## United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT

_____________ No. 97-6080EMSL

____________ In re: *
* SHARON DENISE WADE, *
* Debtor. *
* SHARON DENISE WADE, *
* Appeal from the UnitedState s Plaintiff-Appellant, * Bankruptcy Court fo r the
* Eastern District of Missouri

v. *
* MIDWEST ACCEPTANCE * CORPORATION, and PATRICIA A. * FLOOD, *
* Defendants-Appellees, *
* and *
* A. THOMAS DEWOSKIN, *
* Defendant-Trustee. *
*

____________ Submitted: February 18, 1998. Filed: April 6, 1998.

____________ Before KOGER, Chief Judge, KRESSEL, and DREHER, Bankruptcy Judges. DREHER, Bankruptcy Judge.2

Appella nt, Sharon Denise Wade (Wade), appeals from a decision of the bankruptcy court which denied her lien avoidanc e as to three wage payments which had been garnished by and paid over to Appellee, Midwest Accepta nce Corporation (Midwest), prior to the date she filed her bankr

uptcy petition and further determined that such wage payments were not preferences. For the reasons stated below, we reverse and remand.

FACTS

On August 23, 1994, Midwest obtained a judgment against Wade in Missouri state court for $4,462.32, plus costs and accruing interest. In pursuit of execution, at Midwest's request, the state court issued a writ of ga rnishment and execution. The writ, along with the garnishment summons, were served on Wade's employer on August 21, 1996. The return date on the writ was November 11, 1997.

Betwe en September 22, 1996, and December 4, 1996, Wade's employer made si x payments i nto court in response to the writ. Three payments were made by Wade' s employer, received by the court, and disbursed to Midwest on the following dates: Amount Employer's Check Received by Court Paid to Midwest $158.24 09/23/96 09/26/96 10/08/96 $150.33 10/07/96 10/10/96 10/18/96 $156.23 10/21/96 10/31/96 11/13/96 $465.80
On November 22, 1996, Wade filed a petition for relief under Chapter 13 of th e United States Bankruptcy Code. She voluntarily converted the case to one under Chapte r 7 on Decembe r 8, 1996. The remaining three payments were made by Wade's employer , received by the court, and disbursed to Midwest on the following dates: Amount Employer's Check Received by Court Paid to Midwest
$139.40 11/04/96 11/12/96 12/03/96 $157.59 11/19/96 11/25/96 12/06/96 $151.69 12/04/96 12/10/96 01/08/97 $448.68Wade sued Midwest; its attorney, Patricia Flood; and the Chapter 7 Trustee, A. Thomas 1 Dewoskin. The Trustee has not been involved in the proceedings and no judgment was entered against him. No judgment was entered against Ms. Flood, who could only be derivatively liable, but she is an Appellee in the case also.
3 Wade sought to exempt all six payments under Missouri law, no objections to such claim to exemption were filed, and Wade's Chapter 7 bankruptcy trustee commenced n o action t o recover any of the payments. Wade then commenced an adversary proceedin g aga inst several parties, including Midwest, seeking twofold relief. First, Wade sought t o 1 avoidMidwest's lien using the lien avoidance provisions set forth in § 522(f)(1)(A) of the Bankr uptcy Code. Alternatively, Wade sought to recover all six payments as preferentia l prepetition or wrongful postpetition transfers under §§ 522(h), 547, 549 and 550 of the Code. The parties stipulated to the relevant facts and submitted the case for determination b y
summ ary judgment on these two causes of action. With respect to the preference action , Midwest did not plead, allege or try any defenses that may have been available to it under § 547(c) of the Code, electing instead to assert that Wade could not establish the necessary elements of a preference.

The bankruptcy court ruled that Wade was entitled to avoid Midwest's lien under § 522(f)(1)(A) as to the last, but not as to the first, three payments. The court reasoned, i n essence, that, in order to effect lien avoidance u nder § 522(f)(1)(A), the debtor must have an interest in property at the time the bankrup tcy petition was filed. The court further held that
on Novembe r 22, 1996, Wade had no interest in the first three payments, but did have a n inte rest in the fourth and fifth payments. The court also ruled that Wade either had a n interest in the sixth payment or such payment, constituting postpetition earnings, was no t prop erty of the estate under 11 U.S.C. § 541(a)(6). Accordingly, Wade was awarde d judgment for the last three payments in the sum of $448.68 and Midwest was required to pay that sum to Wade. The court then held that Midwest had a lien on the first three payments as of the date the writ of garnishment was served, the lien had attached ou tside the ninety day preference p eriod, and Wade had, therefore, not shown that Midwest enhanced its position during the ninety day preference period by receiving such payments. Midwest was , therefore, not required to pay back the first three payments.By failing to address the lien avoidance issue, we do not mean to suggest in any way that the 2 bankruptcy court decided this issue incorrectly. We simply do not need to reach the point.
4 Wade has filed this appeal from that portion of the judgment denying her lie n avoidance on the first three payments and rejecting h er claim that those three payments were preferences avoidable under § 547 of the Bankruptcy Code. Mid west has not cross-appealed as to the la st three payments and the parties agree that the bankruptcy court's decision with respect to those payments is not challenged in this appeal.
As for the bankruptcy court's decision regarding the first three payments, Wade asserts that the court erred when it determined that, because Wade had no interest in the first three payments, she could not avoid Midwest's statutory garnishment lien as to such payments

