Opinion
Case No. 94-20473, Chapter 7, Adversary No. 94-2019
May 12, 1995
DECISION
THIS MATTER came before the court on motions of both parties for summary judgment. The parties agree there is no genuine issue of material fact. The court has heard arguments of counsel, has considered the motions, the affidavits and exhibits, and the other materials on file, and being fully advised hereby renders its decision.
Jurisdiction
The adversary complaint was filed pursuant to 11 U.S.C. § 547 (b). The court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 157(a) and 1334. This is a core proceeding within the meaning of § 157(b)(2)(F).
Issue
The issue is when, under § 547(b)(4)(A), a transfer of the debtor's interest in property takes place if that transfer is accomplished by operation of the Wyoming garnishment statutes. The parties dispute whether the transfer occurs when a writ of garnishment is served or when the state court issues an order disbursing the garnished funds.
UNCONTROVERTED FACTS
The uncontroverted facts establish that the defendants Vincent J. Curtis, Jr., and Fletcher, Heald Hildreth (Curtis) are judgment creditors of the plaintiff, Buck Broadcasting, Inc. (Buck Broadcasting). Curtis obtained a judgment for unpaid legal fees in the superior Court of the District of Columbia on September 7, 1993. That judgment was filed for execution purposes in the District Court for the First Judicial District of Wyoming on November 1, 1993.
Curtis instituted collection activity on the judgment by obtaining writs of execution and garnishment from the Clerk of the Laramie County District Court. These writs were served by the Laramie County Sheriff on various garnishees to satisfy the judgment from accounts receivable owed to Buck Broadcasting for radio advertising. As a result of the garnishments, Curtis intercepted and collected advertising revenues of Buck Broadcasting.
With its pleadings, Buck Broadcasting submitted a compilation entitled Schedule of Garnishment and Execution Service and Release. The parties do not dispute that the compilation is an accurate list of the transfers in question and the dates upon which various events occurred in connection with the garnishments, although the court finds some information lacking. The court has attached a copy of the schedule to this decision as Exhibit A. With respect to four (4) of the transfers in question, there may be factual questions to be resolved by the parties within the parameters of this decision or brought to the court for further resolution.
On June 28, 1994, Buck Broadcasting filed a voluntary chapter 11 petition in this court. The case was converted to a chapter 7 case on November 23, 1994, the day after the court held a hearing on these summary judgment motions.
CONCLUSIONS OF LAW
Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. In re Baum, 22 F.3d 1014, 1016-1017 (10th Cir. 1994). In this case, the parties agree that the dispute is a legal question concerning the timing of various transfers under 11 U.S.C. § 547(b)(4)(A) and that the other elements of § 547 are satisfied.
The Title Question
As a threshold question, Curtis argues that the garnishments were not preferential transfers because they were not transfers of an interest of the debtor in property within the meaning of § 547(b). In support of this legal proposition, Curtis cites a case in which the bankruptcy court held that an Internal Revenue Service notice of levy terminated the debtor's chose in action (account receivable) and converted it into a payment to the IRS. In re Sigmund London, Inc., 139 B.R. 765 (Bankr.E.D.N.Y. 1992). From this proposition, Curtis argues that a Buck Broadcasting account receivable is "gone when seized" under the garnishment lien and the "debtor has nothing." The argument completely ignores the fact that at some specific point in time the "seizure" occurs, and it is precisely that timing with which the preference statute is concerned.
Other courts have reached results contrary to the London decision. See, e.g., In re Hebermehl, 132 B.R. 651 (Bankr.D.Colo. 1991); In re Hooper, 152 B.R. 309 (Bankr.D.Colo. 1993). But, whether or not the London case adopts the correct legal analysis is irrelevant here. The court in London was not resolving whether a preferential transfer had occurred, and on that basis alone the case is distinguishable.
An account receivable is property of the estate and is property in which the debtor has an interest. See 11 U.S.C. § 541. The nature of the debtor's property interest is a question of state law. Barnhill v.Johnson, 112 S.Ct. 1386, 1389 (1992). Nothing under Wyoming law supports the argument that a garnishment transfers title to an account receivable when the writ is served, or that no transfer ever occurs.
Applicability of § 547(c)(5)
Curtis also contends that none of the transfers in question is avoidable because Buck Broadcasting cannot meet the requirements of § 547(c)(5). In support of this argument Curtis directs the court's attention to In re Castletons, Inc. 990 F.2d 551 (10th Cir. 1993). The Castletons, Inc., case is factually inapposite, and the cited section deals with transfers that create security interests. The Bankruptcy Code defines a security interest in § 101(51) as a lien created by agreement. Obviously, that is not the situation here, and § 547(c)(5) is not applicable.
