Trustee Recovers Garnished Wages

In Tower Credit, Incorporated v. Schott (In re Jackson), 850 F.3d 816 (5th Cir. 2017), the U.S. Court of Appeals for the Fifth Circuit affirmed a bankruptcy court’s ruling that wages garnished within ninety days prior to a Chapter 7 debtor’s bankruptcy filing were recoverable by the trustee as preferential transfers. Although the creditor served the debtor’s employer with the garnishment order more than ninety days prior to the bankruptcy filing, wages earned by the debtor within the preference period were recoverable by the trustee.

The creditor obtained a judgment against the debtor and began to garnish his wages. The debtor later filed for bankruptcy, and the trustee sought to recover wages garnished within the 90-day period before the filing as preferential transfers. The creditor argued that the garnished wages transferred under state law when it served the garnishment order on the debtor’s employer more than 90 days before the bankruptcy filing. However, state law controls the timing of transfers only in the absence of controlling federal law.

Bankruptcy Code Sec. 547(e) provides that a transfer is made when it is perfected, and a transfer is perfected when “a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.” The creditor argued that as soon as it served the garnishment order, no creditor could have acquired a judicial lien that was superior to the creditor’s interest in the debtor’s wages. However, the debtor did not have any interest in the wages to transfer until he earned them. Consequently, wages earned during the preference period transferred to the creditor during the preference period and were recoverable by the trustee.