Jeff Moyer v. Connie RogersJeff Moyer v. Connie Rogers
File Name: 26b0003n.06
COUNSEL
ARGUED: Matthew T. Nelson, WARNER NORCROSS + JUDD LLP, Grand Rapids, Michigan, for Appellant. Scott F. Smith, SMITH LAW GROUP PLLC, Farmington Hills, Michigan, for Appellees. ON BRIEF: Matthew T. Nelson, Charles R. Quigg, WARNER NORCROSS + JUDD LLP, Grand Rapids, Michigan, Andrew J. Gerdes, CAPITAL BANKRUPTCY, Lansing, Michigan, for Appellant. Scott F. Smith, SMITH LAW GROUP PLLC, Farmington Hills, Michigan, for Appellees.
GUSTAFSON, J., delivered the opinion of the panel in which BAUKNIGHT, C.J., and MASHBURN, J., concurred. GUSTAFSON, J. (pp. 27–29), also delivered a separate concurring opinion.
JOHN P. GUSTAFSON, Bankruptcy Appellate Panel Judge. This appeal arises from an adversary proceeding brought by the chapter 7 Trustee, Jeff A. Moyer (“Trustee” or “Appellant”) against Defendant-investors Connie Rogers (“Rogers”) and William Stephen (“Stephen”) following the collapse of Wedgewood Properties, LLC (“Wedgewood”), a Nevada company managed by now-deceased attorney Shawn Weera (“Weera”). Between 2013 and 2016, Rogers and Stephen invested a total of $635,000 in Wedgewood. They initiated a state court proceeding against Weera and Wedgewood, asserting claims of conversion and violation of securities laws, and later settled the action for $900,000. In partial satisfaction of the settlement agreement, Rogers and Stephen recovered $550,000, which was later found to have come from: 1) real property sales and 2) monies invested in Wedgewood by other creditors. The Bankruptcy Court found1 that Wedgewood was continuously insolvent, commingled funds, and operated with characteristics of a Ponzi scheme. The Court found that Rogers and Stephen had received fraudulent transfers; however, the court also found they had established their good faith affirmative defense to avoidance of most of those transfers. Further, the Bankruptcy Court found that service was sufficient to perfect the Defendants’ garnishment 93 days before the bankruptcy filing, taking the transfer of money through garnishment outside the preference period. Because the Bankruptcy Court’s factual finding of good faith is not clearly erroneous, and the garnishment holding is supported by existing case law, the Bankruptcy Court’s judgment is AFFIRMED.
- Did the Bankruptcy Court err when it found that Appellees accepted Wedgewood’s actual fraudulent transfers in good faith for purposes of their affirmative defense under Section 548(c) of the Bankruptcy Code?
- Did the bankruptcy court err when it held that Michigan’s court rule regarding dismissal of improperly served complaints meant that the garnishment was deemed to have been served outside the preference period?
JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Western District of Michigan has authorized appeals to the Panel. Pursuant to
The specific types of relief determined in this case are also recognized as creating final orders. First, orders that fully dispose of fraudulent transfer claims are final. See Suhar v. Bruno (In re Neal), 478 B.R. 261, 265 (B.A.P. 6th Cir. 2012) (citing Lyon v. Eiseman (In re Forbes), 372 B.R. 321, 325 (B.A.P. 6th Cir. 2007) (“A bankruptcy court order which sets aside a fraudulent conveyance pursuant to
Second, orders that fully dispose of a preference claim under
The Panel “reviews conclusions of law de novo and factual determinations . . . under a clearly erroneous standard.” Kraus Anderson Cap., Inc. v. Bradley (In re Bradley), 507 B.R. 192, 196 (B.A.P. 6th Cir. 2014) (citing Van Aken v. Van Aken (In re Van Aken), 320 B.R. 620, 622 (B.A.P. 6th Cir. 2005)); see also Miller v. Wylie (In re Wylie), No. 24-1321, 2024 WL 4553297, at *2 (6th Cir. Oct. 23, 2024) (“We review the bankruptcy court’s legal conclusions de novo, [] and its factual findings—such as a finding of intent—for clear error, Barclays/Am. Bus. Credit, Inc. v. Adams (In re Adams), 31 F.3d 389, 393 (6th Cir. 1994).”). “A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court, on the entire evidence, is left with the definite and firm conviction that a mistake has been committed.’” In re Wylie, 2024 WL 4553297 at *2 (citing United States v. Mathews (In re Mathews), 209 B.R. 218, 219 (B.A.P. 6th Cir. 1997) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511 (1985))). Echoing the Supreme Court’s holding in Anderson, the Sixth Circuit explained the contours of the clearly erroneous standard:
This standard does not entitle the reviewing court to reverse a factual finding simply because it is convinced that it would have decided the case differently. Anderson, 470 U.S. at 573. If the district court’s account of the evidence is plausible in light of the entire record, this court may not reverse that accounting, even if convinced that, had it been sitting as trier of fact, it would have weighed the evidence differently. Id. at 574–75. Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be deemed clearly erroneous. Id. at 574. “This is so even when the district court’s findings do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts.” Id.
