Opinion
Case No. 14-54780
12-30-2014
In re: Latanya Marie Jacobs, Debtor.
Chapter 7 ORDER DENYING DEBTOR'S MOTION FOR TURNOVER AND REQUEST FOR SANCTIONS
I. INTRODUCTION
After Debtor filed her Chapter 7 bankruptcy petition, she notified Citizens Insurance Company of America ("Citizens") and demanded a release of its wage garnishment and return of the garnished funds. Citizens promptly filed a garnishment release and returned all funds received postpetition; it refused to return the $500.36 received prepetition.
Debtor's motion for turnover of the prepetition funds and request for sanctions is pending. The motion is fully briefed; the Court heard argument on December 29, 2014. Because the small preference exception allows Citizens to keep up to $600.00 of garnished wages - earned within 90 days of the date of Debtor's bankruptcy filing - Debtor's motion is DENIED.
Debtor's motion is also denied because it should have been filed as an adversary proceeding. Fed. R. Bankr. P. 7001(1).
II. BACKGROUND
In 2013, Citizens received a default judgment against Debtor. To collect on the judgment, Citizens filed a wage garnishment. Six withholdings - totaling $500.36 - were deducted from Debtor's wages during the 90-day period before Debtor's bankruptcy filing:
1. $.68 on July 22, 2014
2. $107.24 on August 5, 2014
3. $159.60 on August 5, 2014
4. $122.44 on August 14, 2014
5. $5.82 on September 10, 2014
6. $104.58 on September 15, 2014
Debtor filed bankruptcy on September 19, 2014; she exempted an "Anticipated Garnishment Recovery" in the amount of $748.00. Citizens received notice of the bankruptcy filing on September 22, 2014 and immediately filed a garnishment release with the Wayne County Clerk.
On September 26, 2014, Citizens received two postpetition garnishments totaling $242.18. It returned these funds to Debtor's employer. But there is no proof as to when Debtor earned the $242.18. Debtor's counsel subsequently demanded a refund of "the amount garnished from [Debtor's] paycheck within 90 days of her bankruptcy filing." Citizens refused. This motion followed.
III. ANALYSIS
11 U.S.C. § 547(b) provides:
the 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; or
(B) between ninety days and one year before the date of the filing of
the petition, if such creditor at the time of such transfer was an insider; and
(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.
Generally, a trustee brings an action to avoid a prepetition transfer. However, a debtor has standing to avoid a transfer "to the extent that the debtor could have exempted such property . . . if (1) such transfer is avoidable by the trustee under section . . . 547 . . .; and (2) the trustee does not attempt to avoid such transfer." 11 U.S.C. § 522(h) (emphasis added).
But, "[t]he trustee may not avoid . . . a transfer . . . if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600[.]" 11 U.S.C. § 547(c)(8). This is commonly referred to as the "small preference exception." If the trustee is subject to the small preference exception, so too is a debtor who technically acts in his or her place. Baker v. Kas Enterprises (In re Baker), 246 B.R. 379, 382 (Bankr. E.D. Mo. 2000):
under Section 547(c)(8), a trustee may not avoid a transfer if the aggregate value of all property that constitutes or is affected by the transfer is less than $600.00 [and] the Debtor's power . . . is not greater than that of the Trustee[; therefore,] the Debtor would not prevail against the Respondent in an Adversary Proceeding under Section 547(b).
There is no question that Debtor has standing to avoid the transfer, and the $500.36 in withholdings Citizens retained constitute preferential transfers under section 547. Relying on In re Morehead, Debtor argues that all funds - $742.44 - Citizens received within 90 days before the date of her petition should be avoided as a preferential transfer. The Court disagrees.
Debtor claims Citizens actually received $748.00.
Pursuant to 11 U.S.C. § 547(e)(3), "a transfer is not made until the debtor has acquired rights in the property transferred." In wage garnishment cases, a transfer occurs when the employee has performed the work required to earn the wages. Morehead v. State Farm Mut. Auto. Ins. Co. (In re Morehead), 249 F.3d 445, 449 (6th Cir. 2001):
[i]t is illogical to find that a debtor may acquire rights in future wages when they have not yet been earned. The mere fact that a creditor perfects a garnishment order on a debtor's future wages does not guarantee that the debtor will ever earn any wages. The debtor retains the choice to work for the garnishee employee, to work for someone else or not to work at all. To the extent the debtor chooses to work for the garnishee employer, any earnings during the 90-day preference period established by 11 U.S.C. § 547(b)(4)(A) that are transferred to the creditor pursuant to a garnishment order are avoidable as a preferential transfer, regardless of the date of perfection of the garnishment order.(Emphasis added). Therefore, the critical date in determining whether garnished wages fall within the preference period is not when a creditor receives the garnished funds or perfects its garnishment lien - it is when a debtor earns the wages: garnished wages earned during the 90-day preference period are avoidable. Guernsey v. Old Kent Bank (In re Guernsey), 204 B.R. 199, 201-02 (Bankr. W.D. Mich. 1996) (for purposes of section 547(e)(3), the transfer occurs when the judgment debtor has earned the wages garnished).
Debtor earned $500.36 prepetition. But she has failed to prove she earned the $242.18 prepetition (i.e., before September 19, 2014). 11 U.S.C. § 547(g) ("the trustee [/debtor] has the burden of proving the avoidability of a transfer under subsection (b) of this section"). Thus, the small preference exception applies because the amount earned prepetition is less than $600.00.
Debtor does not present any pay stubs after the period ending September 6, 2014; therefore, the Court cannot determine - for "transfer" purposes - when Debtor earned the $242.18 in wages Citizens received postpetition.
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IV. CONCLUSION
Because the small preference exception allows Citizens to keep up to $600.00 of garnished wages - earned within 90 days of the date of Debtor's bankruptcy filing - Debtor's motion is DENIED.
Signed on December 30, 2014
/s/ Mark A. Randon
Mark A. Randon
United States Bankruptcy Judge