The Date of Service of a Writ of Garnishment Is the Date of Transfer of a Preference

On an issue where the circuits are split, Bankruptcy Judge Ann M. Nevins of Hartford, Conn., took sides with the majority by holding that the date of the service of a writ of garnishment on the debtor’s bank is the date of a transfer for preference purposes.

The creditor held a judgment against the debtor, who was later to file a chapter 7 petition. Outside the 90-day preference period, the creditor served a notice of execution on the bank holding the debtor’s account. The account held about $11,000 at the time.

Within the time prescribed by Connecticut law, the debtor objected to the garnishment, claiming the funds were exempt. Within the 90-day preference period, the state court denied the exemption claim. A few days later — also within the exemption period — the bank transferred the $11,000 to the creditor.

The trustee filed a preference action, claiming that the transfer of the $11,000 was avoidable as a preference under Section 547. The bank filed a motion for summary judgment, contending that the transfer occurred outside of the preference when the writ was served.

The bank won in the June 22 opinion by Judge Nevins. She explained how the circuits are split and how the Second Circuit has not taken sides.

Before 1995, three circuits had held that a transfer for preference purposes occurs when a writ of garnishment is served on the debtor’s bank. Then, the Seventh Circuit created the split by holding under Indiana law that the date of transfer to the judgment creditor is the date of transfer. Freedom Group Inc. v. Lapham-Hickey Steel Corp. (In re Freedom Group Inc.), 50 F.3d 408 (7th Cir. 1995).

To underpin her decision, Judge Nevins invoked Barnhill v. Johnson, 503 U.S. 393 (1992), for the principle that interests in property are determined by state law. Barnhill held that the date a check is honored is the date of transfer, not the date the check was delivered.

Although Barnhill implies that the date of receipt by the creditor is the date of the transfer, Judge Nevins analyzed Connecticut law and decided that service of the writ effected the transfer. In that regard, she followed a decision by one of her predecessors on the Connecticut bench, Lind v. O’Connell (In re Lind), 223 B.R. 64 (Bankr. D. Conn. 1998) (Shiff, J., Ret.).

Judge Nevins focused on the definition of a “transfer” in Section 547(e)(1)(B). She decided “that service of the writ of execution perfects the judgment creditor’s interest and forecloses a competing creditor on a simple contract from acquiring a superior interest.” The debtor’s objection regarding an exemption claim “merely created a dispute between the Debtor and [and the creditor] concerning the amount of funds [the creditor] was entitled to and did not implicate § 547(e)’s concern with the moment a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.”

In sum, Judge Nevins held that “the transfer date for purposes of a preferential transfer claim pursuant to § 547(b)(4)(A) is the date of service of a bank execution served according to the Connecticut statutory scheme.” She therefore granted summary judgment and dismissed the preference suit.