Construction Case Garnishments

The United States District Court in Alexandria has reviewed a matter important to many supplier and contractor creditors: the garnishment of funds due their debtors from another party.  The case was U.S. v. Harkins Builders Inc.  In Harkins a material supplier was pursuing a garnishment proceeding against a builder who owed money to the judgment debtor, a drywall subcontractor.  The Court ruled that the supplier was not bound by a mandatory arbitration clause in a separate contract between the builder and the drywall sub.

In Harkins a materials company supplied drywall materials to drywall subcontractors.  When the drywall subs failed to pay for the materials, the supplier obtained a federal court judgment for $278,520.  The supplier then initiated a garnishment proceeding against a builder to attach monies owed by the builder to the drywall sub under a contract between them.  As garnishee, the sub confessed assets but argued that the amount it owed to the drywall sub should be reduced by setoffs totaling $50,853 allegedly owed by the sub to the builder under their contract.  The garnishee also argued that any dispute about these setoffs must be resolved through arbitration, as provided in the contract between the drywall sub and the builder.

The Court rejected the contention that the resolution of the amount of money owed by the builder to the drywall sub and subjected to garnishment must be accomplished through arbitration.  As a judgment creditor of the drywall sub, the supplier was not a party to the contract between the sub and the builder, and its interest was limited to the drywall sub's property interest in the builder's hands.  The parties to the drywall builder contract agreed to arbitration as an efficient procedural mechanism for resolving contractual disputes, including disputes over amounts owed.  The agreement to arbitrate, however, does not add or subtract value in the calculus for determining the value of the contract right.  The Court ruled that since the judgment creditor was afforded court procedures for determining the value, the fact that the property before the court was created by a contract containing an arbitration clause did not require a non-party to the contract to follow the contract's procedural mechanisms for dispute resolution.  Accordingly, the federal courts assumed jurisdiction to make the decision.