United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

_____________

No. 97-6080EMSL

____________

In re: *

 *

SHARON DENISE WADE, *

*

Debtor. *

*

SHARON DENISE WADE, *

* Appeal from the United States

Plaintiff-Appellant, * Bankruptcy Court for

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

Appellant, Sharon Denise Wade (Wade), appeals from a decision of the bankruptcy

court which denied her lien avoidance as to three wage payments which had been garnished

by and paid over to Appellee, Midwest Acceptance Corporation (Midwest), prior to the date

she filed her bankruptcy 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 garnishment 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.

Between September 22, 1996, and December 4, 1996, Wade's employer made six

payments into 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 the

United States Bankruptcy Code. She voluntarily converted the case to one under Chapter

7 on December 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

$448.68
Wade 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 no

action to recover any of the payments. Wade then commenced an adversary proceeding

against several parties, including Midwest, seeking twofold relief. First, Wade sought to

1

avoid Midwest's lien using the lien avoidance provisions set forth in § 522(f)(1)(A) of the

Bankruptcy Code. Alternatively, Wade sought to recover all six payments as preferential

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 by

summary 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, in

essence, that, in order to effect lien avoidance under § 522(f)(1)(A), the debtor must have an

interest in property at the time the bankruptcy petition was filed. The court further held that

on November 22, 1996, Wade had no interest in the first three payments, but did have an

interest in the fourth and fifth payments. The court also ruled that Wade either had an

interest in the sixth payment or such payment, constituting postpetition earnings, was not

property of the estate under 11 U.S.C. § 541(a)(6). Accordingly, Wade was awarded

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 outside the ninety day

preference period, 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 lien

avoidance on the first three payments and rejecting her claim that those three payments were

preferences avoidable under § 547 of the Bankruptcy Code. Midwest has not cross-appealed

as to the last 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 court erred in holding that the first three payments were

not preferential because one of the elements of a preference, improvement in position, had

not been established. 

DECISION

We hold that the bankruptcy court erred in its determination that the first three

payments were not preferential. Accordingly, we need not address the question of whether

the Debtor was entitled to lien avoidance.2

I. STANDARD OF REVIEW

The bankruptcy court in this case granted summary judgment in favor of Midwest

with regard to the first three payments garnished by Midwest. We review the bankruptcy

court's decision de novo. Kunkel v. Sprague Nat'l Bank, 128 F.3d 636, 640 (8th Cir. 1997);

Tudor Oaks Ltd. Partnership v. Cochrane (In re Cochrane), 124 F.3d 978, 981 (8th Cir.

1997); Waugh v. I.R.S. (In re Waugh), 109 F.3d 489, 491 (8th Cir. 1997). Thus, we will

affirm only if, assuming all reasonable inferences favorable to the nonmoving party, the

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." FED. R. BANKR. 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. ELEMENTS OF A PREFERENCE: RECOVERY BY DEBTOR

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 the

debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made--

(A) on 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 enables such creditor to receive more than such

creditor would receive if--

(A) the 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 section, any prepetition transfer is preferential

and avoidable 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 was

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 or

indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with

property or with an interest in property . . . ." Id. § 101(54). Section 547(e) defines when

a transfer 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). Subsections 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).

Ordinarily, 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 benefit of the debtor if the property

would have been exempt and was not voluntarily transferred, and if, further, the trustee has

not sought such avoidance. See LaBarge v. Benda (In re Merrifield), 214 B.R. 362, 365

4

(B.A.P. 8th Cir. 1997). As stated earlier, all three such requirements 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 that they were not the subject of an avoidance action by the trustee. Thus, Wade has

standing to seek avoidance of the prepetition transfer.