Harlamert v. World Finer Foods, Inc., 489 F.3d 767, 771 (6th Cir. 2007).
Finally, the Panel reviews a federal court’s application of state law de novo. Whitlock v. FSL Mgmt., LLC, 843 F.3d 1084, 1088 (6th Cir. 2016) (citing Matilla v. S. Ky. Rural Elec. Co-op. Corp., 240 F. App’x 35, 38 (6th Cir. 2007)). When a state’s highest court has not addressed an issue of state law, federal courts are to “predict how the [state’s highest] court would rule by looking to all the available data.” Antioch Co. Litig. Tr. v. Morgan, 644 F. App’x 579, 582 (6th Cir., 2016) (quoting Allstate Ins. Co. v. Thrifty Rent-A-Car Sys., Inc., 249 F.3d 450, 454 (6th Cir. 2001)).2 “Relevant data include decisions of the state appellate courts, and those decisions should not be disregarded unless we are presented with persuasive data that the Michigan Supreme Court would decide otherwise.” Allstate Ins. Co., 249 F.3d at 454 (citation omitted).
FACTS
The Bankruptcy Court held a three-day trial and received testimony from four witnesses. Various exhibits were also admitted into evidence. Most of the underlying facts do not appear to be in dispute. Instead, it is the inferences and conclusions that are to be drawn from those facts that are the subject of this appeal.
Debtor was a Nevada company founded in 2002 and managed by Weera. Initially, it was claimed to be focused on commercial real estate but shifted to currency trading by 2008. Weera, an attorney, also provided legal and financial elder services to clients, including Rogers and Stephen.
At the time of trial in 2024, Rogers was in her early eighties. She had a high school education and worked as an executive assistant until her retirement in 2004. The Bankruptcy Court found Rogers’ memory to be sharp and her testimony credible. Stephen also had a high school education. He worked as a draftsman in the auto industry prior to his retirement. At the time of trial, Stephen was ninety-one years old. The Bankruptcy Court found him to be honest and intelligent but noted that his memory was failing and he had cognitive difficulties. The Court greatly discounted Stephen’s testimony and accorded it almost no weight.
In February 2013, at the suggestion of Weera, Stephen invested $50,000 in Wedgewood. About two years later, the Michigan Department of Licensing and Regulatory Affairs (“LARA”) issued a cease-and-desist order against Weera and Wedgewood, and in March 2016, the terms of a settlement were incorporated into an Amended Administrative Consent Order (“Consent Order”). The LARA Consent Order prohibited Wedgewood from accepting investments from new investors for a sixteen-month period. However, Wedgewood was permitted to continue to receive
In March 2016, Stephen invested an additional $100,000 in Wedgewood. In April 2016, Stephen invested an additional $330,000, and Rogers made her only investment of $155,000.
Weera led Rogers and Stephen to believe that the sale of certain annuities and their Wedgewood investments would not create any tax liabilities. Rogers and Stephen began to become concerned regarding their investments after receiving a Form 1099 reflecting approximately $400,000 in taxable income in January 2017. They hired a tax specialist who told them they would owe about $30,000 in taxes. The tax specialist also stated that Weera had known the full extent of the tax liability from the beginning. Rogers and Stephens were told they “needed a specialist” and it was suggested that they contact an attorney. (Opinion Regarding Avoidance and Recovery of Fraudulent Transfers (“Op.”) at 14, Adv. P. 20-80139-jwb, ECF No. 150.)
By April of 2017 Rogers had “lost faith” in Weera, believing he had misrepresented the tax consequence of the Wedgewood investment. (Id.) At this time, Rogers and Stephen retained an attorney, David Foster (“Foster”). He filed a complaint in Wayne County Circuit Court, asserting various claims, including statutory conversion and securities law violations, focusing on Weera’s alleged misrepresentations and misuse of investment funds. During discovery, Foster found that Weera withdrew the $585,000 invested by Rogers and Stephen and transferred those funds to offshore accounts. Bank records disclosed during discovery also showed several transfers made to other individuals after Stephen’s original investment of $50,000.
