• Garnished Wages Can Be Avoided as Preferences
  • April 18, 2017 | Author: Lawrence D. Coppel
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • Most creditors are aware that payments made to them by debtors on their debts within the bankruptcy preference period (normally 90 days) may be avoided (i.e., clawed back) by the bankruptcy trustee as preferences. In a recent decision, the United States Court of Appeals for the Fifth Circuit considered whether a "transfer" for preference purposes under the Bankruptcy Code occurs when a garnishment is served on the debtor's employer or when the wages are actually paid. Under the facts of the case, the garnishment was served outside of the preference period and the trustee sued to avoid wage payments made within the preference period. The creditor argued that since, under state law, its garnishment lien extended to future wage payments, a "transfer" for preference purposes occurred outside of the preference period, and, thus, the payments made during the period could not be recovered. The Fifth Circuit rejected the creditor's argument and ruled in favor of the trustee. In doing so, the Court relied upon Section 547(e)(3) of the Bankruptcy Code which provides that "a transfer is not made until the debtor has acquired rights in the property transferred." Since a debtor is not entitled to wages until after they are earned, the court reasoned that the debtor did not acquire rights to the wages at issue until they were earned during the preference period. The Fifth Circuit noted that its holding is contrary to decisions of three other appellate courts. The United States Court of Appeals for the Fourth Circuit, in which Maryland is located, has not ruled on the issue. However, in a reported decision, the Maryland Bankruptcy Court has ruled in favor of a trustee on a preference claim under similar facts.