Philips North America, LLC v. KPI Healthcare, Inc.

11/16/2023

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

September 7, 2023 Session

PHILIPS NORTH AMERICA, LLC v. KPI HEALTHCARE, INC. ET AL.

Appeal from the Circuit Court for Williamson County

No. 2022-CV-60 Joseph A. Woodruff, Judge

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No. M2022-01688-COA-R3-CV

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To collect on its judgment, Appellant judgment creditor served a levy on Appellee

garnishee bank. Judgment creditor sought to garnish an escrow account that was subject

to an escrow agreement between a third-party and judgment debtor’s representative.

Garnishee bank initially responded that it did not have any funds to remit. Thereafter,

garnishee bank filed an amended response and enclosed a cashier’s check for $731,598.51,

the amount of funds in the escrow account; the check was made payable to the Williamson

County Circuit Court. A few days later, garnishee bank filed a motion to return funds

deposited into the Clerk’s Office. At trial, garnishee bank argued that it was not properly

served with the levy and that, even if service was proper, judgment creditor had no right to

collect the funds held in the escrow account. The trial court agreed. We conclude that

garnishee bank waived any objection concerning whether the levy was properly served.

The trial court’s order is otherwise affirmed.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court

Reversed in Part; Affirmed in Part; and Remanded

KENNY ARMSTRONG, J., delivered the opinion of the court, in which FRANK G. CLEMENT,

JR., P.J., M.S., and ANDY D. BENNETT, J., joined.

Tara L. Swafford and Elizabeth G. Hart, Franklin, Tennessee, Carla M. Wirtschafter, Los

Angeles, California, and M. Patrick Yingling, Chicago, Illinois, for the appellant, Philips

North America, LLC.

Kathryn Skagerberg and Woods Drinkwater, Nashville, Tennessee, and Jeffrey A. Greene,

Franklin, Tennessee, for the appellee, Capstar Bank.1

1

KPI Healthcare, Inc. and KPI Healthcare eCommerce, Inc. a/k/a O2 Lifecare, Inc. are not parties to this

appeal.

OPINION

I. Background

In September 2021, a California court awarded Appellant Philips North America,

LLC (“Philips”) a $37,593,949.95 judgment against KPI Healthcare, Inc. (“KPI”) and KPI

Healthcare eCommerce, Inc. a/k/a O2 Lifecare, Inc. During that litigation, KPI’s CEO,

President, and Owner, Steven Minn, sold KPI’s assets and left the United States. Philips

alleges that some of these assets were sold to Diagnostx, LLC (“Diagnostx”) and that the

payment for such assets was deposited into an escrow account held at Appellee Capstar

Bank (“Capstar”) in Tennessee, discussed further below. On June 24, 2022, Philips

obtained a writ of execution from the Williamson County Circuit Court (“trial court”)

directed to Capstar. The only judgment debtor identified on the bank levy (the “Levy”)

was “KPI Healthcare, Inc.,” i.e., KPI. The only account number listed on the Levy was

“[xxxxxx]4054 (Diagnostx LLC)” (the “Account”).

Concerning the Account, it was titled “Diagnostx LLC” and was an “Escrow

Services Money Market” account. Capstar, as the escrow agent, possessed an escrow

agreement (the “Escrow Agreement”), which was entered on July 8, 2020 between

Diagnostx and Mr. Minn, in his capacity as the “Seller Representative.” Under the

agreement, KPI and KPI’s stockholders were the “Sellers.” Relevant here, under paragraph

1.2 of the Escrow Agreement, Diagnostx remitted $1,000,000.00 to Capstar to be deposited

into the Account. Paragraph 4.10 of the Escrow Agreement provided that it terminated on

July 8, 2022. The agreement further provided that, “[u]pon the Escrow Release Date, the

Escrow Agent [(Capstar)] is authorized and directed to disburse all of the remaining funds

and property held . . . in accordance with the joint written instructions of [Diagnostx and

KPI].”

On July 1, 2022, the Levy was delivered and receipt was acknowledged by Cathy

Walker, a front desk receptionist at Capstar. Ms. Walker was not the authorized registered

agent for Capstar; Timothy K. Schools, CEO of Capstar, was the registered agent for

service of process on the bank.

