Creditor could garnish accounts to collect on contempt order

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A plaintiff was entitled to collect on a contempt award against a national business franchise by garnishing two bank accounts in the franchise’s name because the current owner of the franchise failed to establish that it had actually loaned money to the franchise and thereby acquired a valid, superior interest in the accounts.

Background

David Schwartz is the founder of two companies: Rent-a-Wreck of America Inc., a national business that rents used automobiles; and Bundy American LLC, a company that brokers Rent-a-Wreck franchises. J.J.F. Management Services Inc.’s predecessor-in-interest purchased all outstanding Rent-a-Wreck stock in 2006.

After J.J.F.’s takeover, we affirmed a jury verdict holding that Schwartz has an implied franchise agreement to continue operating a Rent-a-Wreck franchise in the greater Los Angeles area. The district court ordered that Rent-a-Wreck’s call center not dissuade potential customers from transacting with Schwartz’s Rent-a-Wreck franchise location or otherwise divert business away from Schwartz’s franchise territory. On June 29, 2017, the district court found Rent-a-Wreck in contempt for violating this order and directed that Rent-a-Wreck pay Schwartz $83,620.80.

Less than a month later, Rent-a-Wreck and Bundy filed a voluntary bankruptcy petition in the Delaware Bankruptcy Court, which placed an automatic stay on Schwartz’s attempts to collect on the contempt award. The bankruptcy court later dismissed the petition for lack of good faith, and Schwartz resumed his collection attempts.

On April 17, 2018, Schwartz filed a motion for writs of garnishment against two deposit accounts in Rent-a-Wreck’s name. On May 2, 2018, J.J.F. filed a motion to intervene in the garnishment proceedings, claiming it had a superior interest in the deposit accounts based on two loans it had purportedly made to Rent-a-Wreck and Bundy that had named the two accounts as collateral.

The district court denied J.J.F.’s motion to intervene and instead treated J.J.F.’s claims as a motion by a third party pursuant to Rule 2-643(e). The court then held that J.J.F. had failed to demonstrate its bona fide entitlement to the garnished property and denied its claims on the merits. This appeal followed.

Analysis

The district court did not clearly err in concluding that J.J.F. failed to demonstrate a valid claim to the garnished accounts based on a 2006 loan made to Rent-a-Wreck as the documents produced by J.J.F. did not conclusively establish that the money was ever actually transferred Rent-a-Wreck or Bundy. The lack of any attempts to collect on the purported loan until Schwartz came calling is further evidence that J.J.F.’s claims are not bona fide.

The district court also did not clearly err by concluding that J.J.F. lacked a valid claim to the garnished accounts with respect to the debtor-in-possession financing agreement authorized by the bankruptcy court in its Aug. 30, 2017 order.

Notably, the district court’s conclusion that J.J.F. had not produced evidence that money ever changed hands between J.J.F. and Rent-a-Wreck applies equally to this financing. In addition, consistent with the bankruptcy court’s finding, the district court concluded that the bankruptcy proceedings were nothing more than a thinly-veiled effort to impede Schwartz from collecting on the contempt award. Under these circumstances, it was not clear error for the court to conclude that the financing arising out of such proceedings did not provide J.J.F. with a valid claim to the garnished accounts.

The insider relationship between Rent-a-Wreck and J.J.F. further calls into question the validity of J.J.F’s claims. Rent-a-Wreck was wholly owned by J.J.F. when the debtor-in-possession financing was negotiated and remains wholly owned by J.J.F. today. In addition, J.J.F. is controlled by the director and chairman of Rent-a-Wreck’s board of directors. On these facts, it is difficult to view J.J.F’s Rule 2-643 motion as anything but another shameless attempt to avoid paying the contempt award.

Finally, the bankruptcy court’s Aug. 30, 2017 order authorizing the debtor-in-possession financing did not preclude Schwartz’s claims. The purpose of the Aug. 30, 2017 order was to provide for Rent-a-Wreck’s and Bundy’s financing needs during bankruptcy. In contrast, the present action relates to J.J.F.’s priority over the funds in the previously garnished accounts. The two proceedings therefore do not concern the same core of operative facts.

Moreover, the bankruptcy never actually decided the merits of J.J.F.’s claim to an interest in the deposit accounts. Indeed, the order was based on the stipulations of Rent-a-Wreck and Bundy and was expressly made without prejudice to the rights of parties in interest. As a party in interest, Schwartz retained the right to challenge the validity of J.J.F.’s claims.

Affirmed.

Schwartz v. J.J.F. Management Services Inc., Case No. 18-2160, April 29, 2019. 4th Cir. (Duncan), Appeal from USDC for the District of Maryland (Messitte). Michael Lichtenstein for Appellant; Roger Charles Simmons for Appellees. VLW 019-2-136. 18 pp.