The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
In a recent published opinion, the Seventh Circuit Court of Appeals (the Court) reversed its own precedent in ruling that federal, not state law, defines the meaning of “transfer” in § 547 of the Bankruptcy Code, the statutory authority which allows a trustee to recover preferential transfers for the benefit of the estate. Warsco v Creditmax Collection Agency, Inc., 56 F.4th 1134 (7th Cir. 2023).
To view the opinion, click here.
Mark Warsco was appointed chapter 7 trustee in the bankruptcy case of Isiah Harris. He discovered that about $3700 had been paid to Creditmax Collection Agency under a garnishment order based on a judgment held by Creditmax within 90 days of the petition date. Warsco filed a preference action under § 547 of the Bankruptcy Code, asserting that the preferential payment on an antecedent debt received by Creditmax should be recovered for the benefit of all unsecured creditors. Creditmax defended the adversary proceeding by arguing that the garnishment order was issued in Indiana more than 90 days before the bankruptcy commenced and therefore the payment was not a preference because under Indiana law a “transfer” occurs when a garnishment order is entered, not when money is paid. It cited Seventh Circuit authority, In re Coppie, 725 F 2d 951 (7th Cir. 1984), which held that the definition of “transfer” for the purpose of § 547 depends on state law. The bankruptcy court concluded it was bound by Coppie, despite its reservations that it was wrongly decided, and denied the trustee’s application.
The trustee applied for a direct appeal to the Court, which it accepted. It agreed with the bankruptcy court that Coppie was wrongly decided and reversed.
The Court recognized that intervening Supreme Court precedent on the definition of “transfer” compelled it to reverse its precedent. In Barnhill v Johnson, 503 U.S. 393 (1992), the Supreme Court held that federal rather than state law defines the meaning of “transfer” in § 547. Barnhill had also ruled that under federal law a transfer occurs when money changes hands. Barnhill arose from a check which was signed and delivered outside the 90 day preference period but paid inside that window. The Supreme Court ruled that the date on the check was irrelevant and only when it was paid did the pertinent “transfer” occur.
The Court saw no distinction for the definition of transfer between a check, an instruction to a bank to pay money, and a garnishment, an instruction to an employer to pay money, in this instance to a creditor with a judgment. Under either instruction, from the time it was given things might occur to delay or even cancel payment. Therefore, the relevant transfer is not effective until money has changed hands, i.e., been paid. Since the payment here was within 90 days of the bankruptcy filing, the garnishment was a preferential payment, subject to recovery by the trustee.
The lesson here is that a circuit court need not sit en banc to reverse its own precedent when intervening authority from the Supreme Court has dictated reversal. The key to the federal definition of “transfer” is that money changes hands. If that occurs within 90 days of bankruptcy on account of a preexisting debt. the payment is a preference and the unfortunate creditor must pay it back to the estate.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.