III. BANKRUPTCY COURT ANALYSIS

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 payments were made to or for the benefit of Midwest, for or on account of Wade's

antecedent debt to Midwest, within ninety days prior to the filing of the bankruptcy petition,

and while Wade was presumptively insolvent. Referring to and relying upon Missouri

5

garnishment law, however, the bankruptcy court focused on the transfer which occurred

when the writ of garnishment was served on August 21, 1996, a date more than ninety days

prior to the bankruptcy filing. Because the bankruptcy court read Missouri's garnishment law

to provide the garnishor 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 bankruptcy court, the payments made by the garnishee to the court and by

the court to Midwest did not result in Midwest's improving its position because Midwest was

a creditor holding a lien which attached as to all three payments outside the preference

period. This was, in the court's view, as a result of the service of the garnishment summons

outside the ninety day preference period. In reaching this conclusion, the bankruptcy court

correctly noted that ordinarily payments made to a lien creditor fully perfected prior to the

start of the preference 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 preference period." In a later order denying Wade's

motion for amended findings, the bankruptcy court rejected Wade's request that the
8

bankruptcy court make factual findings or allow additional evidence regarding when the

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 easily be made by reasonable

persons."

IV. MISSOURI LAW

The bankruptcy court correctly interpreted Missouri garnishment law. Missouri's

garnishment statutes, like garnishment statutes in many states, provide that service of the

notice of garnishment 

shall have the effect of attaching all personal property, money, rights, credits,

bonds, bills, notes, drafts, checks or other choses in action of the defendant in

the garnishee's possession or charge, or under his control at the time of the

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 of

filing his answer . . . .

MO. ANN. STAT. § 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

subject 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." MO. R. CIV. 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. Bambrick 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 service is superior to later perfected security interests. Vittert Constr. and Inv. Co. v.

Wall Covering Contractors, Inc., 473 S.W.2d 799, 804 (Mo. App. 1971) (lien created by

service 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 continuing one. That is, it attaches to property held by the
Subject, 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 MO. ANN. STAT. § 525.030 (West

Supp. 1998).

9

garnishee and owing to the debtor on the date the garnishment writ is served and to property

coming into the garnishee'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.

MO. ANN. STAT. § 525.260 (West 1953).

Plainly, then, under Missouri law the service 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 and

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. FEDERAL LAW: SECTION 547(e)(3)

As stated earlier, § 547(e)(3) furnishes a caveat to the general rule that a transfer

becomes effective for preference purposes at the time it is effective between the parties. The

Code prevents a transfer which might otherwise have been considered to have occurred when

a continuing 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, if

future wages are subject to a garnishment lien arising outside the ninety day preference

period, but are earned within that ninety day period, the lien does not attach until the wages

are earned.

It is fundamental that state law controls the underlying rights parties may have to

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 recent and important example of this axiom is the Supreme Court's decision in

Fidelity Financial Services, Inc. v. Fink, 118 S. Ct. 651 (1998). In Fidelity, the debtor

purchased a new car with funds provided by Fidelity. She gave Fidelity a note secured by

the car, but Fidelity failed to perfect its security interest within the twenty-day time limit of

§ 547(c)(3)(B). Missouri law deemed perfection of a security interest to have occurred on

the date of delivery, if all the necessary papers were recorded within thirty days of delivery.

The Supreme 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 two

are in conflict. See id. at 656.

The analysis is strengthened by reference to a leading commentary which addresses

this precise question:

Although the section 547(e)(3) caveat is aimed primarily at UCC

Article 9 floating liens, application of the caveat is not limited to them. It

applies to every kind of transfer, including involuntary transfers of the debtor's

property. Suppose, for example, that C wins a judgment against D and gets a

continuing garnishment against D's employer. The garnishment first takes

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 garnishing creditor. Suppose, also,

that the garnishment is a continuing garnishment, that is, the lien affects wages

thereafter earned by D until the garnishment expires by law or by the terms of

the writ. The garnishment may continue until the creditor's judgment is

satisfied.

