Transfer of Funds Divided between Creditor and Creditor’s Agent Fully Avoidable

Posted by NCBRC - January 29, 2021

Garnished wages divided between the creditor and his agent in accordance with their fee agreement were an avoidable transfer in their entirety even though the creditor never received the portion withheld by the agent. Hooker v. Wanigas Credit Union, No. 20-2252 (6th Cir. Jan. 26, 2021) (unpublished).

During the ninety-day preference period,Wanigas Credit Union, through its agent, Shek Law Offices, garnished $884.13 from the debtor’s wages in satisfaction of a judgment Wanigas had against the debtor. Shek retained $452.60 of the garnished wages and sent the remaining $431.53 to Wanigas. After filing for bankruptcy the debtor sought turnover of the funds under section 547(b)(1) as a preferential transfer. Wanigas turned over only the funds it received. It argued that the portion retained by Shek was not subject to turnover because Wanigas never received the funds, and in the alternative, because the funds were subject to an attorney-charging lien. The bankruptcy court denied Wanigas’s motion for summary judgment and ordered turnover of the funds. The district court granted leave to appeal and affirmed.

On appeal to the Sixth Circuit, Wanigas argued that the transfer did not meet two of the five requirements of a preferential transfer: 1) the funds were not transferred “to or for the benefit of a creditor,” as required by section 547(b)(1), and 2) the transfer did not allow Wanigas to receive more than it would have received as a creditor in the debtor’s bankruptcy case, as required by section 547(b)(5)(A).

As to the first argument, the court found Shek was merely a conduit, receiving the funds as an agent of Wanigas. Because agents “stand in the place of their principals,” the court found the transfer to Shek was tantamount to a transfer to Wanigas and, in fact, reduced the debt by the entire amount, not just the amount actually received by Wanigas. Where the garnishment was “for” Wanigas’s benefit, the manner of collection was less important.

The court found the case relied on by Wanigas, In re Sheppard, 521 B.R. 599 (Bankr. E.D. Mich. 2014), was wrongly decided. In Sheppard, the bankruptcy court held that the determination of whether a transfer was “to” or “for the benefit of” a creditor depended on the debtor’s intent. Where the transfer was involuntary, as here, the Sheppard court held the determining factor was whether the funds were actually received by the creditor. The court found that section 547(b) does not support this interpretation. So long as the transfer was “for the benefit of the creditor,” and was of an “interest of the debtor,” it satisfied the provision without regard to any actual intent or affirmative act on the part of the debtor to set the transfer in motion.

Wanigas’s argument that it did not receive more than it would have in bankruptcy also failed. The court found the entire amount of the garnishment benefited Wanigas even though the debt was collected and partially retained by Wanigas’s agent. Wanigas “received” the funds through its agent, and benefited by being able to pay its own debt to Shek in accordance with their fee agreement. Wanigas did not dispute that, as a practical matter, had it received the entire amount and then paid Shek from the funds, the entire amount would have been avoidable. The court found the method by which the same result was achieved did not affect the operation of section 547(b).

The court also disagreed that, under Michigan law, the transfer to Shek was not avoidable because the payment was made to satisfy an “attorney-charging lien.” The court found that any lien Shek may have had relating to a debt owed it by Wanigas was “beside the point because Shek is Wanigas’s creditor, not [the debtor’s],” and an attorney’s lien is generally not enforceable against a third party.

The court affirmed.

Hooker Jan 2021


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