Foster amended the complaint in December 2017, detailing additional factual allegations regarding the funds’ disposition and suggesting misuse and possible Ponzi scheme characteristics, particularly with regard to the initial $50,000 investment made by Stephen. Foster testified in his deposition that the Ponzi scheme allegation was not substantiated due to challenging discovery issues and the settlement occurring soon after the filing of the amended complaint. He admitted to using the term “Ponzi scheme” for its impact, despite not believing Wedgewood was in fact a Ponzi scheme. He claimed to have used the allegations as a litigation strategy due to opposing
In April 2018, Defendants entered into a settlement with Weera and Wedgewood for $900,000, structured as a $550,000 downpayment and a $350,000 promissory note. The downpayment was made with three cashier’s checks totaling $550,000, which were deposited into Foster’s trust account and then distributed to Rogers and Stephen. According to the Trustee’s C.P.A., Wedgewood was insolvent at the time these transfers were made, and $450,000 of the downpayment came from the sale of Weera’s real property, referred to as the Caledonia farm property, while $100,000 came from other investors. However, Defendants averred (based on their belief that the funds were from Weera’s overseas transfers) that they were unaware of Wedgewood’s insolvency.
Post-settlement, the first $10,000 installment on the promissory note was made in May 2018 to Foster. Foster then transferred $8,425.26 to Rogers and Stephen. Following Weera’s death in June 2018, there was a default on the monthly payments, and in July 2018, a consent judgment was entered for $350,000, less payments previously made.
Foster garnished Wedgewood’s bank account, resulting in $98,063.15 being debited, part of which was retained by Foster for legal fees with the remainder distributed to Rogers and Stephen. Neither party appears to have raised or discussed the issue of Rogers’ and Stephen’s knowledge regarding the garnishment except for the Bankruptcy Court, which briefly addressed the matter in a footnote that stated:
The court questions whether the $98,063.15 transfer, which was made involuntarily pursuant to the writ of garnishment after Weera’s death, should be included as a transfer made with actual intent to defraud. The Trustee has consistently argued that it should. The Defendants have not refuted this assertion and have not sought to distinguish this transfer based on its involuntary nature or its timing. For this reason, the court accepts the Trustee’s argument that the transfer for [sic] funds pursuant to the garnishment was also made with actual intent to defraud.
(Id. at 42, n.32.)
At trial, David Schmid (“Schmid”), a bank representative,3 testified that the bank’s procedures contemplated that service of a garnishment could be done by “walk-in” at a specific branch. (Id. at 26.) He also stated that an Assistant Branch Manager, such as Bennett, would have had authority to accept service. Schmid confirmed that the bank’s internal records showed that Bennett was personally served with the garnishment on August 14, 2018. Upon receipt of the writ, Schmid explained that the bank’s procedures would have required Bennett to promptly send an electronic copy of the writ to the levy and garnishment department for processing and that the hard copy would have been forwarded via courier or inter-office delivery. According to bank records, the garnishment department noted that it received the garnishment on August 17th. The Bankruptcy Court found that “the evidence clearly establishes that the personal service resulted in the bank being informed of the garnishment.” (Id. at 63.)
On November 15, 2018, a chapter 7 petition was filed for Wedgewood, and Appellant was appointed as the chapter 7 trustee. Rogers and Stephen filed a claim for $203,294, based on the state court Consent Judgment. The Trustee initiated the adversary proceeding on November 6, 2020.
The Trustee estimated the unsecured claims in the chapter 7 case at a minimum of $5.46 million. As of August 2023, the estate had $322,000 in its account and potential judgments totaling approximately $674,000, leading to a maximum possible distribution of about $996,000 to creditors, or 18% of claims. The Trustee compared this to the amount Rogers and Stephen received from the prepetition garnishment and asserted that they received more through the garnishment than they would have as unsecured creditors.
The Trustee’s C.P.A. prepared an expert report and an electronic spreadsheet summarizing her findings based on her review of bankruptcy and probate case filings, bank statements, and business records. The Trustee’s expert witness identified five instances when new investor funds were used to repay prior investors, concluding that Wedgewood operated as a Ponzi scheme. Her report documented instances of fund diversion and commingling between May 2014 and June 2018, with twelve examples of transfers from Wedgewood’s accounts to personal and business accounts and seven instances of using non-Wedgewood accounts to fund Wedgewood obligations. Transfers to individual investors of between $5,000 and $50,000 were made during 2013, 2014, and 2015. The Trustee’s C.P.A. concluded that Wedgewood was continuously insolvent from May 1, 2012, through November 15, 2018, with assets estimated at $1,133,952.03 and liabilities at $3,650,262.52 as of May 1, 2012, resulting in an insolvency of $2,516,310.49, and continued insolvency between $2.3 million and $6.8 million during the prepetition period.
DISCUSSION
1. Did the Trial Court err in finding that Appellees accepted Wedgewood’s actually fraudulent transfers in good faith for purposes of their affirmative defense under Section 548(c) of the Bankruptcy Code?
