Opinion
CASE NO. 98-15601-AJM-7A, Adversary Proceeding No. 99-323
December 7, 1998
Mark R. Galliher, Attorney for National City Bank of Indiana.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Carousel Travel Agency, Inc. (the "Debtor") filed its voluntary petition under Chapter 7 on December 7, 1998. Richard E. Boston (the "Trustee") was appointed the chapter 7 trustee on December 9, 1998. The Trustee filed his Complaint to Avoid Preferential Transfer (the "Complaint") against the Defendant, National City Bank (the "Bank") on August 2, 1999. The Complaint alleges that the Bank received a preferential payment by virtue of receipt of funds as a result of a final order in garnishment. The Trustee thereafter filed on March 30, 2000 his Motion for Summary Judgment (the "Motion") with respect to all issues raised in the Complaint and the Defendant opposes the Motion.
Hearing on the Motion was held on May 30, 2000 wherein the Trustee appeared in person; the Bank appeared by counsel, Mark Galliher. At the conclusion of the hearing the parties were instructed to submit proposed findings of fact and conclusions of law within twenty (20) days. The parties indicated that they wanted to continue to pursue settlement negotiations in the interim. Ultimately, the parties informed the Court that a settlement had not been reached. The last set of proposed findings and conclusions was submitted on October 24, 2000.
FINDINGS OF FACT
There is no genuine issue of material fact with respect to the following:
1. On April 15, 1996, the Bank obtained a judgment against the Debtor, and other Defendants, in amounts totaling in excess of $189,000.00.
2. On June 10, 1998, National City filed a Motion for Proceedings Supplemental, and served garnishment interrogatories on Fifth Third ("Fifth Third"), as a Garnishee Defendant. Pursuant to Indiana Code 28-9-4-2, the garnishment interrogatories served on Fifth Third included an order by the court that the Bank maintain a hold on any accounts in the name of the Judgment Defendants, one of which was the Debtor.
3. On June 16, 1998, Fifth Third filed its answers to these interrogatories, disclosing that the Debtor maintained accounts on deposit at Fifth Third in the approximate amount of $12,027.04. Consequently, pursuant to Indiana Code 34-55-8-7(c), and the previous order included with the garnishment interrogatories which directed Fifth Third to maintain a hold on any accounts in the name of the Debtor, a hold was placed on the Debtor's account.
4. After a final hearing was held upon the Bank's garnishment proceeding against Fifth Third, on September 18, 1998, the court entered its Final Order in Garnishment. Apparently in the period between June 16, 1998 (when Fifth Third responded to the garnishment interrogatories, disclosing the existence of the accounts in the Debtor's name) and September 18, 1998 (the date the court entered its Final Order in Garnishment), an additional $3859.25 was deposited into the Debtor's account at Fifth Third, because, pursuant to this September 18th Order, Fifth Third paid over the sum of $15,886.29 to the Bank. There is nothing in the record with respect to when this additional amount was deposited into the Debtor's account at Fifth Third.
5. On December 7, 1998, over 170 days after the Bank served its interrogatories on Fifth Third, and 80 days after the Bank received the $15,886.29 payment, the Debtor filed its voluntary petition for relief under chapter 7.
CONCLUSIONS OF LAW
1. This Court has jurisdiction over this adversary proceeding and its subject matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). Venue of this adversary proceeding lies in this district under the provisions of 28 U.S.C. § 1408 and 1409.
2. Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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.Civ.P. 56(c). See also, Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The Court construes the evidence and draws all reasonable inferences based on the evidence in the light most favorable to the nonmoving party. Once a properly supported summary judgment motion is made, the nonmovant must "go beyond the pleadings" and designate specific facts to support or defend each element of the claim, demonstrating a genuine issue for trial. American Modern Home Ins. Co. v. Tranex Credit Corp., 2000 WL 724005 (S.D.Ind.). Rule 56 of the Federal Rules of Civil Procedure applies in bankruptcy adversary proceedings, see, Fed.R.Bankr.P. 7056, and therefore the standards that govern summary judgment motions under Fed.R.Civ.P. 56(c) are equally applicable here.
3. The thrust of the Trustee's Motion for Summary Judgment is that the transfer of funds from the Debtor's bank account to the Bank on September 18, 1998, pursuant to a Final Order in Garnishment, is avoidable under 11 U.S.C. § 547. The policy underlying § 547(b) "is to set aside transfers that potentially prefer selected creditors" In re Belknap, Inc., 909 F.2d 879, 883 (6th Cir. 1990). "No policy is more important in bankruptcy than equality of treatment among creditors of equal status. The bankruptcy code establishes an order of priorities and requires distribution of estate assets according to that order . . . The policy is so strong that even lawful payments and other transfers to creditors by the pre-bankruptcy debtor may be recovered as preferences". In re St. Francis Physician Network, Inc., 213 B.R. 710, 717 (Bankr. N.D. Ill. 1997).
