In Re Klingbeil
ORDER GRANTING DEBTORS’ “MOTION FOR TURNOVER”
This Chapter 7 case came on before the Court on July 24, 1989, for hearing on Debtors’ motion for turnover. Debtors appeared by James M. Meehan, their attorney. First of Omaha, a creditor, appeared by its attorney, Roger A. Nurnberger. Upon the moving and responsive documents, counsel’s acknowledgment of uncontested facts, and the record made at hearing, the Court makes the following order.
FINDINGS OF FACT
A. Procedural Background.
1. Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code on March 17, 1989.
2. On their Schedule B-3, Debtors scheduled an asset described as “involuntary garnishment by Roger Nurnberger, Esq., on behalf of First of Omaha. Debtor alleges trustee’s interest for purpose of claiming derivative exemption as cash or any other available exemption.” Debtors valued this asset at $2,560.00.
3. The notice of meeting of creditors issued by the Clerk of this Court set April 26, 1989, as the date for the meeting of creditors in this case. The meeting was convened and concluded on that date.
4. Neither the Trustee “nor any other party in interest objected to Debtors’ claim of exemption in the garnished funds or the right to recover them, within 30 days after April 26, 1989.
B. Facts Relevant to Debtors’ Motion.
5. First of Omaha sued Debtors to collect on an account stated, apparently in the fall of 1988.
6. Roger Nurnberger, counsel for First of Omaha, served a pre-judgment garnishment summons upon Viking Vocational Center (“Viking”), Debtor Larry Kling-beil’s employer, on October 12, 1988.
7. Viking paid Klingbeil twice per month. His pay periods ran from the first through the fifteenth days, and from the sixteenth through the final days, of each month.
8. After the service of the garnishment summons, Viking failed to withhold any wages from those owing to Klingbeil for the first pay period of October, 1988, on account of the garnishment. It did withhold a total of $1,602.80 from Klingbeil’s wages for pay periods through December 15, 1988.
9. In late December, 1988 or early January 1989, Nurnberger served another garnishment summons upon Viking. During the months of January through March 1989, Viking withheld an additional $1,602.80 from Klingbeil’s wages.
10. Judgment was entered against Debtors in First of Omaha’s collection action on March 1, 1989.
11. After the entry of the judgment, Nurnberger levied upon the garnished sums in the hands
of
Viking by using a
12. Nurnberger has since disbursed the collected funds to First of Omaha, after retaining his attorney fees and costs.
DISCUSSION
A. Debtors’ Standing to Invoke Avoidance Remedies.
Via this motion,
1
Debtors seek to utilize the derivative avoidance powers granted to them by
The debtor may avoid a transfer of property of the debtor ... to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is avoidable by the trustee under section ... 544, ... [or] 547 ... of this title; and
(2) the trustee does not attempt to avoid such transfer.
First of Omaha’s levy upon the funds in question “was not a voluntary transfer of such property by the debtor[s],” and Debtors revealed the fact of the transfer of the funds in their statements and schedules. Thus, Debtors could have satisfied the requirements of
B. Debtors’ Preference Claim under11 U.S.C. § 547 .
[2] Under11 U.S.C. § 547(b) :
Except as provided in subsection (c) of this section, 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; ...
(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.
Debtors have the burden of proof on all of these elements.
First of Omaha’s counsel has narrowed the issues presented, by acknowledging that his client received an avoidable preference in the amount of $1602.80, the part of Klingbeil’s wages which was subjected to garnishment and levy during the 90 days immediately preceding Debtors’ bankruptcy filing. This concession is based on a tacit recognition: that the combination of the fixing and/or perfection of
The issue, then, is whether any preferential transfer of the funds garnished
before
December 17, 1988, took place
on or after
that date. The amount in question is $1,602.80.
2
First of Omaha does not dispute that at all relevant times it was a creditor of Debtors, and that any trans-ferís) of the subject funds were made on account of Debtors’ antecedent debt to it. Debtors are presumed to have been insolvent for the purposes of any transfer made within the 90 days immediately preceding their bankruptcy filing.