The Bankruptcy Court found, and neither party disputes, that Debtor’s transfers to Defendants were actually fraudulent under
Under
There is no statutory definition of “good faith” in the Bankruptcy Code. The Sixth Circuit acknowledged that “courts have ‘struggled’ to define good faith in this context.” Id. at 734 (citing First Indep. Cap. Corp. v. Merrill Lynch Bus. Fin. Servs. Inc. (In re First Indep. Cap. Corp.), 181 F. App’x 524, 528 (6th Cir. 2006)). In Meoli, the Sixth Circuit approved the test for good faith articulated and applied by the bankruptcy court, finding it “not erroneous.” Id. at 734. That “test” was stated in the form of a question: did the transferee “ever reach the point where it could no longer legitimately cling to its belief” that it was receiving transfers in good faith. Id.5
Meoli’s test for good faith would appear to apply with equal force to individual defendants, considering what the defendants knew and at what point they could not “legitimately cling to [their] belief” that they were acting in good faith. 848 F.3d at 723. Furthermore, Appellant does not dispute that the Bankruptcy Court articulated the correct standard. (Appellant’s Br. at 30 (“The bankruptcy court’s articulation of the good-faith standard was therefore correct as far as it goes.”).) Instead, the Appellant asserts that “the bankruptcy court did not apply the standard when analyzing the legal significance of the largely, if not entirely, undisputed facts in this case.” (Id.)
Appellant argues that the Bankruptcy Court “functionally applied a different test: one that required the Trustee to prove that Rogers, Stephen, or Foster actually knew that Wedgewood was a Ponzi scheme.” (Appellant’s Br. at 21.) In contrast, Appellant appears to argue that the presence and knowledge of any red flags places a person on inquiry notice and is sufficient to defeat good faith. However, the idea that bare inquiry notice is sufficient to defeat good faith was rejected by the Sixth Circuit in Meoli, where good faith was found to continue even after the financially sophisticated defendant grew suspicious enough to conduct an investigation.
The facts in the Meoli case demonstrate that the presence of red flags, even those sufficient to lead a person to investigate are not, in and of themselves, enough to defeat good faith. In that case, the bankruptcy court noted numerous red flags that preceded the point at which it determined that the defendant could no longer claim good faith, and that aspect of its decision was affirmed by the Sixth Circuit. In Meoli, Cyberco was a deposit and loan customer of the defendant bank. 848 F.3d at 720. Cyberco’s chairman, Watson, represented that it purchased equipment from Teleservices, which was later proven to be a “paper company” created by Watson to perpetuate fraud. Id. One year into the bank’s relationship with Cyberco, in September 2003, a $2.3 million
In January 2004, the bank asked Cyberco to find a new bank. Some employees stated they did not understand Cyberco’s complex business, but others “clearly worried that Cyberco might not pay back its debt.” Id. White’s superior, Kalb, wrote at the time: “‘the ‘red flags’ continue,’ and that there was in ‘recent times . . . the heightened risk of financial misinformation (as well as fraud),’ and that he hoped [the bank] would not ‘lose money’ in the process of ending its relationship with Cyberco.” Id. By April 2004, Kalb was even more certain there was foul play based on several factors. Id. Around that time, “White found proof of Cyberco’s foul play,” in the form of information that refuted representations that Watson had made about Cyberco’s reasons for not using a lockbox and that its purported customers were in fact competitors. Id. at 721–22. At that point, Kalb and White alerted the bank’s security department. Id. at 722. Meanwhile, Kalb suggested to Watson that the bank contact Cyberco’s customers to verify that they were in fact customers, and Watson resisted. Id. The bankruptcy court, as affirmed by the Sixth Circuit, found that up to this point, the bank had received loan repayment transfers in good faith. Id. at 723.
It was not until April 30, 2004, long after the bounced check, when the bank’s security department “discovered that Watson was a convicted fraudster,” that the bank was found to have lost its ability to assert good faith. Id. The security department failed to communicate this information to Kalb, who was overseeing the bank’s relationship with Cyberco. Id. The bankruptcy court found that had Kalb been provided that information, he “would have acted differently than to continue to receive the transfers from Teleservices in good faith.” Id.
Likewise, we find no error in the Bankruptcy Court’s finding that Rogers and Stephen received the settlement transfers in good faith despite their limited awareness of some red flags.
The Bankruptcy Court’s factual determinations are reviewed under a clearly erroneous standard. The Meoli decision makes it clear that where, as in the present case, the transferees (Rogers and Stephen) established that their initial dealings with Weera and Wedgewood were in good faith and without notice, that “good faith” continues until the initial transferees obtained some definite piece of information demonstrating that the transferees “could no longer legitimately cling to [their] belief” that they were no longer acting in good faith. Id. at 734. Payments received thereafter would be avoidable. See id. at 730 (approving recovery of all payments made after good faith had ended).
The trial court found “that Rogers acted in good faith. She was not complicit in Weera’s fraud and was not aware of any red flags when she made her investment. When red flags came up after her investment in Wedgewood, they pointed to Weera’s ineptitude and lack of follow-through, but not to a broader fraudulent scheme.” (Op. at 49.) Moreover, the Bankruptcy Court held: “The case for good faith is even stronger for Stephen, whose lack of direct communication with Weera and general inability to understand or recall the financial transactions at issue makes it nearly impossible to charge him with knowledge of fraud or potential red flags.” (Id. at 50.)