4. A trustee may avoid a preferential transfer under § 547 of the Bankruptcy Code if it was (1) for the benefit of a creditor; (2) on account of an antecedent debt; (3) made while the debtor was insolvent; (4) within 90 days before the bankruptcy was filed; and the transfer (5) enabled the creditor to receive a larger share of the estate than if the transfer had not been made. Union Bank v. Wolas, 502 U.S. 151, 112 S.Ct. 527 (1991). The Trustee bears the burden of proving not only that a "transfer" (for § 547 purposes) occurred within the 90-day preference period, but that all the elements of § 547(b) are established. In keeping with the "equality of distribution" policy of § 547(b), it follows that the "transfers" that are avoidable under § 547(b) are those that end up giving the creditor something more than what it otherwise would have received had the transfer not been made and had the property transferred been preserved for the estate and distributed according to the priorities set forth under chapter 7 of the bankruptcy code.
5. Here, it appears that the Bank does not dispute that a "transfer" occurred on September 18, 1998 when the account funds were paid to the Bank, and that, said "transfer" was made within the 90-day preference period. However, the existence of a "transfer" within the preference period alone does not lead to the conclusion that summary judgment should be entered in favor of the Trustee. Rather, the Bank contends that it obtained an equitable lien on the funds in the Fifth Third account on June 16, 1998, and since the lien was created outside the 90-day preference period, it cannot be avoided by the Trustee and remains intact. Subsequently, even had the funds not been paid over to the Bank, the Bank nonetheless would have been entitled to the funds because its lien, unavoidable by the Trustee and superior to any interest of the Trustee, would have attached to the funds. The Trustee, under the priorities of the Bankruptcy Code, would have been required to pay the funds to the Bank. Therefore, the transfer did not enable the Bank to receive more than it would have received had the transfer not been made.
6. The leading Indiana decision as to the effect of garnishment interrogatories and the fixing of liens on funds on deposit is Radiotelephone Co. of Indiana, Inc. v. Ford, 532 N.E.2d 238 (Ind.App. 1988). In Radiotelephone, the plaintiff obtained a money judgment against Ford, then served garnishment interrogatories on Wilgro Shopping Center ("Wilgro") seeking to recover funds owed by Wilgro to Ford. Wilgro served interrogatory answers reflecting that it owed Ford $13,000.00. Thereafter, Wilgro paid $13,000.00 directly to Ford, then argued that it was not required to make payment to the plaintiff pursuant to its garnishment proceedings, because no balance remained due to Ford. In ruling to the contrary, the Indiana Court of Appeals squarely held as follows:
The rule today is the same as it has been for over one hundred years: a creditor acquires an equitable lien on funds owed by a third party to the judgment debtor from the time the third party receives service of process in proceedings supplemental . . .
If it were not for the equitable lien created at the time of service of process in proceedings supplemental, a judgment debtor could easily defeat a lien by assignment of the debt or otherwise collecting money owed him by third parties. The equitable lien is intended to preserve the property of the judgment debtor in the hands of a third party pending review and disposition by the proceedings supplemental court.
531 N.E.2d at 241; see also, Diss v. Agri Business International, Inc., 670 N.E.2d 97 (Ind.App. 1996). Not only does this equitable lien arise when the garnishment summons is served, but that lien "is a specific lien upon identifiable property, in that it attaches to the assets sought to be reached in the possession of the garnishee". Matter of U.S. Marketing Concepts, Inc., 113 B.R. 487, 492 (Bankr.N.D.Ind. 1990). Thus, on June 16, 1998 and outside the 90-day preference period, a lien in favor of the Bank arose and that lien attached to the $12,027.04 which was in the possession of Fifth Third as of that date.
7. The Trustee relies upon the Seventh Circuit's decision in Freedom Group, Inc. v. Lapham-Hickey Steel Corp., 50 F.3d 408 (7th Cir. 1995). In Freedom Group, the judgment creditor obtained a money judgment against the debtor, then served garnishment interrogatories upon the debtor's bank on the 91st day before the debtor's bankruptcy petition was filed. As of that date, the balance on hand in the debtor's account at that bank was only $108.25. Subsequently, within the 90 day preference period, the debtor deposited $18,000.00 into its bank account. The judgment creditor then obtained a final order in garnishment, and received all of the funds on deposit in the debtor's account. The trustee asserted a preference action against the creditor. On appeal, the issue was whether a "transfer" occurred within the 90-day preference period. The judgment creditor argued that, even though the funds were paid to it within the 90-day period, such "transfer" related back to the date of the notice of garnishment (which was outside the 90-day period) because the notice "perfected" the judgment creditor's claim to the funds in the account. Therefore, the "transfer" took place outside the preference period, and was not avoidable by the trustee. The Seventh Circuit rejected this "relation back" theory, partly in light of the U.S. Supreme Court case of Barnhill v. Johnson, decided after many of the lower courts' "transfer relates back to perfection" cases upon which the judgment creditor relied were decided. Instead, the Seventh Circuit held that, although service of the garnishment interrogatories created a lien against the debtor's funds, "the funds themselves were not transferred" to the creditor. Rather the Seventh Circuit held that such funds were "transferred" for purposes of § 547 only when the final garnishment order was entered, and thus the transfer of funds was avoidable.