. She also argues that the bankruptcy c ourt erred in holding that the first three payments were not p referential because one of the elements of a preference, improvement in position, had not been established.

DECISION

We hold tha t the bankruptcy court erred in its determination that the first thre e payments were not pre ferential. Accordingly, we need not address the question of whether the Debtor was entitled to lien avoidance. 2

I. S TANDARD OF R EVIEW The ban kruptcy court in this case granted summary judgment in favor of Midwes t wit h regard to the first three payments garnished by Midwest. We review the bankruptc y court's decision de novo

. Kunkel v. Sprague Nat'l Bank , 128 F.3d 636, 640 (8th Cir. 1997); Tudor O aks Ltd. Partnership v. Cochrane (In re Cochrane) , 124 F.3d 978, 981 (8th Cir

. 1997); Wau gh v. I.R.S. (In re Waugh) , 109 F.3d 489, 491 (8th Cir. 1997). Thus, we wil l aff irm only if, assuming all reasonable inferences favorable to the nonmoving party, th e record on appeal demonstrates "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." F ED

. R. B ANKR

. P. 7056(c);5

Celotex Corp. v. Catrett , 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249-50 (1986).

II. E LEMENTS OF A P REFERENCE : R ECOVERY BY D EBTOR Section 547 of the Bankruptcy Code provides: (b) Except

as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property--

(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by th e debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made-- (A) o n or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that en ables such creditor to receive more than suc h creditor would receive if--

(A) th e case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. 11 U.S.C. § 547(b) (1994). According to this sect ion, any prepetition transfer is preferential and avoid able if five elements of proof are present. The transfer must be made 1) to or for the benefit of a creditor; 2) for or on account of antecedent debt; 3) while the debtor wa s insolvent; 4) to a noninsider on or within ninety days of the filing of the bankruptcy case ; and, such transfer must 5) result in the creditor receiving more than the creditor would have received in a hypothetical liquidation in a Chapter 7 case.

Section 101 of the Bankruptcy Code defines a "transfer" as "every mode, direct o r indirec t, absolute or conditional, voluntary or involuntary, of disposing of or parting wit h property or with an interest in property . . . ." Id. § 101(54). Section 547(e) defines when
atransfer is made. For purposes of this appeal the focus is on § 547(e)(2)(A) and (B) and §In the case of purchase-money security transactions, a secured creditor is given a twenty-day 3 grace period from the date the debtor receives possession of the collateral in which to perfect its interest. See 11 U.S.C. § 547(c)(B), (e)(3)(A) (1994). Subsections (g) and (h) of § 522 provide: 4 (g) Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if--

(1) (A) such transfer was not a voluntary transfer of such property by the debtor; and

(B) the debtor did not conceal such property; or (2) the debtor could have avoided such transfer under subsection (f)(2) of this section. (h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if--

(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and (2) the trustee does not attempt to avoid such transfer.
Id. § 522(g), (h).
6 547(e)(3). Sub sections 547(e)(2)(A) and (B) provide that a transfer is made at the time the transfer takes effect between the parties if the transfer is perfected at or within ten days after such time, or upon perfection, if not so perfected within ten days. Section 547(e)(3 ) 3 cautions, however, that, for purposes of preference analysis, a transfer is not made "until the debtor has acquired rights in the property transferred." Id. § 547(e)(3).

Ordin arily, only the trustee may bring an action to avoid a prepetition transfer

. However, § 522(h) of the Bankruptcy Code, when read in conjunction with § 522(g), allows a debtor to avoid prepetition preferential transfers for the b enefit of the debtor if the property would have been exempt an d was not voluntarily transferred, and if, further, the trustee has not sought s uch avoidance. See LaBarge v. Benda ( In re Merrifield ), 214 B.R. 362, 36 5 4 (B.A.P. 8th Cir. 1997). As stated earlier, all three such requ irements are met in this case; the parties agree that the garnished wages are exempt, that they were transferred involuntarily,Section 547(f) provides that, "[f]or the purposes of this section, the debtor is presumed to 5 have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition." Id. § 547(f).
7 and th at they were not the subject of an avoidance action by the trustee. Thus, Wade ha s standing to seek avoidance of the prepetition transfer.