The only element in contention, then, is
The legal issues are a little more complex than either counsel recognizes. There were two possible transfers of the subject funds within the 90-day period of vulnerability. The first is that which may have taken place upon the entry of judgment in favor of First of Omaha on March 1, 1989. The second is that which unquestionably took place when Viking forwarded the funds to Nurnberger in compliance with his levy of execution. For analytical purposes, these transfers may be treated separately.
See In re Newcomb,
C. First of Omaha’s Secured Position in the Funds.
Under Minnesota law, pre-judgment garnishment is available to creditors only under limited circumstances:
[A] plaintiff in any action in a court of record for the recovery of money may issue a garnishee summons before judgment therein in the following instances only:
(a) following by at least 40 days services of the summons and complaint upon the debtor in the main action where judgment by default could be entered pursuant to Rule 55.01(1) of the Minnesota Rules of Civil Procedure ...
MINN.STAT. § 571.41 subd. 2. The statutes define the effect of pre-judgment garnishment:
... [Sjervice of the garnishee summons upon the garnishee shall attach and bind, to respond to final judgment in the action, all personal property of the judgment debtor in the possession of, or under the control of the garnishee and all indebtedness owing by the garnishee to the judgment debtor at the time of service and all nonexempt disposable earnings earned or to be earned within that pay period and within 60 days thereafter.
MINN.STAT. § 571.42 subd. 1.
While the garnishment statute does not use the word “lien” on its face, the courts have consistently construed the words “attach and bind” in MINN.STAT. § 571.42 subd. 1 as creating an inchoate lien against the subject asset in favor of the garnishor.
The service of First of Omaha’s first garnishment summons attached an inchoate lien to Klingbeil’s garnishable wages, as he accrued his right to them during the period from mid-October to mid-December, 1988. First of Omaha acknowledges that this series of attachments constituted “transfers” within the broad definition of
The question, however, is not limited to the mere attachment of the lien(s). The perfection of a previously-attached lien or security interest is also a “transfer” within the meaning of
For the purposes of a preference action, A transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.
It follows that First of Omaha’s execution on the subject funds also was an avoidable preference. Absent the perfection of its garnishment lien, First of Omaha had only the rights of an unsecured judgment creditor against the accumulated wages. Its levy against the subject funds undeniably enabled it to receive more than it would have in a hypothetical Chapter 7 liquidation, whether Debtors had been able
These conclusions do not quite end the analysis. Avoidance of these two transfers, accomplished alone, would place the subject funds back into Viking’s hands, still subject to First of Omaha’s inchoate garnishment lien. In that posture, First of Omaha’s inchoate lien is vulnerable to the “strongarm” power of
The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, ... may avoid any transfer of property of the debtor ... that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such creditor exists
The extent of this hypothetical lien creditor’s rights are determined by state law.
In re Greenhaven Village Apts, of Burns-ville Phase II Ltd. Partnership,
IT IS THEREFORE ORDERED that, no later than May 1, 1990, First of Omaha shall turn over to Debtors, through their counsel, the sum of $3,205.60.
Notes
. Debtors’ counsel should have brought this matter before the Court via adversary proceeding. See BANKR.R. 7001(1) and (2). Counsel for First of Omaha does not object to litigating this matter by motion and, indeed, encourages doing so in the stated interests of economy for both parties. To be sure, had Debtors sued this out by adversary proceeding, the mode of presentation would undoubtedly have been by a motion for summary judgment—the record on which would have been indistinguishable from the present record. Given the relatively modest amount in controversy and the unnecessary duplication of expense which would result from a denial of this motion on purely procedural grounds, the Court will entertain it. However, this is not to be taken as a precedential waiver of the procedural distinctions of BANKR.R. 9014 and 7001; counsel should stand advised.
. For brevity, the funds garnished prior to December 17, 1988, will be referred to as "the subject funds."
. First of Omaha’s defense thus is not based upon a comparison between the monetary benefit which it did gain as a purely unsecured creditor, and the pro rata distribution which it would have received in a hypothetical liquidation. The latter is the more common factual basis for a defense under
. [T]ransfer means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption;
. This case was denominated as a no-asset case, but the Trustee has not yet filed a report closing the estate as such. Debtors' B Schedules do not evidence anything of potential value for creditors.