On August 2, 2022, Capstar received joint written instructions to disburse the

remaining $731,573.51 held in the Account to a Bank of America account where KPI was

the beneficiary. The funds were transferred and the Account was closed.

On August 9, 2022, Philips sent a demand letter to Capstar concerning Capstar’s

failure to provide a response to the July 1, 2022 Levy. On August 18, 2022, Capstar

responded to Philips’ demand letter by stating that the bank did not have any funds to remit.

On September 1, 2022, Capstar received a subpoena demanding production of statements

and canceled checks on the Account. On October 3, 2022, Capstar sent an amended

response to the trial court enclosing a cashier’s check for $731,598.51 paid to the

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Williamson County Circuit Court.2

On October 20, 2022, Capstar filed a motion to return funds deposited into the

Clerk’s Office. Capstar also filed a motion for temporary restraining order to prevent the

disbursement of those funds to Philips. That same day, the trial court entered an order

staying all matters in the case pending a hearing on Capstar’s motion to return funds. On

October 31, 2022, Philips filed its response in opposition to the motion to return funds and

temporary restraining order.

On November 3, 2022, the trial court heard Capstar’s motion and granted it by order

of November 17, 2022. Specifically, the trial court held that: (1) Capstar was not properly

served with the Levy; (2) Philips had no right to the funds held by the Clerk’s Office; (3)

Diagnostx was not a judgment debtor in the underlying civil action giving rise to the

judgment; and (4) even if Capstar was properly served, the Levy was insufficient to create

any obligation to Capstar to attach funds not belonging to KPI. Philips filed a timely

appeal.

II. Issues

Philips raises four issues for this Court’s review, as stated in its brief:

1. Whether Capstar Bank failed to meet its burden under Tennessee Rule of Civil

Procedure 60.

2. Whether Capstar Bank waived its objections to the Levy by answering the Levy

twice without asserting its objections.

3. Whether Philips properly served Capstar Bank with the Levy.

4. Whether Philips’ Levy identified a judgment debtor (KPI) that was the beneficiary

of an account at Capstar Bank.

III. Standard of Review

We review a non-jury case “de novo upon the record with a presumption of

correctness as to the findings of fact, unless the preponderance of the evidence is

otherwise.” Bowden v. Ward, 27 S.W.3d 913, 916 (Tenn. 2000) (citing Tenn. R. App. P.

13(d)). The trial court’s conclusions of law are reviewed de novo and “are accorded no

presumption of correctness.” Brunswick Acceptance Co., LLC v. MEJ, LLC, 292 S.W.3d

638, 642 (Tenn. 2008).

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It is unclear why there was a $25.00 discrepancy between the amount Capstar paid into the clerk’s office

and the amount Capstar disbursed to the Bank of America account.

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IV. Analysis

A. Capstar’s Use of Tennessee Rule of Civil Procedure Rule 60

As discussed, supra, on October 20, 2022, Capstar filed a motion to return the

$731,598.51 it deposited into the Clerk’s Office. In this motion, Capstar relied on Rule 60

of the Tennessee Rules of Civil Procedure as authority for its request. On appeal, Philips

argues that this Court should reverse the trial court’s order returning the funds because

Capstar failed to meet its burden under Rule 60. Rule 60 is a vehicle that litigants may use

to correct mistakes in judgments or orders. See Tenn. R. Civ. P. 60.01, 60.02. When

Capstar filed the motion to return funds, the trial court had not yet entered an order or

judgment in the case. Accordingly, Rule 60 was inapplicable. However, Capstar’s

incorrect use of Rule 60 did not bar it from the relief it sought.

It is well-settled that trial courts should “give effect to the substance of pleadings

and motions rather than to their terminology or form.” Anderson v. DTB Corp., No. 89-

172-II, 1990 WL 33380, at *2 (Tenn. Ct. App. Mar. 28, 1990). Indeed, the Tennessee

Rules of Civil Procedure provide that “[n]o technical forms of pleadings or motions are

required,” Tenn. R. Civ. P. 8.05, and that all pleadings shall be construed “to do substantial

justice.” Tenn. R. Civ. P. 8.06. Accordingly, “[a] trial court ‘has the discretion to treat the

pleading according to the relief sought.’” Norton v. Everhart, 895 S.W.2d 317, 319 (Tenn.