Rogers and Stephen were elderly individuals with little financial or legal experience. There is no evidence that they should have known or understood the potential legal implications of what little knowledge they had. Their limited knowledge of red flags and the concept of inquiry notice do not compel the conclusion that Rogers and Stephen did not act in good faith. In Meoli and
The Bankruptcy Court made factual findings that Rogers and Stephen acted in good faith. (Op. at 46–50.) Appellant has failed to show that these factual findings are “clearly erroneous”; therefore, there is no reversible error in these findings of good faith.
The remaining issue relating to good faith is Appellant’s contention that the Bankruptcy Court’s findings related to Foster constitute reversible error. The Bankruptcy Court reviewed Michigan law regarding the imputation of knowledge to an attorney’s client:
Under Michigan law, it is generally held that “where a client is represented by an attorney, knowledge acquired by the attorney while acting within the scope of his authority is by fiction of law the knowledge of the client.” Katz v. Kowalsky, 296 Mich. 164, 170, 295 N.W. 600, 603 (1941); see also Restatement (Third) of Agency, § 5.03 (2006).
(Op. at 50–51.)
The specific factual issue is captured by the Bankruptcy Court’s assertion: “Whatever Attorney Foster may have suspected about Wedgewood’s operations, there is no evidence that he knew it was a Ponzi scheme. Under the circumstances, there is no actual knowledge of the scheme that can be imputed to the Defendants to undermine the court’s previous determination that they accepted the transfers from Wedgewood in good faith.” (Id. at 54.)
Foster’s testimony was presented in the form of deposition testimony. The clearly erroneous standard applies with equal force to a trial court’s findings made based upon transcripts or deposition testimony. Guerrero v. United States, 383 F.3d 409, 414–16 (6th Cir. 2004); see also McFarland v. T.E. Mercer Trucking Co., 781 F.2d 1146, 1148 (5th Cir. 1986) (discussing the then-recent amendment to
The Trustee lists all of the facts, statements and pleadings that would support a finding of inquiry notice on the part of Foster that, in turn, should be—in his view—attributed to Rogers and Stephen. (See Appellant’s Br. at 32–41.)
Notably, most of the information known to Foster that suggested the potential of a Ponzi scheme was related to the first $50,000 invested by Stephen in February 2013. There is far less evidence regarding the later, larger investments made by Stephen in March 2016, and the investments by Stephen and Rogers in April 2016. In presenting his case, it appears that the Trustee chose to argue that all of the investments were avoidable rather than separating the original $50,000 investment, for which there was more evidence that it was used as part of a Ponzi scheme.7 The Bankruptcy Court considered the case as it was presented and did not separately consider each individual investment.
Foster had enough facts to lead him to include a Ponzi scheme claim in the amended complaint he filed, and he sought additional discovery on that issue. Nevertheless, the Bankruptcy Court considered and credited Foster’s assertion that he only threw in the Ponzi scheme claim as a litigation tactic and that his primary concern was that Weera had stolen Rogers’ and Stephen’s money and transferred it overseas.
In considering whether Foster’s limited knowledge was sufficient to tip the scale to a loss of good faith, the Bankruptcy Court also considered what it actually took for persons or entities with more information to discover Weera and Wedgewood’s fraud.
Second, the Bankruptcy Court had the opportunity to consider testimony from the Trustee’s expert, who did uncover the Ponzi scheme and documented it. In hearing that testimony, the Bankruptcy Court had information about what efforts it actually took to bring to light proof of the fraudulent scheme that LARA had failed to uncover.
Thus, the Bankruptcy Court was able to view the deposition testimony of Foster in the context of, and in comparison with, a governmental licensing and regulatory agency that did not discover the Ponzi scheme and a forensic accountant who did.
The Bankruptcy Court found that “[w]hatever Attorney Foster may have suspected about Wedgewood’s operations, there is no evidence that he knew it was a Ponzi scheme.” (Op. at 54.) Although the Bankruptcy Court used language suggestive of a requirement of actual knowledge, that is not consistent with the Bankruptcy Court’s review or treatment of the evidence. Nor is the finding clearly erroneous in light of the comparison of Foster’s knowledge with that of the bank in Meoli.