Preferential Transfers
Buck Broadcasting seeks to avoid transfers alleged to be preferences under § 547(b) which states that "[t]he trustee may avoid any transfer of an interest of the debtor in property . . . made (A) on or within 90 days before the date of the filing of the petition." The 90-day period is calculated by application of Fed.R.Bankr.P. 9006 and by counting back from the date of the filing of the petition (the event from which the time is measured), in this case, June 28, 1994. In re Nelson Co., 959 F.2d 1260, 1266 (3rd Cir. 1992); In re Antweil, 97 B.R. 63, 64 (Bankr.D.N.M. 1989). Here the last date falling within the 90-day period is March 30, 1994.
"What constitutes a transfer and when it is complete" is a question of federal law. Barnhill v.Johnson, 112 S.Ct. at 1389; citing McKenzie v. Irving, 323 U.S. 365, 369-270 (1945). A transfer is defined by § 101(54) as "every mode . . . of disposing of or parting with property or with an interest in property." This broad definition includes the creation of a judicial lien. In re Conner, 733 F.2d 1560, 1562 (11th Cir. 1984); 11 U.S.C. § 101(36) (37). A garnishment creates a judicial lien under Wyoming law. See Wyo. Stat. § 1-15-502(a) (1988).
Federal law also defines when a transfer is perfected for preference purposes in S 547(e). The section provides:
(e) (1) For the purposes of this section — . . .
(B) a transfer of . . . property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee; and
(2) . . . except as provided in paragraph (3) of this subsection, a transfer is made —
(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at . . . such time.
And in § 547(e)(3) the Code provides that "a transfer is not made until the debtor has acquired rights in the property transferred."
Although some courts have held that § 547(e) does not apply to a non-consensual lien, the United States Supreme Court applied the subsection without discussion where the alleged transfer was the payment of a debt by check. Barnhill v. Johnson, 112 S.Ct. at 1391. And in a case decided previous to Barnhill, the Seventh Circuit persuasively defined "perfection" more broadly than the granting and filing of a consensual lien. Global Distribution Network v. Star Expansion, 949 F.2d 910, 913 (7th Cir. 1991).
Whether or when a lien arises is a question of state law. In re T.M. Sweeney Sons, LTL Services, Inc., 120 B.R. 101, 104 (Bankr.N.D.Ill. 1990). This court must determine the time under state law when a creditor on a simple contract cannot acquire a lien in Buck Broadcasting's accounts receivable superior to that Curtis.
Under Wyoming law a judgment creditor may execute on property of the judgment debtor, i.e., Buck Broadcasting, to satisfy its judgment by means of a post-judgment writ of garnishment. Wyo. Stat §§ 1-15-401, et seq. (1988). A writ of garnishment is used by a creditor to levy upon property such as an account receivable "due or yet to become due at the time of service of writ" that is in possession of a third person. Wyo. Stat. § 1-15-402 (1988).
A garnishment writ is equivalent to a writ of execution which is used to levy against personal property in the possession of the judgment debtor. Wyo. Stat. §§ 1-17-101, et seq. (1988). Although Curtis obtained and served both a writ of execution and a writ of garnishment in each instance, this court questions whether both were necessary.
The garnishee is bound to "hold for the benefit of the plaintiff all property of the defendant in his possession, and money and credits due from him to the defendant, from the time he is served with the writ until the writ is discharged." Wyo. Stat. § 1-15-425 (1988). The garnishee is automatically released from the writ after 30 days provided that the garnishee has "delivered to the court all of the defendant's . . . choses in action [or] money" in its possession or "coming into its possession within thirty (30) days after service of the writ." Wyo. Stat. § 1-15-407(c) (Supp. 1994).
There is apparently only one published case interpreting perfection under Wyoming's garnishment procedures. United States v. Hunt, 373 F. Supp. 1079, 1081 (D.Wyo. 1974); modified, 513 F.2d 129 (10th Cir. 1975). In Hunt the court held that the service of a garnishment writ gave the creditor a paramount right (security) to the property. The court was interpreting the predecessor statutes to those now in effect, and the garnishment was a pre-judgment garnishment. Nonetheless, the holding that service of the writ created a lien is sound.
Wyoming's continuing garnishment statutes, although not directly applicable, are instructive for three (3) reasons. See Wyo. Stat. §§ 1-15-501, et seq. (1988; Supp. 1994). First, § 1-15-502(b) provides that the garnishment "shall be a lien and continuing levy against said earnings due until . . . ninety (90) days have expired since service of the writ." (Emphasis provided).
Second, they clearly establish the order of priority if more than one person serves a writ of garnishment on a particular garnishee. Wyo. Stat. § 1-15-504(a) (1988). Multiple garnishment writs "shall be satisfied in the order of service on the garnishee." And finally, "a writ of execution is not a prerequisite to issuance of a writ of continuing garnishment." Wyo. Stat. § 1-15-502(a) (1988).