1995) (citing Fallin v. Knox County Board of Commissioners, 656 S.W.2d 338, 342

(Tenn. 1983); State v. Minimum Salary Dep't. of A.M.E. Church, 477 S.W.2d 11, 12

(Tenn. 1972)).

Turning to the motion to return funds, Capstar argued, inter alia, that: (1) it was not

properly served with the Levy; and (2) it had no obligation to attach funds not belonging

to KPI, the judgment debtor. For these reasons, Capstar asked the trial court to return the

funds deposited into the Clerk’s Office to Capstar. As discussed, supra, in its order, the

trial court found that: (1) Capstar was not properly served with the Levy; (2) Philips had

no right to the money being held in the Clerk’s Office; (3) Diagnostx was not a judgment

debtor in the underlying civil action giving rise to the judgment; and (4) even if Capstar

was properly served, the Levy was insufficient to create any obligation to Capstar to attach

funds not belonging to KPI. Thus, the trial court properly treated the motion to return funds

according to the relief sought rather than analyzing it under Rule 60. Accordingly, Philips’

first issue is without merit.

B. Capstar Waived Objections to Service of the Levy

Philips next argues that Capstar waived any objections to the service of the Levy

and, consequently, was properly served with same. As discussed above, despite Mr.

Schools being the registered agent for service of process on the bank, Ms. Walker, a front

desk receptionist, acknowledged receipt of the Levy on July 1, 2022. In its final order, the

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trial court found that “service made on a clerical employee of the subject garnishee business

entity [,i.e., Ms. Walker,] is not an accepted substitute for service of process on the business

entity’s registered agent [, i.e., Mr. Schools].” Accordingly, the trial court found that

Capstar was not properly served with the Levy. Despite noting Philips’ argument that

Capstar waived any objections to service of the Levy, the trial court did not address the

merits of this argument.

Our courts have repeatedly held “that the appearance and answer of a garnishee

waives any objection that might have been taken to the notice.” Miller, Stewart & Co. v.

O’Bannon, 72 Tenn. 398, 403 (Tenn. 1880) (citing Moody v. Alter, Winston & Co., 59

Tenn. 142, 146 (Tenn. 1873); Hearn v. Crutcher, 12 Tenn. 461, 475 (Tenn. 1833)); see

also Gen. Truck Sales, Inc. v. Simmons, 343 S.W.2d 884, 887 (Tenn. 1961); Stonecipher

v. Knoxville Sav. & Loan Ass’n, 298 S.W.2d 785, 788 (Tenn. Ct. App. 1956). We recall

that, on August 18, 2022, Capstar responded to Philips’ demand letter by stating that the

bank did not have any funds to remit. On October 3, 2022, Capstar sent an amended

response and a cashier’s check for $731,598.51 paid to the Williamson County Circuit

Court. Accordingly, Capstar made its first appearance and provided an answer on August

18, 2022 and provided an amended answer on October 3, 2022. On this Court’s review,

Capstar did not allege improper service or raise any objections in either of these responses.

Indeed, Capstar first argued that it was not properly served with the Levy in its October 20,

2022 motion to return funds.3 At that point, Capstar had already appeared and answered

the Levy, waiving any objection it may have had to service of same. See Stonecipher, 298

S.W.2d at 788 (“[T]he rule is well settled that where [a] garnishee voluntarily appears and

answers, he waives all defects in the garnishment summons, or in its service on him.”).

Accordingly, we conclude that the trial court erred in holding that Capstar was not properly

served with the Levy.

C. Philips Not Entitled to Funds Held in Capstar Account

Capstar’s waiver of service did not, ipso facto, entitle Philips to the escrow funds in

the Account. A brief discussion of the law concerning garnishments is helpful before

proceeding with our analysis. A “[g]arnishment is a proceeding whereby the plaintiff seeks

to subject to his claim property of the defendant in the hands of a third person . . . .”

