Simon PLC Attorneys & Counselors – March 2022 Memorandum
Garnishing accounts? Don’t forget the crypto wallet.
Troy, Michigan – As creative as creditors and their attorneys can be in terms of locating and executing against money and assets of a judgment debtor, many debtors are even more creative in looking for those places where they can park their money and assets, that would appear to remain just outside of the creditor’s reach. The latest favorite “hiding place” is actually in plain sight. Consider the recent phenomenon of cryptocurrency and the cryptocurrency wallet.
So, what is a cryptocurrency? Most everyone reading this memorandum have heard the term before, but what actually is a cryptocurrency? According to Investopedia, “cryptocurrency” “is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.” (Emphasis added).
“Rendering them theoretically immune to government interference or manipulation.” This appears to be why there is increasing interest in parking cash in cryptocurrency, the belief of immunity to governmental interference,” including from the courts.
This belief of immunity or protection is not supported in practice. Cryptocurrency can be garnished just as any other asset or account.
There are hundreds of cryptocurrencies in the current cryptocurrency marketplace. The most recognized would be Bitcoin, which currently trades at a value of 1 Bitcoin for $38,303.20 U.S. Dollars. This is a long way from the first known Bitcoin transaction, the purchase of 2 Papa John’s pizzas worth $41.00 for 10,000 Bitcoin on May 22, 2010. At today’s Bitcoin value, those 2 pizzas would cost $380,303,200.00. (MarketWatch Article, “Bitcoin Pizza Day? Laszlo Hanyecz spent $3.8 billion on pizzas in the summer of 2010 using the novel crypto,” May 22, 2021).
Other well known cryptocurrency exchanges include Ethereum ($2,631.50 U.S. Dollars per Ethereum coin), Solana ($91.9050 U.S. Dollars per Solna coin), and Litecoin ($110.240 U.S. Dollars per Litcoin). These are relatively stable when compared to other cryptocurrencies, which appear to come and go on a daily basis. Other popular cryptocurrencies known as “meme cryptocurrencies,” include Dogecoin ($0.1370790 U.S. Dollars per Dogecoin) and Shiba Inu ($0.00002538 U.S. Dollars per Shiba Inu coin).
Where are cryptocurrencies kept? Not in a traditional bank account or a brokerage investment account. Instead and consistent with the idea of trying to remain “immune to government interference or manipulation,” cryptocurrencies are kept in “wallets,” theoretically outside of government interference. According to Investopedia, a cryptocurrency “wallet” is “used to send and receive [cryptocurrency]. This is analogous to a physical wallet. However, instead of storing physical currency, the wallet stores the cryptographic information used to access [cryptocurrency] addresses and send transactions.”
Much like the funds in an investment account or bank account, it is the contents of the wallet that can be garnished in garnishment proceedings. Indeed, although the concept of cryptocurrency and wallets are relatively new, the garnishment statutes appear to need no change to address this form of property.
As example, in Ohio, garnishment proceedings are split into two types – (i) garnishment of personal earnings (Ohio Revised Code §2716.01(A) and §2716.03 et seq.), and (ii) garnishment of property other than personal earnings (Ohio Revised Code §2716.01(B) and §2716.11 et seq.). Garnishment of a cryptocurrency wallet falls under the latter statutory provision, garnishment of property other than personal earnings.
There is no definitional limit of “property” under the Ohio garnishment statute. As such, cryptocurrencies can be included as “property.”
We had recent success in garnishing more than $12,000.00 in equivalent cryptocurrency from a cryptocurrency wallet held by a judgment debtor. The judgment debtor in question, was essentially judgment proof for more than 4 years, and the property and income to be garnished essentially dried-up.
In that case, we successfully identified a cryptocurrency exchange that the judgment debtor had been using through bank account statements and records obtained through subpoena. Of course, the judgment debtor had failed to identify holding any cryptocurrency or wallets in prior proceedings.
According to Investopedia, a “cryptocurrency exchange” is a “digital marketplace where traders can buy and sell [cryptocurrency] using different fiat currencies or altcoins. A [cryptocurrency] exchange is an online platform that acts as an intermediary between buyers and sellers of the cryptocurrency.”
There are any number of cryptocurrency exchanges. They include Coinbase, Robinhood, Gemini and FTX. A simple google search will come up with these exchanges, and many others.
Having identified a cryptocurrency exchange, we were then able to seek and secure an order of garnishment for property other than person earnings as against property of the judgment debtor, cryptocurrencies, held in the judgment debtor’s wallet with the garnishee exchange. To the surprise of the judgment debtor, the cryptocurrency exchange fully complied with the garnishment order, answered, and issued a check for the garnished proceeds. On the latter point, the cryptocurrency exchange will convert the cryptocurrency on receipt of the garnishment order, issuing the proceeds in U.S. Dollars.
The key to this process was identifying the cryptocurrency exchange. In this case, the bank account statements showed a multiple years’ long history of the judgment debtor with debits in favor of the cryptocurrency exchange. Once identified, we issued the garnishment and shortly thereafter, a separate subpoena to the cryptocurrency exchange for their statements and records, to confirm cryptocurrency balances in the wallet held by the judgment debtor.
In short, consider this newest method to store and potentially “hide” property that judgment debtors are looking to. It is likely to become more and more frequent of a place that judgment debtors will try and use.
N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.
