Are Stocks Pledged For Margin Loan Vulnerable To Writ of Garnishment?

One of my clients has a securities account at a national stock brokerage company with about $300,000 of liquid, marketable securities. The client borrowed about $230,000 from the brokerage company “on margin” so that the loan is secured by the stocks in the account. The client has a judgment against him for over $1,000,000.

The client believes that his stock account is protected from his judgment creditor by virtue of the margin loan security. He believes that the stock account could not be subject to garnishment because the margin loan agreement gives the lender/broker a first security interest in the entire account.

I do not think my client is correct in his assumption, and I believe the stocks are at risk. A creditor can serve a writ of garnishment upon the broker. The broker will answer that it holds the debtor’s stock and that the stocks are encumbered, in part, by the broker’s security interest. I think a creditor could obtain an order requiring the stock broker to liquidate the account, pay off the loan and release the security interest, and then pay the net proceeds to the creditor in satisfaction of the writ.

Last updated on May 22, 2020

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