Beware the “Choice of Law” Provision

Do you realize that many of the contracts, equipment leases and loan documents that you have signed would require a Michigan judge to use other States’ laws in deciding lawsuits rather than Michigan’s?

This is because many contracts contain a “choice of law” or “governing law” provision, by which the parties choose to apply the law of one particular state to govern their contract.  A choice of law provision may affect the outcome of a lawsuit if the law of the chosen state differs from Michigan law on a key issue.

When reviewing a proposed contract before signing it, it is essential to read and understand the entire contract.  This is not just the price or the interest rate.  It also includes the general provisions at the end or on the back of the page—otherwise known as the “fine print” or “boilerplate”.

Many companies do business in multiple states.  For them, it is important to have certainty about what their contracts mean.  As a result, their standard contracts will contain a choice of law provision.  In addition, they may choose the law of a state that is most favorable to them — such as the law of a state that allows lenders to charge higher interest rates without violating usury laws.

If the law of Michigan doesn’t differ from the law of the chosen state on any important issue for the contract, then the choice of law provision is moot.  If, however, there is an important difference, then the party being asked to accept the choice of law provision has three options:  (1) Negotiate to change the contract; (2) Refuse to sign the contract containing the choice of law provision; or (3) Sign the contract knowing that it contains that provision and its implications.  If you are dealing with a much bigger company, they may not be willing to alter their standard contract.  You need to go into the transaction with a full understanding of its terms, so you are not surprised when a dispute arises.

The Michigan courts will normally enforce a choice of law provision, with two major exceptions:

1. The chosen state must have some relationship to the transaction, such as one of the states being based there, or part of the transaction being performed there.  A choice of law provision may not be enforced if two Michigan companies, with a transaction to be performed in Michigan, try to choose the law of some other state for the purpose of avoiding the application of a Michigan law.
2. A Michigan court may also refuse to enforce a choice of law provision if that would violate Michigan public policy.  In other words, if the result would be contrary to an important Michigan law, and Michigan has a greater interest in the outcome than the state whose law was chosen by the parties, the Court may disregard the choice of law provision.  This does not occur very often, particularly where there is no irregularity in the making of the contract containing the choice of law provision.

Many contracts also contain a “choice of venue”  provision, by which the parties agree to litigate their disputes in the courts of a particular state.  Choice of venue provisions will be discussed in a future article.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm. Click here to view his professional resume.

Garnishments – What you need to know as a business owner…

As a business owner, there is a strong possibility that you have received, or will receive a Writ of Garnishment at some time.    It could entail garnishing an employee’s paycheck, or turning over property that you hold for a third party, or owe to a third party.    Because a garnishment is an official court document, it is critical that you complete the paperwork and comply with the dictates of the writ immediately.   If you do not timely respond to the garnishment, you could become liable for the entire debt owed by someone else.  This article discusses the different types of garnishments and what is required of you to be in full compliance.

What is a Garnishment?

Garnishment is a court procedure through which a debtor’s money or property that is in the hands of a third party (the garnishee), may be subjected to the payment of the creditor’s claim.    Typically judgment creditors garnish wages, bank accounts and accounts payable.     Simply put, when a creditor gets a money judgment against a defendant, and the defendant does not have the money to immediately satisfy the judgment, the creditor can apply to the court to have the defendant’s wages garnished.   This means as an employer of the defendant you would be under order to remit a specified portion of the defendant’s paycheck to the creditor every pay period until the writ expires.    The creditor can also garnish the defendant’s bank accounts, tax refunds or other assets in the hands of third parties, including amounts owed by the defendant to the garnishee.

Garnishment Procedures

When you receive a Writ of Garnishment, it will be approved by the clerk of the court.  The Writ of Garnishment will contain a verified statement the Creditor has obtained a money judgment against the defendants.   Also included will be identifying information such as the defendant’s social security number, employee identification number or federal tax number.    Carefully examine the date the Writ was issued to ensure that 91 days after issuance have not expired.   If you are served more than 91 days after the Writ was issued, it is invalid.

After you have received the Writ and verified its timeliness, you must send a copy of the Writ of Garnishment to the defendant within 7 days.  As the garnishee have 14 days to file with the court clerk a verified disclosure indicating what (if anything) you owe to the defendant.    You must also send a copy of the verified disclosure form to the creditor and defendant, who will both be listed on the Writ of Garnishment.   At this point a judgment as already been entered and you are not the arbiter of the fairness of it.     If there has been an error, then it is the defendant’s attorney’s responsibility to investigate it, not yours.   Explain to the employee that you have no choice in the matter.

If you fail to respond to the Writ of Garnishment, the creditor can take a default judgment against you.  As a result of the default you will become liable for the entire debt owed by defendant, even if you had no involvement whatsoever with the creditor before that. We have seen this happen before, and it is not easy to get a default set aside.   Don’t let this happen to you.

After you have given the defendant a copy of the Writ, the defendant has 14 days in which to file an objection with the court.  Any objections will be resolved by the Court.

If the garnishment is for wages, you are required to begin making the deductions from the defendant/employee’s paycheck when the Writ of Garnishment is received.   The Writ will inform you the amount and to whom the payment must be directed.     A Writ of Garnishment only lasts 91 days, and a new one must be issued should the judgment not be satisfied within that time period.   For garnishees with weekly, biweekly, or semimonthly pay periods, withholding shall commence with the first full pay period after the Writ was served.    Withholding shall cease upon the end of the last full pay period prior to the expiration of the Writ.

Every time a payment is withheld, the garnishee must provide the following information to the creditor and the defendant:  case number, date and amount withheld, and the balance due on the Writ.    After 28 days from the date of the service of the Writ on the garnishee, unless an objection to the Garnishment is pending with the Court, the garnishee shall transmit all withheld funds to the creditor unless the garnishee has been notified that objections have been filed.

The creditor also has the right to issue interrogatories to the garnishee regarding amounts owed and other creditors who have attempted to garnish the funds.   A garnishee only has to comply with one garnishment at a time for the same creditor.    If there are multiple garnishments, contact us to determine which garnishment holds the higher priority under the Michigan Court Rules.

Compliance is Vital

Should you fail to comply with the dictates of the Writ of Garnishment, your company will become liable for the judgment against the defendants.    While possibly tedious, full compliance is necessary because the penalties are far too stringent otherwise.   As always, if you ever have any questions on the process contact us.

This article was written by Michael R. Dorfman, Senior Associate at Demorest Law Firm. Click here to view his professional resume.

Understanding Michigan Usury Law