Preferential Transfer Governed by Date Garnished Wages Earned

Posted by NCBRC - March 15, 2017

It is not the date the garnishment order is served on the employer, but the date the debtor earns the wages that governs whether garnishment of those earnings is a preferential transfer. Tower Credit Inc. v. Schott (In re Jackson), No. 16-30274 (5th Cir. March 13, 2017).

Pursuant to a state court judgment, Tower Credit garnished the wages of the chapter 7 debtor, Christon Jackson. When he filed for bankruptcy, the trustee, Martin Schott, moved for turnover of the garnished wages as preferential transfers. Section 547(b) empowers a trustee to avoid a transfer made within 90 days of bankruptcy filing. The bankruptcy court granted summary judgment in favor of Mr. Schott. The district court affirmed.

On appeal, the Fifth Circuit began with section 547(e)(2)(B), under which a transfer is made when it is “perfected,” which “in the context of nonreal property, occurs when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. § 547(e)(1)(B).” Tower Credit argued that this milestone occurred when it served the garnishment order on Mr. Jackson’s employer.

Section 547(e)(3), however, says that the transfer does not occur until the debtor acquires rights in the property transferred. Under the reasoning in Local Loan Co. v. Hunt, 292 U.S. 234 (1934) (addressing a discharge dispute), that defining event does not happen until the debtor actually earns the wages. Because federal rather than state law determines when a transfer of property occurs, the court rejected Tower Credit’s argument that state transfer laws governed the issue. Furthermore, the court distinguished cases cited by Tower Credit as not addressing the impact of section 547(e)(3), or as, in the case of In re Coppie, 728 F. 2d 951 (7th Cir. 1984), incorrectly finding that section inapplicable.

The court concluded that “[t]he combination of Supreme Court precedent and the overwhelming weight of persuasive authority applying § 547(e)(3) make clear that a debtor’s wages cannot be transferred until they are earned.” It affirmed.

Schott 5th Cir. opinion March 2017

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