III. B ANKRUPTCY C OURT A NALYSIS The bankruptcy court determined that the three payments made, first, by the employer to the court, and, then, by the court to Midwest, met the first four criteria of preference

. These pay ments were made to or for the benefit of Midwest, for or on account of Wade' s antecedent debt to Midwest, within ninety days p rior to the filing of the bankruptcy petition,
an d while Wade was presumptively insolvent. Referring to and relying upon Missour i 5 gar nishment

law, however, the bankruptcy court focused on the transfer which occurre d when the writ of garnishmen t was served on August 21, 1996, a date more than ninety days prior to the bankruptcy filing. Because the bankruptcy court read Missour i's garnishment law to provide the garnisho r with a continuing lien on all wages earned from the date of service of the writ of garnishment until the return date on the writ or the service of the garnishee's answer, the bankruptcy court held that the fifth element of a preference had not been met. According to the bankruptc y court, the payments made by the garnishee to the court and by the court to Midwest did not result in Midwest's improving its p osition because Midwest was
a cred itor holding a lien which attached as to all three payments outside the preferenc e period. This was, in the court's view, as a result of the service of the garnishment summons outside the ninety da

y preference period. In reaching this conclusion, the bankruptcy court
corre ctly noted that ordinarily payments made to a lien creditor fully perfected prior to the start of the pref

erence period do not improve the creditor's position and are not preferential even if such payments occur within the preference period.
Curiously, the bankruptcy court made reference to Bankruptcy Code § 547(e)(3), but stated that it had "no evidence or stipulation from which to determine whether Debtor' s wages were earned inside or outside the preferen ce period." In a later order denying Wade's motion for amended findings, the bankruptcy court rejected Wade's request that the8

bankruptcy court make factual findings or allow additional evidence regarding when th e wages were earned, stating, "[a]lthough the stipulation of facts submitted by the parties did not expressly address this issue, it is a determination which can eas ily be made by reasonable persons."

IV. M ISSOURI L AW The bankruptcy court correctly interpreted Missouri garnishment law. Missouri' s garnish ment

statutes, like garnishment statutes in many states, provide that service of th e notice of garnishment shall have the effect of attachin g all personal property, money, rights, credits, bonds, bills, notes, drafts, chec ks or other choses in action of the defendant in the garnishee's possession or charge, or under his control at the time of th e service of the garnishment, or which may come into his possession or charge, or under his control, or be owing by him, between that time and the time o f filing his answer

. . . . M O

. A NN

. S TAT . § 525.040 (West Supp. 1998) (emphasis added). Missouri Rules of Court further provide that "The service of notice of garnishment and summons attaches the property subje ct to garnishment in the garnishee's possession or charge or under the garnishee' s control between the time the notice is served and the time of the return date on the writ of garnishment." M O

. R. C IV

. P. 90.06.
Thus, under Missouri law, service of the garnishment summons and writ creates a lien in the garnishor's favor which attaches to wages owing on the date of service and any which accrue thereafter until the return or answer date. Ferneau v. Armour &Co. , 303 S.W.2d 161, 166 (Mo. App . 1957); Ralston Purina Co. v. King , 101 S.W.2d 734, 735 (Mo. App. 1937); Bambrick V. Bam

brick Bros. Constr. Co. , 132 S.W. 322, 324 (Mo. App. 1910); Dinkins v. Crunden-Martin Woodenware Co. , 73 S.W. 246 , 248 (Mo. App. 1903). The lien created by such s ervice is superior to later perfected security interests. Vittert Constr. and Inv. Co. v. Wall Cove ring Contractors, Inc. , 473 S.W.2d 799, 804 (Mo. App. 1971) (lien created b y
se rvice of the garnishment summons is superior to later-assessed federal tax lien); M. R

. Dugan v. Missouri Neon & Plastic Adver. Co. , 472 F.2d 944, 952 (8th Cir. 1973) (same). Under Missouri law, the lien is a continu ing one. That is, it attaches to property held by theSubject, of course, to Missouri's exemption law for earned wages. Under Missouri law, the 6 maximum amount of an individual's weekly earnings that may be subject to garnishment may not exceed: (a) twenty-five percentum, or, (b) the amount by which his aggregate earnings for that week, after deduction from those earnings of any amounts required to be withheld by law, exceed thirty times the federal minimum hourly wage prescribed by section 6(a)(1) of the Fair labor Standards Act of 1938 in effect at the time the earnings are payable, or, (c) if the employee is the head of a family and a resident of Missouri, ten percentum, whichever is less. See M O

