Suffice it to say that a doctor, Andrew, with his own practice went through a bitterly fought divorce over some pretty respectable assets. Terry, his wife, came out with an overall award of well over a million dollars. Andrew was not happy about this so he appealed and tried various tactics, including bankruptcy, to avoid paying. Terry, unwilling to walk away from a million plus, filed garnishments on various insurance carriers thought to owe money to Andrew’s practice.

Andrew argued that Terry could not garnish the entirety of those payments because they qualified as earnings under KRS 427.010 and so only 25% of the paymenbts could be taken. The Court kindly pointed out that his argument more precisely came under KRS 427.005 defining earnings a compensation paid for personal services. Andrew stated that all payments from the insurers were for his personal services as a physician.

The Court of Appeals agreed here with the trial court finding that “that these funds are due to Dr. Mickler’s medical practice and contain not only fees for the professional service delivered by Dr. Mickler but also fees for other services delivered by the staff and employees in Dr. Mickler’s medical practice.” Id. at 5. The Court of Appeals adopted the analysis of a Bankruptcy Court in Idaho because there was no case law on point in Kentucky. The Idaho Bankruptcy court looked at that state’s identical statute and determined that whether such payments are earnings is a fact specific analysis of what parts of such payments are for the personal services of the individual physician. Here, Andrew failed to put forth evidence to the trial court as to what parts of those payments were to compensate him solely for his services and what was attributable to services of other staff or service in his medical practice. For the lack of this evidence, Andrew’s appeal failed.

There is a two-fold less here for small business owners. First, it is wise to recognize that the personal tragedy of divorce can very much impact your business regardless of whether you have an LLC, LLP, S-Corp or other organizational structure. The second lesson is that good record keeping can save you in the event of such litigation. Of course, you have to use the records you have. Here, Andrew’s attorney took and all or nothing approach rather than putting forth evidence of where exactly those insurance payments would be going. Perhaps the records were not available. Either way, the point is the same, keep good records and use them in litigation.

Arbitration provisions: if you have to sneak it in, it probably is not enforceable

Arbitration provisions are found everywhere these days. Retailers and service providers are quite smitten with arbitration because they anticipate it will reduce litigation costs considerably. This overriding desire to arbitrate can lead to creative measures to secure a contract provision requiring arbitration. However, it is more important that any such provision is actually binding.

The recent Court of Appeals case, Paul Miller Ford, Inc. v. Rutherford, 2007-CA-000293-MR (Dec. 28, 2007)(NOTto be published) gives a great example of an unenforceable arbitration agreement. The actual language was not the problem:

ARBITRATION: Any claim or dispute arising out of or in any way relating to this contract, the negotiations, financing, sale or lease of the vehicle which is the subject of this contract, including any claim involving fraud or misrepresentation, must be resolved by binding arbitration administered by the Better Business Bureau of Central and Eastern Kentucky, Inc. in accordance with its rules. All arbitration proceedings shall be held in Lexington, Kentucky. The decision of the arbitrator(s) will be final, conclusive and binding on the parties to the arbitration and no party shall institute any suit with regard to the claim or dispute except to enforce the arbitration decision. Venue for any action to
enforce this arbitration agreement, or an arbitration decision shall be in Fayette County, Lexington, Kentucky.

The problem was that this was a paragraph near the bottom of a page that was styled as a questionnaire. Furthermore, there was no place for initials or a signature with this paragraph while other twelve paragraphs on the page did require initials.

The Court, in making a fact specific determination if this arbitration provision was unconscionable, found that the nature of the document containing the provision was “masuerading as [a] performance evaluation. . . .” Id. at 8. Basically, Rutherford did not voluntarily and knowingly agree to arbitration.

I have no idea why Paul Miller Ford decided it wise to try and slip an arbitration clause in on the customer. Perhaps an attorney advised them to do it this way. Paul Miller should ask for their money back if that is the case. Regardless, not only did this approach prevent the clause from being enforceable, it also engendered mistrust of their business practice in this area. A wiser, and more cost effective approach would be to offer straight up information about arbitration. Explain arbitration fully to the client and have them sign a clear statement agreeing to arbitration.

A business could make enforcement of the provision even more likely to be binding by offering additional consideration for signing the provision - such as an extra $100.00 off the price or a free oil change. This would be a cost saver since the business would garner the savings of arbitration with a highly enforceable provision.