Aside from the technical and traditional objections to allowing a proceeding in equity where garnishment at law is appropriate, Missouri’s equitable garnishment statute imposes a number of burdens upon insurers and insureds alike. As discussed in our prior posts on this topic, the current state of practice with respect to Missouri’s equitable garnishment statute is inconsistent with both the legislative intent and the early history of opinions construing the statute, and today we will explore some of the unnecessary harm that results from more recent jurisprudence.
There Is No Right to Recover Attorneys’ Fees for Wrongful Equitable Garnishment
A garnishee is entitled to recover costs and attorneys’ fees associated with an unsuccessful garnishment at law. Mo. Rev. Stat. § 525.240; Rule 90.18. An equitable garnishment action, however, does not provide for the payment of attorneys’ fees to the prevailing garnishee. Johnston v. Sweany, 68 S.W.3d 398, 404 (Mo. banc 2002). Because an equitable garnishment does not provide for the recovery of attorneys’ fees to the wrongfully-garnished insurer, plaintiffs prefer this method for reaching insurance policy proceeds, particularly in cases of doubtful coverage. Indeed, the Johnston v. Sweany court notes that the avoidance of legal fees for wrongful garnishment is an “advantage” to the equitable proceeding.
It is difficult to read Johnston v. Sweany as accomplishing any purpose other than to treat insurers differently from all other contracting parties, and to expose them to non-compensable expenses, including attorneys’ fees, alone of all garnishees. The legislative history of § 379.200 does not express this policy, and there is no evidence that the current practice is what the Missouri legislature intended when it enacted § 379.200.
Joinder of the Insured Burdens the Insured and Tends to Thwart Federal Removal
Section 379.200 also allows the joinder of the insured. There is no apparent reason for this in an action to recover the proceeds of a legally enforceable policy, because the equitable garnishment statute only allows the judgment creditor to collect from the insurer those sums that are due under the policy, and provides for no other form of recovery against the insured. Mazdra v. Selective Ins. Co., 398 S.W.2d 841, 845-46 (Mo. 1966). The insured’s rights cannot be affected by an equitable garnishment action.
As discussed in our first post on this topic, joinder of the insured in an equitable garnishment may have been sensible in the early days of the 20th century, when an insured and insurer could conspire to cancel an auto liability policy, or “settle” disputed questions of coverage under the policy, thereby rendering the policy unenforceable at law after the accident. The insured may have engaged in wrongful conduct that should be considered by the court in equity. Because Section 379.195 now fixes an insurer’s liability at the time of the accident, however, the conduct of the insured subsequent to the accident is irrelevant. Requiring the insured to “defend” a garnishment action simply exposes the insured to unreimbursed legal expenses.
The presence of the insured in the equitable garnishment action also frustrates removal to federal court. The Eighth Circuit has held that garnishments at law are removable. Randolph v. Employers Mutual Liability Ins. Co. of Wisconsin, 260 F.2d 461, 464-65 (8th Cir. 1958) (as a matter of federal law, garnishment is a separate proceeding for removal purposes); Hayes v. Pharmacists Mut. Ins. Co., 276 F. Supp. 2d 985, 987 (W.D. Mo. 2003). Despite arguments that the insured (from whom no relief can be obtained in the equitable garnishment proceeding) is, at best, a nominal party, or should be realigned with the judgment creditor, the federal courts have proven hostile to attempts to remove equitable garnishment actions where the insured shares citizenship with the judgment creditor (which is usually the case). See, e.g., Prendergast v. Alliance General Ins. Co., 921 F. Supp. 653, 655 (E.D. Mo. 1996). There is no practical reason why a garnishment at law should be removable to the federal court and an equitable garnishment should not, given that exactly the same relief is afforded under either cause of action (namely, payment of the insurance policy proceeds).
Joinder of the Insured Encourages the Filing of Bad Faith Claims
The equitable garnishment action also may become a vehicle for the insured’s assertion of a bad faith refusal to settle cross-claim against the insurer. In addition to inviting the filing of such a claim by the insured, the equitable garnishment proceeding allows the judgment creditor’s attorney to drive the litigation of the bad faith claim.
The judgment creditor and his or her attorney, both of whom may well be material fact witnesses with respect to the insured’s bad faith claim, are active participants in discovery. This presents a significant potential for prejudice to the insurer, in that there is no ordinary provision for “sequestering” counsel or parties in a case with multiple claims such that these potential witnesses do not have access to other witnesses’ testimony. The judgment creditor’s attorney is a witness with personal knowledge of the facts underlying the bad faith cross-claim, and should be expected to be deposed and testify with respect to the cross-claim. While we have had success severing bad faith claims from equitable garnishment claims for these reasons, this is an additional expense that the insurer bears solely by virtue of this proceeding in equity rather than at law.
Discovery in an Equitable Garnishment Proceeding is Considerably Broader
Equitable garnishment actions are not subject to the same limited discovery imposed on garnishments at law. Many Missouri circuit courts have established mandatory standard interrogatories for garnishments at law. Moreover, with exposure to payment of attorneys’ fees for wrongful garnishment, judgment creditors pursuing garnishment at law tend to be more circumspect in their discovery requests.
There is no such limitation on discovery in an equitable garnishment proceeding. Insurers face, in many cases, years of seemingly endless discovery regarding everything from the insurer’s claims-handling practices to the wording of every automobile policy in every state in the nation. Missouri’s liberal discovery rules permit a party discovery not only with respect to the claims or defenses of the party seeking discovery, but also into “the claim or defense of any other party.” Rule 56.01(b)(1). Particularly where joined with a bad faith claim, the judgment creditor may drive expansive discovery into matters with no bearing upon his or her equitable garnishment action, including discovery into the insurer’s claims file, its investigation of the accident, and its relationship with its insureds. The insurer is prejudiced by being required to disclose its confidential, proprietary, and trade secret business information to a party with no need to discover such information.
As practitioners can attest, unrestrained discovery often comprises the bulk of a party’s expenditures in litigation. Where an insurance policy is typically construed as a matter of law by the court, the protracted discovery permitted in equitable garnishment actions is especially pernicious.
Hope for Reversing Course on Equitable Garnishment
The current state of jurisprudence on equitable garnishment is inconsistent with the legislative history of the statute and with early, and still relevant, precedent construing the purposes and limits of the remedy. In our next post, we will examine strategies for the insurer to reverse this course.