Moreover, the structure of the Opinion deserves attention. The sequencing of the analysis—starting with Rogers and Foster’s intertwined awareness and moving to the independent good faith analysis of Foster—suggests that the red flags and inquiry notice issues were
The Appellant’s arguments are primarily based upon case law from other jurisdictions that take a different approach to the good faith requirement in
The Trustee emphasizes the negative impact that allowing the good faith defense for Rogers and Stephen has on other creditors in the underlying chapter 7 case, i.e., that giving priority to two creditors disadvantages similarly situated creditors who are equally blameless. This situation is not an unfamiliar one to bankruptcy judges, who regularly deal with priority issues that have the same dynamic. Yes, other parties will receive less because Stephen and Rogers received more. But that is inherent in the statutory exception to recovery set forth in
Accordingly, the Panel finds that the Bankruptcy Court did not err in finding that Appellees accepted Wedgewood’s actual fraudulent transfers in good faith for purposes of their affirmative defense under
“Under
Federal law controls “[w]hat constitutes a transfer and when it is complete.” Barnhill v. Johnson, 503 U.S. 393, 397, 112 S. Ct. 1386, 1389 (1992). The term “transfer” is defined in the Bankruptcy Code and, for purposes of the issues before the Panel, includes “the creation of a lien.”
From a broader federal perspective, the majority rule among the circuit courts, including this circuit, has been that when a bank account is garnished, a transfer occurs “upon service of the garnishment order and notice on the garnishee bank.” Id. at 498 (holding that a transfer of garnished funds under Ohio law is perfected upon service of the garnishment order because that action “binds” the funds and, after that time, no other creditor can acquire a superior lien in the funds); Phillips v. MBank Waco, N.A. (In re Latham), 823 F.2d 108, 110 (5th Cir. 1987) (interpreting Texas law); Walutes v. Baltimore Rigging Co., 390 F.2d 350 (4th Cir. 1968) (interpreting Maryland law as it applied to Section 60 of the Bankruptcy Act).9 The questions in
“Michigan follows the general rule that a garnishment lien attaches upon service of the writ.” Mich. Tractor & Mach. Co. v. Elsey, 216 Mich. App. 94, 97, 549 N.W.2d 27, 29 (1996) (quoting Mary v. Lewis, 399 Mich. 401, 411, 249 N.W.2d 102 (1976)); see also Bleau v. First of Am. Bank-Cent. (In re Arnold), 132 B.R. 13, 14–15 (Bankr. E.D. Mich. 1991) (“[A] post-judgment lien is perfected when the writ is served,” and the first perfected would have priority.); In re Collier, No. 22-30274-JDA, 2022 WL 2357087, at *2 (Bankr. E.D. Mich. June 29, 2022) (holding that a perfected lien arose from tax refund garnishment “[a]t the time the writ was served”); In re Piccard, No. 18-22427-DOB, 2021 WL 1134793, at *5 (Bankr. E.D. Mich. Mar. 24, 2021) (“A garnishment is perfected when the notice is served.”).
The facts underlying the transfer are not in dispute. Instead, this issue turns on an interpretation of Michigan law—the interaction of Michigan’s garnishment statutes and the requirements of the Michigan Court Rules—to determine when the transfer occurred for preference purposes under
In deciding an issue of state law that has not been directly addressed by the state’s supreme court, the Panel must predict “how that court would rule if it were faced with the issue.” See United States v. Simpson, 520 F.3d 531, 535 (6th Cir. 2008); Kingsley Assoc., Inc. v. Moll PlastiCrafters, Inc., 65 F.3d 498, 507 (6th Cir. 1995) (“Since the Michigan Supreme Court has not addressed this issue, however, we must predict how it would resolve the issue from ‘all relevant data.’”). Relevant data includes the state’s appellate court decisions, as well as “the state’s supreme court dicta, restatements of law, law review commentaries, and the majority rule among other states.” Garden City Osteopathic Hosp. v. HBE Corp., 55 F.3d 1126, 1130 (6th Cir. 1995)); Drown v. Perfect (In re Giaimo), 440 B.R. 761, 769 (B.A.P. 6th Cir. 2010).
Michigan Court Rule (“MCR”) 3.101(F)(1) states that garnishments should be served: “in the manner provided for service of a summons and complaint in MCR 2.105.” MCR 2.105(D) addresses service on a corporation:
(D) Private Corporations, Domestic and Foreign. Service of process on a domestic or foreign corporation may be made by
- serving a summons and a copy of the complaint on an officer or the resident agent;
- serving a summons and a copy of the complaint on a director, trustee, or person in charge of an office or business establishment of the corporation and sending a summons and a copy of the complaint by registered mail, addressed to the principal office of the corporation;
MCR 2.105(D).
It is undisputed that Foster did not strictly comply with the service statute. Based on that circumstance, the Bankruptcy Court examined at what point the service became effective. The Bankruptcy Court considered the additional facts that “Chemical Bank’s garnishee disclosure, prepared on August 21, 2018, states that the bank received the writ on August 17, which is the date that the bank’s garnishment department received the writ.” However, a bank representative testified that according to bank policy, the writ should have been considered received as of August 14 when the bank’s internal records showed that the branch manager received the writ, not the date that the garnishment made its way to the garnishment department.