In In re Battery One-Stop, Ltd., 36 F.3d 493 (6th Cir. 1994), the
Sixth Circuit Court of Appeals interpreted Ohio's garnishment statutes which are similar to Wyoming's. That court held, and this court agrees, that perfection occurs when the garnishee is bound for the property, i.e., the time the writ is served. Id. at 495.
The court is aware that the Seventh Circuit Court of Appeals has recently rejected the rule adopted here. In re Freedom Group, Inc., 1995 W.L. 104833, at *4 (7th Cir. March 14, 1995) In Freedom Group, the court analogized to the delivery of a check and the United States Supreme Court's decision in Barnhill v. Johnson. The court held that the final court order releasing the funds was the effective time of the transfer. The decision relied on preference policy and the fact that after perfection of a garnishment lien, possible contingencies might affect the transfer.
This court believes that the better reasoned rule is the Battery One-Stop, Ltd. rule for two (2) reasons. First, the ability of a judgment debtor to stop payment on a check creates a contingency which does not exist in the context of a garnishment. The rule of Barnhill v. Johnson is not controlling in this context.
Second, the Freedom Group court ignored the plain language of § 547(e)(2)(A) which establishes the time when the rights of the parties become fixed. In a garnishment, the lien (transfer) is effective against the debtor when the garnishee is bound. At that point, the debtor has no control over the funds.
This court holds that the service of the garnishment writ is the time when, under Wyoming law, a creditor on a simple contract cannot acquire a judicial lien superior to the lien of the garnishing creditor. And is thus, under federal law, the time that the lien is perfected and the transfer is effective, subject to the applicability of § 547(e)(3).
Debtor's Rights in the Property
Wyoming allows a writ of garnishment to remain effective for 30 days. Buck Broadcasting argues that § 547(e)(3) is controlling and precludes a transfer to the extent the lien may encumber property not yet earned. In § 547(e)(3), the Code provides that the debtor must have acquired rights in the property before a transfer is made.
Although § 547(e)(3) may have been enacted to deal with consensual liens, In re Coppie, 728 F.2d 951 (7th Cir. 1984), cert. denied, 469 U.S. 1105 (1985), the plain language of the statute makes no such distinction. And the cases where the courts do not apply the section to continuing wage garnishments are factually distinguishable. See In re Polce, 168 B.R. 580 (Bankr.N.D.W. Va. 1994) (discussion of both points of view).
In the court's opinion, Buck Broadcasting did not have a property interest in the accounts receivable until the advertisements had been aired on the radio. Until then Buck Broadcasting had not acquired a right to payment. The court holds that, with respect to accounts receivable, the prospective lien arising under state law creates a preferential transfer when the debtor earns the right to payment. In this case, that is when Buck Broadcasting aired the advertisements. This result is also consistent with the Uniform Commercial Code and the creation of a consensual lien. Wyo. Stat. §§ 34.1-9-203 34.1-9-303 (1991).
The service of a writ of garnishment creates a perfected lien. To the extent that the debtor has acquired rights in the property subject to the lien, the transfer for preference avoidance purposes occurs when the lien is created. Otherwise, the transfer occurs when the debtor acquires rights in the property. In the case of accounts receivable, that event occurs when the account is earned.
The Specific Transfers
The parties both submitted charts. They establish that seven (7) writs were served after March 30, 1994, and payments were made on those writs totalling $2,922.23. These are numbered 10 — 16 on Exhibit A. Buck Broadcasting is entitled to avoid all transfers in connection with those writs and Curtis shall return to Buck Broadcasting $1,748.29, the sum collected by Curtis.
Four (4) writs were served and the payments occurred prior to March 30, 1994. These are numbered 1 — 4 on Exhibit A. These transfers are not avoidable and Curtis is entitled to retain $3,066.00 collected from them.
The transfers remaining require further discussion. Curtis served a writ of garnishment on Laramie County Community College on March 29, 1994, and again on May 11, 1994. The garnishee submitted $225.00 on June 2, 1994. Exhibit A, No. 9. Because the first writ served was only effective until April 28, 1994, the payment was obviously in response to the second writ. Thus, it too is avoidable and Buck Broadcasting is entitled to retain those funds.
Four (4) transfers remain, totalling $1,353.80. These include one (1) payment from The Cheyenne Club for $440.00 (No. 5), one (1) payment from Mr. Steve's Rent-To-Own for $359.00 (No. 7), and two (2) payments from Cheyenne Light Fuel and Power of $227.40 each (Nos. 6 and 8). The facts are not clear with respect to any of these four (4) payments. First, all four (4) were apparently earned during March, but the date upon which the ads aired is not provided. Second, the exhibits contain inconsistent information concerning the date(s) that writs were served on Cheyenne Light Fuel and Power and upon which two (2) payments were apparently made.
The court will issue a judgment in accordance with this decision. The remaining issues will be resolved at the trial or by the parties upon stipulation to the court.