Court Opinion

ID: 4152093
Source: CourtListenerOpinion
Date Created: 2017-03-13 18:00:54.152608+00
Date Added: 2024-06-11T14:29:08.843385
License: Public Domain

Case: 16-30274     Document: 00513907721   Page: 1   Date Filed: 03/13/2017

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                              United States Court of Appeals

                                 No. 16-30274
                                                                       Fifth Circuit

                                                                     FILED
                                                               March 13, 2017

In the Matter of: CHRISTON JACKSON                              Lyle W. Cayce
                                                                     Clerk
            Debtor

TOWER CREDIT, INCORPORATED,

             Appellant

v.

MARTIN A. SCHOTT,

             Appellee

                Appeal from the United States District Court
                    for the Middle District of Louisiana

Before DAVIS, DENNIS, and SOUTHWICK, Circuit Judges.
JAMES L. DENNIS, Circuit Judge:
      In 2009, Tower Credit, Incorporated, obtained a money judgment in a
Louisiana state court against Christon Jackson. Seeking to collect, Tower
obtained a garnishment order, served it on Jackson’s employer on January 19,
2012, and began collecting Jackson’s garnished wages. On November 17, 2012,
Jackson filed for Chapter 7 bankruptcy protection in the United States
Bankruptcy Court for the Middle District of Louisiana. The bankruptcy court
appointed Martin Schott as trustee to administer Jackson’s estate. In 2014,
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the trustee initiated this adversary action, seeking to void the garnishments
collected by Tower within ninety days prior to Jackson’s filing for bankruptcy
as preferential transfers pursuant to 11 U.S.C. § 547(b). The trustee initially
sought the return of $2,034.81, but the parties have since stipulated that the
actual amount at issue is $1,756.04. The bankruptcy court ultimately granted
summary judgment in favor of the trustee, and the district court affirmed on
appeal. Tower timely appealed to this court, arguing that the garnished wages
should be considered transferred on the date the garnishment order was
served, before the preference period, and therefore that the trustee is not
entitled to recover them. We disagree and therefore affirm.
                                DISCUSSION
      On appeal in a bankruptcy case, we apply the same standard of review
that the district court applied: “[T]he bankruptcy court’s factual findings are
reviewed for clear error; its legal conclusions and mixed questions of fact and
law, de novo.” In re Mercer, 246 F.3d 391, 402 (5th Cir. 2001) (italics removed).
Section 547(b) provides, in relevant part:
      [T]he 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; . . .
             (B) . . .
         (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.

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      Tower contests only the fourth element, arguing that Jackson’s interest
in the garnished wages was transferred to Tower when it served the
garnishment order on Jackson’s employer, more than ninety days before the
filing of Jackson’s petition.
      “What constitutes a transfer and when it is complete is a matter of
federal law.” Barnhill v. Johnson, 503 U.S. 393, 397 (1992) (citation and
internal quotation marks omitted). State law generally determines the nature
of property interests involved in purported transfers, but only “[i]n the absence
of controlling federal law.” See id. at 398; see also Local Loan Co. v. Hunt, 292
U.S. 234, 243-45 (1934) (declining to adhere to an Illinois state-law fiction that
“an assignment of future wages creates a lien effective from the date of the
assignment, which is not invalidated by the assignor’s discharge in
bankruptcy” and stating, “Local rules subversive [to the general purpose and
policy of the bankruptcy act] cannot be accepted as controlling the action of a
federal court.”).
      Section 547(e) provides the governing principles that determine the
timing of a transfer. As relevant to the instant case, a transfer is generally
made at the time it is “perfected,” § 547(e)(2)(B), which, in the context of non-
real property, occurs when “a creditor on a simple contract cannot acquire a
judicial lien that is superior to the interest of the transferee.” § 547(e)(1)(B).
However, § 547(e)(3) qualifies that general principle and provides that “a
transfer is not made until the debtor has acquired rights in the property
transferred.” See also In re Latham, 823 F.2d 108, 110 (5th Cir. 1987) (stating,
“[A] lien that is perfected outside the preference period does not attach to
property rights transferred to the Debtor during the preference period” and
citing Tabita v. IRS, 38 B.R. 511, 513 (E.D. Pa. 1984) for the proposition that

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“wages earned within preference period are subject to preference even though
writ of attachment was served beyond the preference period”). 1
       Tower contends that as soon as it served the garnishment order on
Jackson’s employer, no creditor on a simple contract could have acquired a
judicial lien superior to Tower’s interest. Thus, it argues that the transfer of
the interest in Jackson’s garnished wages was perfected at that time pursuant
to § 547(e)(1)(B). That would be true, except for the additional instruction of
§ 547(e)(3), which requires the debtor to have rights in the property before any
transfer can occur.
       In Local Loan, the Supreme Court held, albeit in the context of a
bankruptcy discharge dispute, “The earning power of an individual is the
power to create property; but it is not translated into property within the
meaning of the Bankruptcy Act until it has brought earnings into existence.” 2
292 U.S. at 243. Thus, as the Sixth Circuit explained in In re Morehead, 249
F.3d 445, 448 (6th Cir. 2001), in the wage garnishment context, a debtor cannot
logically obtain rights in her future wages until she performs the services that
entitle her to receive those wages. 249 F.3d at 448. The Morehead court
therefore held that “when wages are earned during the preference period,
transfer of those wages pursuant to a garnishment order is avoidable under . . .
§ 547(b)[ ].” Id. In other words, because Jackson had not earned the disputed

       1   Latham’s favorable citation of Tabita for this proposition is arguably dicta, as
Latham did not involve wage garnishment. See 823 F.2d at 109.
        2 The Bankruptcy Act was repealed in 1978 and replaced by the current Bankruptcy

