Date of a Garnishment Order Doesn’t Matter for Preferences, Seventh Circuit Says

Overruling the Seventh Circuit’s own 1984 precedent in deference to the later-decided Barnhill v. Johnson, 503 U.S. 393 (1992), Circuit Judge Frank H. Easterbrook held that a judgment creditor is liable for a preference if the creditor collects on a garnishment within the 90-day preference window.

Even though the garnishment order was obtained outside of the preference period, it’s still a preference, because the “transfer” occurs when the payment is made, Judge Easterbrook held in a typically concise, four-page opinion on January 9.

The creditor held a judgment and obtained a garnishment order more than 90 days before the debtor filed bankruptcy. Within the preference period, the creditor collected $3,700 from the garnishment of the debtor’s wages in Indiana.

The bankruptcy trustee sued the creditor to recover $3,700 as a preference under Section 547. Relying on the Seventh Circuit’s 1984 decision in In re Coppie, 728 F.2d 951 (7th Cir. 1984), the creditor moved to dismiss on the ground that the transfer occurred outside of the preference period when the garnishment order was issued.

Indeed, Coppie held that the definition of a “transfer” is governed by state law and that Indiana law defines a “transfer” as having taken place when a garnishment order is entered, not when money is paid.

Bound by Coppie, Chief Bankruptcy Judge Robert E. Grant of Fort Wayne, Ind., granted the motion to dismiss. The trustee filed an appeal and a motion for a direct appeal to the Seventh Circuit.

Citing Barnhill, Judge Grant granted the motion for a direct appeal and said that Coppie “should be revisited.”

The Seventh Circuit accepted the direct appeal. The appeal was submitted on January 6, and Judge Easterbrook handed down his decision three days later, saying that “Coppie is indeed wrongly decided” in view of the Supreme Court’s later opinion in Barnhill.

Barnhill involved a regular check that was issued outside of the preference period but paid within 90 days of bankruptcy. Judge Easterbrook paraphrased the Supreme Court’s 7/2 decision as holding “that federal rather than state law defines the meaning of ‘transfer’ in § 547” and “that the date of the check is irrelevant and that only payment of the check marks a ‘transfer.’”

Judge Easterbrook went on to say that the “rule that the ‘transfer’ occurs when money changes hands is as applicable to garnishment as it is to checks.” He described the majority opinion by Chief Justice William H. Rehnquist as having “identified as the date of transfer the time at which the money passes to the creditor’s control.”

Saying that “only the date of payment matters when defining a transfer under § 547,” Judge Easterbrook reversed dismissal of the complaint and remanded the case for resolution on the merits.