503 U.S. 393, 112 S.Ct. 1386 (1992). Barnhill dealt with when a "transfer" occurred when the payment was made to a creditor by check and held that a transfer under § 547 occurs on the date the check is honored, not on the date of the payee's receipt of the check.
8. This case, however, is distinguishable from Freedom Group. First, Freedom Group concentrated on whether a "transfer" occurred within the preference period; the parties there did not raise the issue of whether the transfer enabled the judgment creditor there to receive more than it otherwise would have received had the transfer not been made. Here, there is no dispute that a transfer did indeed occur within the 90-day preference period; we go one step further here, though, because the issue is whether the effect was to give the Bank here more than it otherwise would have been entitled to receive had no transfer occurred.
Furthermore, virtually all of the funds at issue in Freedom Group were deposited in the debtor's bank account, and made subject to the creditor's garnishment lien, within the preference period. In this case, to the contrary, the undisputed evidence shows that at least $12,027.04 existed in the Fifth Third account outside the preference period, even though there is no evidence as to when the additional $3859.25 that the Bank ultimately received was deposited. So, at least with respect to $12,027.04 received by the Bank, it appears as if its lien in those funds is unavoidable.
The Seventh Circuit's Freedom Group decision did state, in passing, that the judgment creditor was not entitled to receive even the $108.00 on deposit in the debtor's accounts when the garnishment interrogatories were initially served, even though the interrogatories were served outside the 90-day preference period. This conclusion, however, was focused solely on when a "transfer" occurs, and did not address the general enforceability of garnishment liens pursuant to the decision in Wey, or whether the transfer enabled the judgment creditor to receive more than it otherwise would have received had the transfer not been made. With respect to the creation and enforcement of liens, all other authority presented by the parties — including the Freedom Group case — holds that a judgment creditor acquires a lien on funds owed by the garnishee defendant to the judgment debtor as of the time the garnishee defendant receives service of process of the garnishment notice. See, Freedom Group, 50 F.3d at 410; Radiotelephone, 531 N.E.2d at 241; Wey, 827 F.2d at 140 (construing Illinois law). Thus, on its face, the Seventh Circuit's decision in Freedom Group does not support a conclusion that the Bank's garnishment lien, which was undisputably perfected long before the 90 day preference period and which cannot be avoided, would somehow be unenforceable in a Chapter 7 liquidation, if the Debtor's funds had not been transferred to the Bank.
9. Nor does the Trustee have a superior right ahead of the Bank to the funds under his § 544 "strong arm" powers even had he argued such. It is settled that an equitable garnishment lien which arises outside the 90-day preference period, such as the lien acquired by the Bank on $12,027.04, may not be defeated by a bankruptcy trustee under Bankruptcy Code § 544, even where no final garnishment order has been entered. Wey v. Sullivan, 827 F.2d 140 (7th Cir. 1987).
In Wey, the judgment creditor served garnishment interrogatories upon the debtor's bank, and the bank filed a response acknowledging that it held funds on deposit in the debtor's bank account. The creditor never obtained a final order requiring the bank account funds to be turned over, and the debtor filed a chapter 7 bankruptcy petition. The trustee sought turnover of the funds on deposit in the debtor's bank account. The Seventh Circuit, however, held that the trustee was not entitled to receive such funds, holding that the fixing of the creditor's garnishment lien, which occurred prior to the preference period, did not itself constitute a preferential transfer. The Seventh Circuit went on to hold that the trustee was not entitled to set aside the attachment of such lien under the trustee's "strong arm" powers, pursuant to 11 U.S.C. § 544. Wey, 827 F.2d at 143.
10. Thus, the Court concludes that: (1) the Bank acquired a lien in the accounts held at Fifth Third on June 16, 1998; (2) that lien arose outside the 90-day preference period and, attached to those funds which were in the account on that date ($12,027.04); (3) because that lien arose outside the preference period, it is not avoidable by the Trustee under § 547(b); (4) even had the funds not been paid to the Bank, but rather had they been turned over to the Trustee, the Bank would have retained its unavoidable lien to the extent of $12,027.04 and the Trustee would have been required to turn at least that amount over to the Bank in accordance with the priorities set forth under the Bankruptcy Code; (5) at least to the extent of $12,027.04, the transfer did not enable the Bank to receive more than what it otherwise would have received had the transfer not been made. Accordingly, the Court concludes that $12,027.04 of the $15,886.29 ultimately paid to the Bank is not an avoidable transfer under § 547(b) and therefore, partial summary judgment should be entered in favor of the Bank, and against the Trustee.
11. There remains a genuine issue of material fact as to whether any of the additional $3859.25 which the Bank also received on September 18, 1998 was deposited into the Fifth Third account within the 90-day preference period, and hence, whether the Bank's receipt of that additional amount is an avoidable transfer under § 547(b).
12. The appropriate partial summary judgment entry follows.