Stonecipher, 298 S.W.2d at 789-90. This Court has explained that “[g]arnishment is in the

nature of an attachment of a debt due the judgment debtor from the garnishee; and, service

of the garnishment upon the garnishee is a warning to the garnishee not to pay the debt due

but to answer the garnishment and hold the fund subject to the orders of the Court.” Dexter

Ridge Shopping Ctr., LLC v. Little, 358 S.W.3d 597, 605 (Tenn. Ct. App. 2010) (citing

3

That same day, Capstar filed Amy Goodin’s affidavit, which also stated, in pertinent part, that Ms. Walker

was not the registered agent for the bank and was not granted authority to accept service on behalf of the

bank. In the affidavit, Ms. Goodin represented that she was the Chief Risk Officer for Capstar and had

“operational oversight of the [b]ank, including account records and knowledge of individuals authorized to

accept service on behalf of the [b]ank.”

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Meadows v. Meadows, No. 88-135-II, 1988 WL 116382, at *3 (Tenn. Ct. App. Nov. 2,

1988) (citing Stonecipher, 298 S.W.2d at 787)).

Here, Philips (the plaintiff, judgment creditor, and garnishor) sought to collect part

of its $37,593,949.95 judgment against KPI (the defendant and judgment debtor) from

Capstar (the third-party garnishee). If Capstar possessed any property, debts, or effects

belonging to KPI that were liable for Philips’ debt, the trial court could have entered a

judgment and an execution for the same to satisfy a portion of Philips’s debt. Tenn. Code

Ann. § 26-2-206. In short, if it was determined that Capstar possessed property, debts, or

effects belonging to KPI, Capstar was required to surrender them to the trial court.

Tullahoma Indus., LLC v. Navajo Air, LLC, No. M2019-02036-COA-R3-CV, 2021 WL

2654988, at *3 (Tenn. Ct. App. June 29, 2021), perm. app. denied (Tenn. Oct. 14, 2021)

(citing Tenn. Code Ann. § 26-2-208 (“As soon as the property is declared to be the property

of the [judgment debtor] . . ., it shall be delivered up to the officer serving the garnishment,

on demand.”)). Given the facts in this case, it is important to recognize that, generally, “‘a

bank/depositor relationship is treated as a debtor/creditor relationship,’” wherein “[t]he

bank ‘acquires title to the money deposited, and becomes the depositor’s debtor for the

amount deposited.’” Tullahoma Indus., LLC, 2021 WL 2654988, at *3 (quoting Rogers

v. First Nat’l Bank, No. M2004-02414-COA-R3-CV, 2006 WL 344759, at *9 (Tenn. Ct.

App. Feb. 14, 2006)). Thus, the core issue here is whether Capstar was indebted to KPI

for the funds in the Account. Philips, as the judgment creditor, bore the burden of proving

such indebtedness. Tullahoma Indus., LLC, 2021 WL 2654988, at *3. As discussed,

supra, the trial court concluded that the funds in the Account did not belong to KPI. Thus,

Capstar was not indebted to KPI, and Philips was not authorized to garnish funds from the

Account.

On appeal, Philips makes two arguments as to why Capstar should have known that

KPI owned the funds in the Account and why Philips was entitled to the funds held by

Capstar: (1) Diagnostx purchased assets from KPI and deposited payment for the purchase

into the Account, thus the funds in the Account belonged to KPI; and (2) the Joint Written

Instruction requiring Capstar to wire funds from the Account to a Bank of America account

showed that KPI was the beneficiary on the Bank of America account, thus the funds in

the Account belonged to KPI. Although these arguments constitute the main issue in this

case, we note that Philips’ briefing of this argument is comprised of only three paragraphs

and contains no law. We caution that Tennessee Rule of Appellate Procedure 27(a)(7)(A)

provides that an appellant’s brief shall contain an argument setting forth “the contentions

of the appellant with respect to the issues presented . . . with citations to the authorities and

appropriate references to the record . . . .” Tenn. R. App. P. 27(a)(7)(A). As the Tennessee

Supreme Court has stated, “[i]t is not the role of the courts, trial or appellate, to research

or construct a litigant’s case or arguments for him or her, and where a party fails to develop

an argument in support of his or her contention or merely constructs a skeletal argument,

the issue is waived.” Sneed v. Bd. of Prof’l Responsibility of Sup. Ct., 301 S.W.3d 603,

615 (Tenn. 2010) (emphasis added); see also Forbess v. Forbess, 370 S.W.3d 347, 355

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(Tenn. Ct. App. 2011) (“This [C]ourt has repeatedly held that a party’s failure to cite

authority for its arguments or to argue the issues in the body of its brief constitute a waiver

on appeal.”). Despite Philips’ failure to properly brief this issue, to bring finality, we

address it below. Tenn. R. App. P. 2 (“For good cause, including the interest of expediting

decision upon any matter the . . . Court of Appeals. . . may suspend the requirements or

provisions of any of these [appellate] rules in a particular case . . . in accordance with its

discretion.”)