Code. See Bankruptcy Reform Act of 1978, 112 Stat. 2549, 2682. However, the Court in Local
Loan grounded its holding in the purpose of the Bankruptcy Act to “relieve the honest debtor
from the weight of oppressive indebtedness, and permit him to start afresh free from the
obligations and responsibilities consequent upon business misfortunes.” See 292 U.S. 234 at
244 (internal quotation marks omitted). This remains a primary purpose of the Bankruptcy
Code as well, and the courts have continued to cite and apply Local Loan for this proposition.
See, e.g., Grogan v. Garner, 498 U.S. 279, 286 (1991); In re Shcolnik, 670 F.3d 624, 632 (5th
Cir. 2012). We therefore conclude that Local Loan’s holding that unearned, future wages are
not property within the meaning of the bankruptcy laws remains valid and binding upon us.
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wages before the ninety-day preference period, he had acquired no rights to
those wages and, under § 547(e)(3), could not have transferred such rights to
Tower prior to the preference period. See Morehead, 249 F.3d at 448; see also
Local Loan, 292 U.S. at 243; Latham, 823 F.2d at 110.
      Tower asserts that Morehead is “limited to states wherein the transfer
does not occur when the garnishment is served.” But it is federal law, not state
law, that determines when the transfer occurred, Barnhill, 503 U.S. at 397,
and § 547(e)(3) requires that a debtor acquire rights in the property in question
before any transfer is made. That is not to say that state law is never relevant
to the application of § 547(e)(3); indeed, in the absence of controlling federal
law, state law will determine whether the debtor had acquired rights in the
property. See Barnhill, 503 U.S. at 397. There is controlling federal law in the
context of a debtor’s rights in future wages, however, and it provides that “[t]he
earning power of an individual . . . is not translated into property . . . until it
has brought earnings into existence.”        See Local loan, 292 U.S. at 243.
Moreover, Tower has not even contended that Louisiana law provides
employees with present rights in their unearned, future wages.
      Tower cites three cases from the 1980s in which other circuits held that
a transfer of garnished wages occurred at the time the garnishment was served
on the employer. See In re Conner, 733 F.2d 1560 (11th Cir. 1984); In re Coppie,
728 F.2d 951 (7th Cir. 1984); In re Riddervold, 647 F.2d 342 (2d Cir. 1981). In
Conner, the Eleventh Circuit relied on § 547(e)(1)(B) and held that, because no
contract creditor could obtain a superior judicial lien after a garnishment was
executed, the transfer occurred at the time of the execution. 733 F.2d at 1562.
In Riddervold, the Second Circuit held that at the time the garnishment was
executed it created a “continuing levy,” which under New York law acted as a
novation of all of the debtor’s rights in his wages, and thus that there was no
transfer during the preference period. 647 F.2d at 346. Importantly, neither
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Riddervold nor Conner even considered the effect of § 547(e)(3), and both
predated Barnhill, in which the Supreme Court held that federal law governs
the determination of whether and when a transfer occurred. See Morehead,
249 F.3d at 448-49 (discussing and rejecting Riddervold and Conner).
      In Coppie, the Seventh Circuit held, similar to Riddervold, that the
execution of a garnishment acted as a novation of all of the debtor’s interests
in the wages under Indiana law so that there could not have been a transfer
within the preference period. 728 F.2d at 953. Addressing § 547(e)(3), the
court found it inapplicable because the debtor “will never acquire rights in the
portion of his or her wages to be garnished in the future” as those were
“irrevocably transferred to the garnishment plaintiff.” Id.
      In our view, the Coppie court’s conclusion that the debtor’s rights in his
future wages were “irrevocably transferred” at the time the garnishment order
was entered conflicts with § 547(e)(3)’s instruction that no transfer of an
interest in property is made before the debtor acquires rights in the property.
Like Conner and Riddervold, Coppie predated Barnhill, and it appears that
the Seventh Circuit itself no longer considers Coppie’s holding good law: that
court subsequently concluded that pre-Barnhill cases holding that a transfer
occurs when a notice of garnishment is served, including Conner, did not
survive the Supreme Court’s decision in Barnhill. See In re Freedom Grp., Inc.,
50 F.3d 408, 412 (7th Cir. 1995).
      The trio of cases cited by Tower has been roundly criticized on the
grounds discussed. See, e.g., Morehead, 249 F.3d at 448-49; Freedom Group,
50 F.3d at 412; In re White, 258 B.R. 129, 134 (Bankr. D.N.J. 2001); In re Mays,
256 B.R. 555, at 560 n.7; Tabita, 38 B.R. at 513; In re Dunn, 56 B.R. 275, 278
(Bankr. M.D. La. 1985); In re Perry, 48 B.R. 591, 598 (Bankr. M.D. Tenn. 1985);
see also 5 Collier on Bankruptcy ¶ 547.05 (16th ed.) (“The analysis of these
three appellate courts is wrong. . . . The timing scheme in section 547(e) does
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not exclude garnishment liens. Until the debtor earns the wages, there is no
property that the creditor can garnish or that the debtor can transfer. The
creditor’s right to the particular funds that are garnished exists only because
the debtor is entitled to be paid those funds as wages; it does not exist unless
the debtor first acquires the right to be paid.”). We join the other courts that
have rejected the cases cited by Tower and decline to follow those cases.
      The combination of Supreme Court precedent and the overwhelming
weight of persuasive authority applying § 547(e)(3) make clear that a debtor’s
wages cannot be transferred until they are earned. Thus, we hold that a
creditor’s collection of garnished wages earned during the preference period is
an avoidable transfer made during the preference period even if the
garnishment was served prior to that period.       We therefore AFFIRM the
district court’s judgment.

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