Monday, March 20, 2017

A Debtor's Wages Cannot be Transferred Until They are Earned

By Steve Stapleton

The Fifth Circuit Court of Appeals has recently held that a debtor’s wages cannot be transferred until they are earned.*1   That somewhat unremarkable principle takes on greater depth in the context of a pre-petition garnishment.

In 2009, Tower Credit obtained a money judgment against Christon Jackson.  In attempting to collect, Tower Credit obtained a garnishment order and on January 19, 2012 served it on Jackson’s employer and started to collect his garnished wages.  On November17, 2012, Jackson filed for bankruptcy protection under Chapter 7 and Martin Schott was appointed as the Chapter 7 trustee.  Shott initiated an avoidance action seeking to recover the garnished wages during the ninety-day preference period under 11 U.S.C. § 547(b).  The bankruptcy court granted the trustee summary judgment.  On appeal, the district court affirmed and the Fifth Circuit affirmed thereafter.

Section 547(b) allows the avoidance of “any transfer of an interest of the debtor in property” during the ninety days prior to bankruptcy on account of an antecedent debt made while the debtor was insolvent.  Tower Credit argued that no transfer occurred during the preference period because Tower Credit had served the garnishment order on the debtor’s employer before the preference period and at that point in time no creditor on a simple contract could have acquired a judicial lien superior to Tower’s interest .  Thus, its interest was perfected pre-petition and the garnished wages were therefore not subject to avoidance.

The Fifth Circuit disagreed.  The Court pointed to section 547(e)(3) of the Bankruptcy Code, noting that, since federal law controls,*2  the general principle of perfection is qualified such that  “a transfer is not made until the debtor has acquired rights in the property transferred.”*3   Since the “earning power of an individual  … is not translated into property … until [the individual] has brought earnings into existence *4 … in the wage garnishment context, a debtor cannot logically obtain rights in her future wages until she performs the services that entitle her to receive those wages.”  Id. at 448 (emphasis added).  

Because the debtor in this case had not earned the disputed wages prior to the initiation of the ninety-day preference period, he had acquired no rights to those wages and could not have therefore transferred such rights to Tower before the preference period.  Concluding that the circuit court decisions to the contrary had been “roundly criticized,” the Fifth Circuit affirmed the district court’s judgment.

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  1. Matter of Jackson (Tower Credit Inc v. Martin A Shott), No. 16-30274 (5th Cir., March 13, 2017, Dennis, J.).
  2. Citing Barnhill v. Johnson, 503 U.S. 393, 397 (1992).
  3. In re Latham, 823 F.2d 108, 110 (5th Cir. 1987).
  4. Local Loan Co. v. Hunt, 292 U.S. 234,  243 (1934).


 

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