Because Michigan Court Rules applicable to the service of a summons and complaint apply to the method of serving a garnishment, the Bankruptcy Court applied another Michigan Court Rule addressing the effect of imperfect service. MCR 2.105(K)(3) provides: “An action shall not be dismissed for improper service of process unless the service failed to inform the defendant of the action within the time provided in these rules for service.” No party has asserted that the service by Foster failed “to inform defendant of the action within the time provided in these rules for service.” The Bankruptcy Court expressly found that the defect of failing to follow up on the personal service “by sending a copy of the writ by registered mail to the bank’s principal office
In Michigan, there are two types of garnishments: periodic and non-periodic. Michigan statutes (“MCLA”) treat periodic and non-periodic garnishments differently in terms of the effect of insufficient service. MCLA § 600.4011 applies to garnishments generally, and § 600.4012 applies only to periodic garnishments.
The periodic garnishment statute (which would apply to wage garnishments) provides: “A garnishment of periodic payments or a notice of failure is not valid or enforceable unless the garnishment is served on the garnishee in accordance with the Michigan court rules.” MCLA § 600.4012(4).14 It further provides that on timely motion of the garnishee after entry of a default judgment, the court shall set aside the default judgment if, among other reasons, the garnishment “was not properly served or sent as required by this section.” MCLA § 600.4012(10)(b)(ii). However, there are no corresponding statutory provisions mandating strictly compliant service for non-periodic garnishments.
While the failure to strictly comply with the requirements of MCR 2.105(D) would appear to be fatal when a creditor seeks to enforce a periodic garnishment, there is support in the Michigan
Most notably, in a case involving a bankruptcy case filed under the Bankruptcy Act, the Michigan Supreme Court stated:
Michigan follows the general rule that a garnishment lien attaches upon service of the writ. Kyte v. MacIvor, 266 Mich. 258, 253 N.W. 289 (1934); Rickman v. Rickman, 180 Mich. 224, 146 N.W. 609 (1914). In the case of a prejudgment garnishment, the entry of a judgment in favor of the plaintiff perfects the lien acquired upon service by removing its inchoate status and establishing the exact amount of the debt owed by the principal defendant and, thus, the amount for which the garnishee may be held liable. Should the plaintiff fail to obtain a judgment, the lien would be discharged.
Mary, 399 Mich. at 411, 249 N.W.2d at 106. This suggests that under Michigan law, a lien arises upon service of the garnishment, even if it is subject to later defeasance.
Further, in McKnight v. General Retirement System of City of Detroit, Nos. 290261 & 293215, 2010 WL 4628654, at *7 (Mich. Ct. App. Nov. 16, 2010), the court determined that a non-periodic writ of garnishment had been properly served, but went on to say in dicta:
The rules governing service of process “are intended to satisfy the due process requirement that a defendant be informed of the pendency of an action by the best means available, by methods reasonably calculated to give a defendant actual notice of the proceeding and an opportunity to be heard and to present objections or defenses.” Even if [the plaintiff] did not properly effectuate service in accordance with the court rule, such a failure is not construed to be fatal, as “[a]n action shall not be dismissed for improper service of process unless the service failed to inform the defendant of the action within the time provided in these rules for service.” [MCR 2.105(J)(3) (now numbered 2.105(K)(3)).] The record adequately demonstrates that Chase Bank had notice of the garnishment action having contacted the Retirement System within three days of receipt of the writ. Any technical defect that may have existed in the manner of service cannot be equated to a complete failure of service and would not justify the setting aside of the default judgment on that basis.
Id. (citation modified).
In a similar federal court decision, Laborers Pension Trust Fund Detroit & Vicinity v. H & H Constructors, Inc., No. 05-CV-71995, 2007 WL 1880720, at *4–5 (E.D. Mich. June 29, 2007),
HVS maintains that the garnishment was improperly served, pointing out that the receipt indicates that the writ was sent via certified mail and was signed for by . . . a receptionist at HVS. HVS further argues that the file does not indicate that the writ was addressed to HVS’s president, secretary, or treasurer.
Plaintiffs respond that HVS was aware of their claims even before the instigation of the instant lawsuit, through Notices of Supplying Labor. . . . Plaintiff argues that HVS admits in its brief that it received actual notice of the lawsuit. Plaintiff points out that . . . HVS’s accounting coordinator[] penned a letter, as part of HVS’s tardy garnishment disclosure, that acknowledged the reception of the writ of garnishment.
Under Michigan law, “[i]f the improper manner of service satisfies due process by giving sufficient notice of the claim, dismissal is not warranted. Thus, if defendant ha[s] timely and actual notice of the action, service [i]s sufficient.” Eckerson v. Mich. Dep’t of Transp., No. 174747, 1996 WL 33349436, *2 (Mich. Ct. App. Oct. 11, 1996) (applying this principle to MCR 2.105(G)); see Ibrahiem v. City of Flint, No. 06-10940, 2006 WL 3759920, *2 (E.D. Mich. Dec. 20, 2006) (holding that where the city acknowledged that its agent received the summons and complaint, the city has been provided “actual notice of the suit”).