As noted above, Philips’ first argument is that

[t]he Levy served on Capstar Bank identifies KPI Healthcare, Inc. as the

judgment debtor (for $37,593,949.95) and lists [the Account]. Capstar Bank

had an Escrow Agreement on file associated with this account. The Escrow

Agreement shows that the funds in the account belong to KPI. In particular,

the Escrow Agreement shows that Diagnostx purchased assets from KPI and

deposited money into the Capstar Bank account to be released to KPI upon a

joint written notice from Diagnostx and KPI’s seller representative, Steven

Minn. Thus, upon receiving the Levy on July 1, 2022, Capstar Bank should

have known that the account identified by the Levy contained funds

belonging to KPI, and Capstar Bank had an obligation at that point not to

disperse funds from the subject account to KPI.

(Internal citations omitted). As an initial matter, it is not clear that Diagnostx purchased

assets from KPI as Philips alleges. While KPI and its stockholders are listed as “sellers”

in the Escrow Agreement there is no “buyer” listed. Furthermore, although the Escrow

Agreement states that Diagnostx and KPI were “parties to [a] certain Asset Purchase

Agreement,” that agreement is not part of our record.

Even assuming, arguendo, that Diagnostx purchased assets from KPI, the record

does not support Philips’ assertion that it was entitled to funds in the Account. First, the

Account was established by and in Diagnostx’s name. The signature card for the Account

is included in the appellate record. “Diagnostx LLC” is listed under both “Title of

Account” and “Business Name,” and Diagnostx’s taxpayer identification number is listed

on the signature card. Furthermore, we note that the address listed for Diagnostx on the

card is in Florida, although the addresses for KPI that appear in our record are in California.

Even the Levy itself seems to acknowledge that the Account is in Diagnostx’s name. Under

the account number to be levied, it states: “[xxxxxx]4054 (Diagnostx LLC).” Indeed, the

record shows that Diagnostx was the customer on the Account rather than KPI. See Tenn.

Code Ann. § 47-4-104(a)(5) (defining “customer” as the “person having an account with a

bank”). As discussed, supra, generally, “‘a bank/depositor relationship is treated as a

debtor/creditor relationship’” wherein “[t]he bank ‘acquires title to the money deposited,

and becomes the depositor’s debtor for the amount deposited.’” Tullahoma Indus., LLC,

2021 WL 2654988, at *3 (quoting Rogers, 2006 WL 344759, at *9). If Capstar was

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indebted to any entity, it would have been to Diagnostx rather than to KPI. Importantly,

Diagnostx was not listed as a judgment debtor on the Levy. Second, ignoring the fact that

Diagnostx was the customer on the Account, because of the nature of the Account, KPI

had no power to withdraw the funds held in it. Under the Escrow Agreement, Capstar, as

the escrow agent,4 could disburse funds only if both Diagnostx and Mr. Minn, as KPI’s

representative, agreed to the disbursement via a joint written instruction. This Court has

held that such escrow accounts function as trust accounts. See Tullahoma Indus., LLC,

2021 WL 2654988, at *4. Thus, the funds in the Account—or KPI’s interest in such

funds—were essentially trust property, not the property of KPI. Id. For the foregoing

reasons, Capstar was not indebted to KPI in the amount of the funds in the Account. Id. at

*3. This Court has explained that “[a] garnishment can only reach debts ‘absolutely

existing[,]’” i.e., “[t]here must be a debt for which the ‘[judgment] debtor could sue the

garnishee . . . and recover.’” Id. at *4. Because Capstar was not indebted to KPI for the

funds in the Account, KPI could not have sued Capstar to recover same. Accordingly,

Philips had no ability to garnish the funds in the Account. Id.