. ANN

. S TAT . § 525.030 (West Supp. 1998).
9 garnishee and owing to the debtor on the datethe garnishment writ is served and to property coming into the garn ishee's possession or control thereafter. Missouri law also specifically provides that debts not yet due may be attached, but not executed on, until they become due. M O

. A NN

. S TAT . § 525.260 (West 1953).
Plainly, then, under Missouri law the serv ice of the garnishment summons on August 21, 1996, created a perfected lien on all wages then owing or owing at any time between said date and November 11, 1997. If bankruptcy had not intervened, Midwest would have had
a garnishment lien on the Debtor's wages earned between those two dates, perfected an d attached as of August 21, 1997, on a retroactive basis as wages were subsequently earned. 6 The lien would have had priority over any lien or security interests attaching thereafter.

V. F EDERAL L AW : S ECTION 547(e)(3) As stated earlier, § 547(e)(3) furnishes a caveat to the general rule that a transfe r becomes effective for preference purposes at the time it is e ffective between the parties. The Code prevents a transfer which might otherwise have been considered t o have occurred when
acontinuing lien is created from actually being effective for preference analysis "until the debtor has acquired rights in the property transferred." 11 U .S.C. § 547(e)(3). Where wages
are involved this means that no transfer occurs until the wages are earned. And, thus, i f future wages are subject to a garnishment lien arising outside the ninety day preferenc e period, but are earned within th at ninety day period, the lien does not attach until the wages are earned.

It is fund amental that state law controls the underlying rights parties may have t o property, contracts, and the like. See, e.g. , Butner v. United States , 440 U.S. 48, 55 (1979)10

(stating that "property interests are created and defined by state law"). Notwithstanding this principle, it is also clear that "federal law is preemptive in bankruptcy." Anderson v. DeLong (In re Chicora Group) , 99 B.R. 715, 716 (Bankr. D. S.C. 1988) (citing Waldschmidt v. Ford Motor Credit Co. (In re Murray) , 27 B.R. 445 (Bankr. M.D . Tenn. 1983)). Thus, while state law may create certain rights to property, federal preference law may act to alter those rights. The most rece nt and important example of this axiom is the Supreme Court's decision i n Fidelity Financial Services, Inc. v. Fink , 118 S. Ct. 651 (1998). In Fidelity , the debto r purchased a new car with funds provided by Fidelity. She gave Fidelity a note secured by the car, but Fidelity faile d to perfect its security interest within the twenty-day time limit of § 54 7(c)(3)(B). Missouri law deemed perfection of a security interest to have occurred on the date of delivery, if all the neces sary papers were recorded within thirty days of delivery. The Su preme Court held that perfection must occur within 20 days as set forth in § 547(c)(3)(B), regardless of Missouri law on the subject. Fidelity resolved a long-standing split in the courts on the question of whether state law deemed perfection could trump the federal statutory definition found in § 547(c)(3)(B). See 118 S. Ct. at 653 n.2. The Court held, importantly, that state perfection law yields to federal preference law where the tw o are in conflict. See id. at 656.
The analy sis is strengthened by reference to a leading commentary which addresses this precise question:

Altho ughthe section 547(e)(3) caveat is aimed primarily at UC C Article 9 flo ating liens, application of the caveat is not limited to them. I t applies to every kind of transfer, including involunt ary transfers of the debtor's property. Suppose, fo r example, that C wins a judgment against D and gets a continuing garnishment against D's employer. The garnishment first take s effect when the writ of garnishment is served on the employer. At that time a lien on D's wages attaches in favor of the garnishi ng creditor. Suppose, also, that the garnishment is a continuing garnishment, that is, the lien affects wages thereafter earned by D until the garn ishment expires by law or by the terms of th e writ. The garnishment may continue until the creditor's judgment i s satisfied.
Service of the writ occurred, and thus the garnishment lien initiall y arose, outside of the preference period. The lien is nevertheless preferential11

to the extent that the lien spreads to the sums that D earns during the preference period. The reason is that D does not acquire rig hts to her wages until she earns them. Thus, because of the section 547(e)( 3) caveat, any transfer of her wages, including a transfer to a creditor by way of a continuing garnishment, cannot occur until the wages are earned or later , not withstanding that the continuing lien of garnishment that automatically attaches to th e wages as soon as she earns them predates the preference period.
1 D AVID G. E PSTEIN ET AL ., B ANKRUPTCY § 6-15, at 553-55 (1992) (footnotes omitted). The authors ack nowledge case authority to the contrary but view such cases as "analyticall y flawed" becau se they base their analysis on a view that a continuing garnishment may b e analogized t o a voluntary assignment of a right arising in the future under an executor y contract; i.e., vie wing a continuing garnishment "as effecting an existing, albeit contingent, right to unearned wages:" First, the argument presupposes that this common-law theory regarding th e assignment