Here, HVS admits that it received the garnishment writ. Furthermore, HVS submits a letter written by its accounting coordinator acknowledging the reception of the writ of garnishment and its referral to HVS’s attorney. Furthermore, MCR 2.105(G) provides that service to a school district can include individuals with “substantially the same duties [as president, secretary, and treasurer] . . . irrespective of title.” Given this evidence, Plaintiffs have shown that HVS received actual notice of the writ of garnishment. See MCR 2.105(J)(3) (“An action shall not be dismissed for improper service of process unless the service failed to inform the defendant of the action within the time provided in these rules for service.”).
Therefore, the Court does not accept Defendant’s argument that it did not receive actual notice of the garnishment.
Id. (citation modified). Both McKnight and Laborers Pension relied in part on MCR 2.105(K)(3), previously numbered MCR 2.105(J)(3).
Thus, although MCL 600.4011(2) “provides the authority for the circuit court to exercise garnishment jurisdiction, the court must do so within the parameters established in the Michigan Court Rules.” Royal York of Plymouth Ass’n v Coldwell Banker Schweitzer Real Estate Servs., 201 Mich App 301, 305, 506 N.W.2d 279 (1993).
Hairston, 2025 WL 1014229, at *4. The Hairston court further stated that “[g]arnishment statutes are to be strictly construed.” Id. at *6 (citing Krakowsky v. Margolis, 255 Mich. 3, 5, 237 N.W. 28, 28 (Mich. 1931)).
The Michigan Supreme Court’s holding that courts are required to strictly construe both the garnishment statutes and the Michigan Court Rules does not expressly address the question this Panel must resolve. Although MCR 2.105(D) states how service is to be made on a corporation, which was not fully accomplished, MCR 2.105(K)(3) uses mandatory language when it directs that “[a]n action shall not be dismissed for improper service of process unless the service failed to inform the defendant of the action within the time provided in these rules for service.”
Although MCLA § 600.4012(4) and MCR 2.105(D) might lead to a different result for a periodic garnishment, strict construction of MCLA § 600.4011 with MCR 2.105(D) and (K)(3) lead the Panel to conclude that the Bankruptcy Court properly analyzed the Michigan statutory and rule framework to conclude that service of the non-periodic writ of garnishment on Chemical Bank was sufficient to provide the bank actual knowledge of the writ, precluding the bank from seeking to invalidate the writ based on improper service. See MCR 2.105(K)(3). Thus, because “Michigan follows the general rule that a garnishment lien attaches upon service of the writ,” Mary, 399 Mich. at 411, 249 N.W.2d at 106, Foster’s service of the garnishment “on the person in charge of an office or business establishment of the corporation” created a “lien” for purposes of
Accordingly, based on Sixth Circuit precedent in In re Battery One-Stop and Michigan statutes, court rules, and case law, the Panel will affirm the Bankruptcy Court’s ruling that the transfer made pursuant to the garnishment of Wedgewood’s bank account was outside the preference period.
CONCLUSION
The Bankruptcy Court’s finding that Appellees received the transfers at issue in good faith for purposes of their affirmative defense under
The Bankruptcy Court’s holding that the garnishment of the Wedgewood bank account was outside the preference period and not avoidable is AFFIRMED.
OPINION
GUSTAFSON, Bankruptcy Appellate Panel Judge. I write separately to respectfully suggest that the distinction between the criteria used to determine good faith under Sections 548(c) and 550(b)(1) is not fixedly partitioned into separate categories of analysis. In my view, “good faith” is the larger category, and the additional language in
In the Sixth Circuit, the case law addressing the continuity between
First, while the Bankruptcy Court undertook Meoli’s “holistic analysis,”3 the decision did not cite or discuss the specific questions relating to inquiry notice that Meoli “encouraged” courts to use: “What a reasonable person would be alerted to depends not just on whether there was inquiry notice, but also on what investigative avenues existed, whether a reasonable person would have undertaken those avenues given the situation, and what findings the reasonable investigations would have yielded. Taken together, Nordic Village and First Independence encourage these inquiries.” Meoli, 848 F.3d at 733. I do not believe this guidance should be confined solely to
The questions Meoli encouraged were not cited or systematically addressed by the Bankruptcy Court. Instead, the decision cited to pre-Meoli cases which articulated a somewhat different standard.5 Directly addressing the specific inquiries encouraged by Meoli would have been, in my view, the better practice and helpful in appellate review. However, the specific findings in the Bankruptcy Court’s decision and its holistic review of the facts support affirmance.
Second, it is my position that the two Sixth Circuit decisions that Meoli relied upon provide further support for affirmance of the Bankruptcy Court’s decision, even though they are cases decided under