SEVENTH CIRCUIT OVERRULES ITS OWN PRECEDENT RELATED TO GARNISHMENT DATE IN PREFERENCE ACTION
In an Indiana bankruptcy case, a creditor obtained an order of garnishment against a debtor more than 90 days before the debtor filed bankruptcy. This was outside of the 90 day “preference” window where such transfers can be routinely avoided in bankruptcy court. Within the preference period, however, the creditor received $3,700 from garnishing the debtor’s wages. Under a prior Seventh Circuit 1984 decision, this transfer would have been not considered a preference because under Indiana law the “transfer” takes place on the date the garnishment order is entered, not when the money is paid.
An intervening Supreme Court decision decided in 1992 (Barnhill v. Johnson, 503 U.S. 393) caused the Seventh Circuit decided to revisit their 1984 opinion. While the Barnhill case was about a check, in that case the court held that federal rather than state law defines the meaning of transfer under Section 547 of the Bankruptcy Code, the section that allows the avoidance of preferential transfers.
Since the earlier 1984 decision concentrated on the date of transfer under Indiana and not federal law, it could no longer be valid. The Seventh Circuit issued an opinion on January 9th. It reviewed the case and found that the date of the transfer of the money under the garnishment order was the relevant date under federal law. As such, the creditor was liable under a preference action to return the garnished funds. The opinion can be found at Warsco v. Credit Max Collection Agency, Inc. (In re Harris), 22-1733 (7th Cir. January 9, 2023).