of rights under executory contract applies to garnishment, an d further assumes that the thing is not displaced, i n bankruptcy preference cases, by section 547(e)(3). Second, even if applicable, the theory must be applied consistently with the section 547 (e)(3) caveat. The language of the section equates the time of transfer with the time the debtor gets rights " in the property transferred. " Alt hough an employee may have a right to receive wages, i.e., money, if she con tinues working, and although that executory contract right may b e transfer red to her creditor when the garnishment lien is first effective, th e employee obviously gets no rights, as against her employer, to money that the employee earns, u ntil the employee earns it. This money, i.e., earned wages, is the obje ct of our concern here, that is, earned wages or money is th e property actually transferred. Because this money is the prop erty transferred, and because the debtor acquires no rights to it until she earns it, there can be no transfer of wages, for p reference purposes, until the wages are earned. Thus, wages earned during the preference period are transferred then despite their being subject to a continuing garnishment that pre-dates the period.
Id. at 556 (footnotes omitted) (emphasis in original).12

We t hink this reasoning sound. It fully comports with the literal language of § 547(e)(3), see United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 241 (1989), and it i s consis tent

with the recent Supreme Court decision in Fidelity . Simplistically stated, stat e nonbankru ptcy law does determine when a transfer is effective between the parties an d against third persons, and also when the debtor acquires rights in the property. But, federal law, namely the caveat provided by § 547(e)(3), determines precisely when a transfer i s made for purposes of preference analysis.

The bankruptcy court relied heavily on the case of In re Wilkinson , 196 B.R. 31 1 (Bank r. E.D. Va. 1996). While Wilkinson was correctly decided and well-reasoned, th e bankruptcy court's reliance was misplaced. Wilkinson is entirely distinguishable from the case at hand. In Wilkins on , as in this case, the garnishment summons and writ were served
more than nine ty days prior to the filing; payment to the garnishor was made within th e preference pe riod. Virginia, like Missouri, grants a garnishor a lien on all funds that th e debtor is entitled to receive fr om the garnishee on the date the garnishment is served and all funds t o which the debtor becomes entitled prior to the return date on the summons. Th e Wilkinson court correctly noted two "conceptually distinct transfers;" one which occurred when thegarnishment summons was served and one which occurred when the wages were paid t o the garnishor. Id . at 319. The court held that the second transfer, occurring within the n inety day preference period, was not preferential because payments were made on a ful ly secured claim which had been created outside that time frame. The distinguishin g feature in Wilkinson , and one emph asized in the court's analysis, however, was the fact that all payments made to the garnishor dur ing the ninety day preference period were wages that had been earned before ninety days prior to the bankruptcy filing. Using precisely th e analysis we use here, and referencing § 547(e)(3) in particular, the Wilkinson court found no preference . It did, however, make clear that its conclusion would have been different if th e wages had been earned during the preference period. Citing Mayo v. United Service s Automo bile Association (In re Mayo) , 19 B.R. 630, 632-33 (E.D. Va. 1981), which itsel f quoted Cox v. General Electric Credit Corp. (In re Co x) , 10 B.R. 268 (Bankr. D. Mo. 1981), the W ilkinson court emphasized that "a payment of the garnishment attributable to wage s earned by the debtor within ninety days of the filing of a b ankruptcy petition is a preferential transfer to a judgment creditor," and distingui shed such a case from one where payment was13

made for wages earned and subjected to a garnishment summons wholly outside the ninety days. Id. at 320.
Accordingly, we co nclude that a garnishment of wages earned within the ninety day preference period is avoidable by the Debtor, but that a ga rnishment of wages earned outside that ninety day time frame is not. Attachment of a lien on garnis hed wages earned within the nin ety day preference period is, thus, a preferential transfer. Because the record does no t evi dence when the three wage payments were earned, and particularly because appellan t sought and was denied the opportunity to develop that record, we reverse and remand with instruction that

the bankruptcy court determine when the wages on the first three payments
were earn ed and whether a material fact issue exists on the question and that it enter a judgment or decision based on such determination.
Accordingl y, we reverse and remand to allow the bankruptcy court to take furthe r action consistent with this decision.
A true copy.

Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR

THE EIGHTH CIRCUIT