Philips’ second argument is:

Even if the Levy and Escrow Agreement did not inform Capstar Bank

that the levied account had funds belonging to KPI (and they did), that fact

should have been abundantly clear on August 2, 2022, when Capstar Bank

received a Joint Written Instruction from Diagnostx and Minn to release the

funds in the subject account to “Beneficiary Name and Address on the

Account: KPI Healthcare, Inc.”

At the hearing, the trial court emphasized the importance of what was

stated in the Joint Written Instruction and directed Capstar Bank’s counsel to

make the Joint Written Instruction available to the court and Philips as soon

as possible after the hearing. When the Joint Written Instruction was finally

revealed after the hearing, it showed (as Philips suspected) that the

instruction was to release [] the funds to the beneficiary on the account, KPI.

Upon receipt of this document after the hearing, Philips filed a Supplemental

Memorandum to address this point. The trial court, however, issued its ruling

without ever addressing the Joint Written Instruction. That was error. The

Joint Written Instruction shows that the subject account contained funds

belonging to the judgment debtor, KPI, and that Capstar Bank knew of this

fact. For this additional reason, this Court should reverse.

(Internal citations omitted). On this Court’s review of Philips’ initial brief, its argument

4

In part, the Escrow Agreement provided that Capstar would open the Account “into which

Diagnostx will deposit funds to be held and disbursed by [Capstar] in accordance with this Escrow

Agreement.”

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concerning the Joint Written Instructions and the wire transfer is unclear. However, we

deduce from its reply brief that Philips’ argument is that it was improper for Capstar to

release funds from the Account to the Bank of America account where KPI was the

beneficiary. Specifically, Philips argues that, because KPI was listed as beneficiary on the

Bank of America account and in the Joint Written Instructions, Capstar should have known

that the funds in the Account belonged to KPI and should not have released them. Philips

argues in its reply brief:

Even if Capstar Bank did not learn that judgment debtor KPI had rights to

the money until Capstar Bank received the Joint Written Instructions . . .

Philips already had asserted its right to those funds pursuant to the Levy, and

it was improper for the bank to release them to KPI. “As soon as the property

is declared to be the property of the [judgment debtor], it shall be delivered

up to the officer serving the garnishment, on demand. On failure to deliver

such property, and a return made on the execution of that fact, judgment shall

be entered immediately against the garnishee, for the debt and costs.” Tenn.

Code Ann. § 26-2-208.

***

Capstar Bank also cites Uniform Commercial Code provisions to argue that

a garnishor interested in funds being transferred via wire should seek the

funds from the receiving bank rather than the sending bank. That may be

true enough where a debtor has no prior relationship with the bank sending

the funds to the debtor. In that case, the debtor has no right to the funds until

they reach his bank account, and thus the debtor’s garnishor has no right to

the funds until they reach the debtor’s bank account. But here, KPI and its

representative, Minn, were parties to the Escrow Agreement with Capstar

Bank. Minn gave Capstar Bank the instruction to release the funds to KPI.

Under the Escrow Agreement, upon that instruction, KPI had a right to those

funds. And because KPI had a right to those funds, Capstar Bank should have

delivered the funds to Philips pursuant to the Levy that Philips served 31 days

earlier. See Tenn. Code Ann. § 26-2-208.

(Internal citations omitted). Again, Philips provides no law to support its argument.

Furthermore, Philips’ argument misconstrues crucial facts. For the reasons discussed

supra, KPI was not entitled to the funds in the Account when they were held by Capstar,

and Capstar was never indebted to KPI. Presumably Bank of America would have become

indebted to KPI on the transfer of the funds, but at no time was Capstar indebted to KPI.

See id. at *3 (discussing that the bank/depositor relationship is treated as a debtor/creditor

relationship). As discussed above, Philips bore the burden of proving that Capstar was

indebted to KPI so that Philips could levy on such debt and collect the funds in the Account.

Id. For the many reasons discussed in this Opinion, we conclude that Philips failed to carry

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its burden.

V. Conclusion

For the foregoing reasons, we reverse the trial court’s conclusion that Capstar was

not properly served with the Levy. The trial court’s order is otherwise affirmed, and the

case is remanded for such further proceedings as are necessary and consistent with this

opinion. Costs of the appeal are assessed to the Appellant, Philips North America, LLC,

for all of which execution may issue if necessary.

s/ Kenny Armstrong

KENNY ARMSTRONG, JUDGE

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