Background
Under the Bankruptcy Code, 11 § U.S.C. 547(b)(4)(A) provides that, with a few exceptions, a trustee in bankruptcy may avoid any transfers of an interest in the debtor’s property that is made on or within 90 days before filing the bankruptcy petition.
In 1984, the Seventh Circuit Court of Appeals decided in In re Coppie that when a transfer of the debtor’s property occurred depended on how state law defined a “transfer.” Indiana law defines “transfer” as when a court enters a garnishment order. Here, a garnishment order was ordered against the debtor’s wages within the 90-day period. As a result, the Seventh Circuit ruled in favor of the creditors, finding that the garnished wages were not preferences that the trustee could avoid.
Thirty-nine years later, on January 9, 2023, the Seventh Circuit Court of Appeals overturned In re Coppie by deciding Warsco v. Creditmax Collection. Prior to the 90-day period provided in 11 § U.S.C. 547(b)(4)(A), a state court entered a garnishment order, requiring Isiah Harris’s employer to pay part of his wages directly to the creditor, Creditmax. After Harris filed for bankruptcy, his trustee tried to avoid the nearly $3,700 of wages that had been garnished to Creditmax during the 90 days prior to his filing for bankruptcy. The trustee wanted to disburse the $3,700 among all of Harris’s creditors without preference to Creditmax.
The Seventh Circuit ruled in favor of the trustee. In determining its own precedent to no longer be valid law, the Seventh Circuit referenced the Supreme Court’s decision in Barnhill v. Johnson, which requires the federal definition of a “transfer” to trump state law definitions. Barnhill deems a transfer of the debtor’s property to have occurred when money is paid, not when the garnishment order was entered. Because the $3,700 was actually paid to Creditmax within the 90 days prior to filing for bankruptcy, it was a preference that the trustee could avoid.
How Does This Impact Creditors?
Warsco therefore changes two aspects of a 39-year-old precedent in bankruptcy law: (1) the definition of “transfer” within 11 § U.S.C. 547(b)(4)(A) is dependent on federal law, not state law, and (2) federal law defines a “transfer” as occurring when money changes hands and is received by the creditor, not when the court enters a garnishment order.
Creditors should beware. Because of Warsco, even though a garnishment order may be entered in favor of a creditor to begin receiving an interest in a debtor’s property, if a debtor files for bankruptcy within 90 days of the creditor having received any of the debtor’s property, then any property the creditor receives can be avoided by the trustee in bankruptcy. Therefore, creditors may owe trustees in bankruptcy for the funds they received within the 90-day-period prior to the debtor filing for bankruptcy.
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