On January 9, the Seventh Circuit overturned its own 39-year-old precedent to find that: (1) the definition of “transfer” for purposes of section 547 of the Bankruptcy Code depends on federal, not state, law; and (2) the date of “transfer” is the time at which the money passes to the creditor’s control.
At a high level, section 547(b) of the Bankruptcy Code allows a bankruptcy trustee to avoid, as preferences, many transfers made by the debtor within 90 days before the filing of the bankruptcy petition. In Warsco v. Creditmax Collection Agency, Inc., the defendant debt collector had obtained a garnishment order from an Indiana state court more than 90 days before the debtor filed for bankruptcy—that is, outside of the preference lookback period. However, the actual garnishment of the debtor’s wages (approximately $3,700) occurred within 90 days before the petition.
The bankruptcy trustee commenced an adversary proceeding against the defendant to avoid and recover the transfer of the debtor’s wages pursuant to section 547(b). The defendant objected, relying on the Seventh Circuit’s precedential decision in In re Coppie. There, the Seventh Circuit held that when a “transfer” occurs for purposes of section 547(b) is determined by state law, not federal law. The defendant further argued that, as a matter of Indiana law, the “transfer” in the instant case had occurred when the garnishment order was entered. While noting that Coppie appeared to be wrongly decided, the bankruptcy court was constrained to follow the Seventh Circuit’s opinion and ruled in favor of the defendant.
On direct appeal, the Seventh Circuit agreed with the bankruptcy court that its old opinion in Coppie was wrongly decided and is no longer good law. Expressly overruling its own precedent, the Seventh Circuit pointed to the Supreme Court’s decision in Barnhill v. Johnson, which held that “federal law rather than state law defines the meaning of ‘transfer’ in §547.” The Supreme Court further held that a “transfer” occurs when “money changes hands.” The Seventh Circuit concluded that for purposes of garnishment, a “transfer” occurs on the date that the debtor’s wages are paid to the creditor. The court remanded the case for further proceedings consistent with its opinion.