Service of the writ occurred, and thus the garnishment lien initially

arose, outside of the preference period. The lien is nevertheless preferential
11

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 rights 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,

notwithstanding that the continuing lien of garnishment that automatically attaches to the

wages as soon as she earns them predates the preference period.

1 DAVID G. EPSTEIN ET AL., BANKRUPTCY § 6-15, at 553-55 (1992) (footnotes omitted). The

authors acknowledge case authority to the contrary but view such cases as "analytically

flawed" because they base their analysis on a view that a continuing garnishment may be

analogized to a voluntary assignment of a right arising in the future under an executory

contract; i.e., viewing a continuing garnishment "as effecting an existing, albeit contingent,

right to unearned wages:"

First, the argument presupposes that this common-law theory regarding the

assignment of rights under executory contract applies to garnishment, and

further assumes that the thing is not displaced, in 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."

Although an employee may have a right to receive wages, i.e., money, if she

continues working, and although that executory contract right may be

transferred to her creditor when the garnishment lien is first effective, the

employee obviously gets no rights, as against her employer, to money that the

employee earns, until the employee earns it. This money, i.e., earned wages,

is the object of our concern here, that is, earned wages or money is the

property actually transferred.

Because this money is the property transferred, and because the debtor

acquires no rights to it until she earns it, there can be no transfer of wages, for

preference 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 think 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 is

consistent with the recent Supreme Court decision in Fidelity. Simplistically stated, state

nonbankruptcy law does determine when a transfer is effective between the parties and

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 is

made for purposes of preference analysis.

The bankruptcy court relied heavily on the case of In re Wilkinson, 196 B.R. 311

(Bankr. E.D. Va. 1996). While Wilkinson was correctly decided and well-reasoned, the

bankruptcy court's reliance was misplaced. Wilkinson is entirely distinguishable from the

case at hand. In Wilkinson, as in this case, the garnishment summons and writ were served

more than ninety days prior to the filing; payment to the garnishor was made within the

preference period. Virginia, like Missouri, grants a garnishor a lien on all funds that the

debtor is entitled to receive from the garnishee on the date the garnishment is served and all

funds to which the debtor becomes entitled prior to the return date on the summons. The

Wilkinson court correctly noted two "conceptually distinct transfers;" one which occurred

when the garnishment summons was served and one which occurred when the wages were

paid to the garnishor. Id. at 319. The court held that the second transfer, occurring within

the ninety day preference period, was not preferential because payments were made on a

fully secured claim which had been created outside that time frame. The distinguishing

feature in Wilkinson, and one emphasized in the court's analysis, however, was the fact that

all payments made to the garnishor during the ninety day preference period were wages that

had been earned before ninety days prior to the bankruptcy filing. Using precisely the

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

the wages had been earned during the preference period. Citing Mayo v. United Services

Automobile Association (In re Mayo), 19 B.R. 630, 632-33 (E.D. Va. 1981), which itself

quoted Cox v. General Electric Credit Corp. (In re Cox), 10 B.R. 268 (Bankr. D. Mo. 1981),

the Wilkinson court emphasized that "a payment of the garnishment attributable to wages

earned by the debtor within ninety days of the filing of a bankruptcy petition is a preferential

transfer to a judgment creditor," and distinguished such a case from one where payment was
13

made for wages earned and subjected to a garnishment summons wholly outside the ninety

days. Id. at 320.

Accordingly, we conclude that a garnishment of wages earned within the ninety day

preference period is avoidable by the Debtor, but that a garnishment of wages earned outside

that ninety day time frame is not. Attachment of a lien on garnished wages earned within the

ninety day preference period is, thus, a preferential transfer. Because the record does not

evidence when the three wage payments were earned, and particularly because appellant

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 earned and whether a material fact issue exists on the question and that it enter a

judgment or decision based on such determination.

Accordingly, we reverse and remand to allow the bankruptcy court to take further

action consistent with this decision.

A true copy.

Attest:

CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR

THE EIGHTH CIRCUIT