Garnishment as Avoidable Transfer

Posted by NCBRC - June 24, 2016

Two recent cases discussed the issue of whether wages subject to a pre-petition garnishment order but actually garnished within the 90-day preference period were part of the bankruptcy estate.

In Weinman v. Alternative Revenue Systems, Inc. (In re Stevens), No. 15-11776, Adv. Proc. No. 15-1340 (Bankr. D. Colo. March 23, 2016), the case was before the court on the Chapter 7 trustee’s and Alternative Revenue Systems’s (ARS) cross motions for summary judgment. Prior to the debtors’, Kwanza and Mindy Stevens, bankruptcy, ARS obtained a judgment against Mindy Stevens, and began garnishing her wages. Approximately three months after the Stevens received their chapter 7 discharge, the trustee brought an adversary proceeding against ARS arguing that two garnishments made within 90 days of the debtors’ bankruptcy were avoidable transfers under section 547. ARS countered that the relevant transfer date was the date the writ of garnishment was served on the employer rather than the date of each individual garnishment. Therefore, the transfer took place prior to the 90 day preference period.

Citing In re M&L Business Mach. Co., Inc., 155 B.R. 531, 534 (Bankr. D. Colo. 1993), the court listed the elements that establish a claim for avoidance under section 547(b):

“(1) the debtor transferred an interest in property, (2) to or for the benefit of a creditor, (3) for or on account of an antecedent debt owed by the debtor before such transfer was made, (4) made while the debtor was insolvent, (5) made on or within 90 days before the date of the filing of the petition, or within one year of the filing of the petition if such creditor is an insider, and (6) that enables such creditor to receive more than the creditor would receive in a case under Chapter 7 of the Bankruptcy Code.” The only elements in dispute were 5 and 6, relating to the appropriate date of the transfer and whether, if the transfer were not avoided, ARS would receive more than it was entitled to in the chapter 7 case.

ARS argued that, under Straight v. First Interstate Bank (In re Straight), 207 B.R. 217 (B.A.P. 10th Cir. 1997), the serving of the writ of garnishment establishes the date of the actual transfer of interest in the funds. In Straight, “the court held payments made during the preference period, pursuant to a garnishment or attachment obtained prior to the preference period, were transfers, ‘but they were not avoidable as preferences because they did not enable the creditors to receive more than they would have without them if the debtor were liquidated in chapter 7. The earlier garnishments or attachments were the transfers accomplishing that for the creditors.’”

The trustee countered that, under section 547(e), a transfer does not occur until the debtor has acquired rights in the property. In the case of wage garnishment, the actual transfer takes place when the debtor earns the wages. Both parties agreed that federal, not state, law determined the date of the transfer.

The court noted that while the service of the writ of garnishment created an “inchoate lien” on future wages, “transfers” under section 101(54), consist of a “parting with property; or an interest in property.” Ms. Stevens did not part with her property until her wages were actually garnished. Thus, the garnishments taking place within 90 days of her bankruptcy were avoidable if they enabled ARS to receive more than it would have in chapter 7.

In determining whether ARS received more, the court distinguished between cases in which the writ of garnishment attaches to funds already owned by the debtor and cases, such as the one at bar, involving wage garnishment. In the former case, the transfer takes place at the time the writ is served, and the creditor’s right to the funds is not affected by the later chapter 7 case. In the latter case, the writ of garnishment attaches to funds the debtor has yet to earn and the actual transfer occurs once the wages are earned. The court adopted the majority view that because each garnishment was a separate transfer, ARS would not have been entitled to the funds from those occurring within 90 days of the bankruptcy. Therefore, the 6th element of the avoidable transfer claim was satisfied.

In a final issue raised for the first time in ARS’s response brief, ARS argued that only those wages actually earned within the 90 day period would be avoidable without regard to the date of the transfer. The court agreed, finding that the relevant fact is when the debtor became entitled to receive the wages (upon earning them), rather than when she actually received them (when her paycheck was issued). Because the record was incomplete as to that factual issue, the court declined to enter summary judgment.

Weinman Bankr D Colo opinion May 2016

In Patton v. Quick Loan Co., No. 16-40141(Bankr. M.D. Ga. May 18, 2016), the case was before the court on the Timothy Patton’s motion for turnover of funds garnished from his wages within 90 days of his bankruptcy petition. The action involved funds that were in possession of the Municipal Court of Columbus at the time of the petition and distributed to Quick Loan post-petition.

To determine the debtor’s interest in the funds, the court looked first to Georgia law under which a judgment creditor initiates a garnishment by serving a summons of garnishment upon the employer (or other garnishee) who then answers the summons. The debtor may object to the garnishment by filing a traverse prior to judgment on the garnishee’s answer or before funds are distributed pursuant to the garnishment.

Quick Loan argued that under Flournoy v. Pate (In re Antley), 18 B.R. 207 (Bankr. M.D. Ga. 1982) and Williams v. Account Control Services (In re Williams), No. 96-40749 (Bankr. M.D. Ga. Aug. 26, 1996), Mr. Patton had no interest in the funds at the time of his bankruptcy petition. Those cases held that “funds representing the debtor’s prepetition wages withheld from the debtor pursuant to a garnishment action were not property of the estate.”

On the other hand, the court in In re Shubert, 525 B.R. 536, 542 (Bankr. M.D. Ga. 2015), held that wages that had been garnished prepetition but not yet distributed to the creditor at the time of the filing of the petition were property of the estate because the debtor could still file a traverse with respect to those wages and, therefore, retained an interest in them.

In finding that Shubert represented the better view, the court distinguished In re Conner, 733 F.2d 1560 (11th Cir. 1984), where that court held that a transfer of funds pursuant to a pre-petition garnishment summons within the bankruptcy preference period was not an avoidable transfer because the actual transfer of the debtor’s interest occurred when the summons of garnishment was filed. The Patton court found that although the lien attached when the summons of garnishment was filed, the debtor retained title to the funds until such time as they were distributed to the creditor.

The court held, therefore, that the funds held by the municipal court were property of the estate because they had not yet been distributed to Quick Loan at the time of the petition and Mr. Patton could still file a traverse with respect to them.

Patton Bankr MD Ga opinion May 2016

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