The Supreme Court will not resolve a circuit split by deciding whether wages garnished within 90 days of bankruptcy are recoverable preferences.
This morning, the high court denied a certiorari petition in Tower Credit Inc. v. Schott, 17-444 (Sup. Ct.), where the Fifth Circuit differed with three older circuit court decisions by holding in March that a wage garnishment resulted in a preference because the transfer was deemed to occur within the preference period when the wages were earned.
The New Orleans-based court reasoned that the transfer to the garnishor came inside the preference window because a worker does not have an interest in wages until she or he has performed services. Tower Credit Inc. v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. March 13, 2017).
In cases decided before the Supreme Court’s decision Barnhill v. Johnson, 503 U.S. 393 (1992), the Second, Seventh and Eleventh Circuits had held that wages earned within 90 days did not give rise to preferences because the transfers were deemed to occur when the garnishment order was entered outside of the preference period. The Fifth Circuit said that those three cases did not survive Barnhill, where the Supreme Court established the principle that federal law prescribes the time of a transfer even though state law determines a debtor’s interest in property.
Involving a mere $1,750, the appeal in the Fifth Circuit was a test case designed to feather the nest of judgment creditors.
The Fifth Circuit, however, sided with the Collier treatise and extrapolated from Barnhill, which held that federal considerations prescribe the time of the transfer as being the date when a check is honored by the drawee bank, not the date when the debtor drew or delivered the check.
The Supreme Court, of course, does not give reasons for denying certiorari. The justices may have felt that the split would resolve itself over time or was not yet well enough developed.
Had the Court granted certiorari, the justices would have had an opening to narrow Barnhill or even revisit Local Loan v. Hunt, 292 U.S. 234 (1934), where the Supreme Court held that the “fresh start” principle prevents a garnishment order from riding through bankruptcy, thus allowing a worker to earn wages after bankruptcy unencumbered by garnishment.
Given how the Supreme Court has been increasingly more deferential to state law in recent years, a high court review of Tower Credit might have resulted in unpredictable results having profound effect on bankruptcy and perhaps even non-bankruptcy law.
To read ABI’s discussion of the Fifth Circuit’s Tower Credit opinion, click here.