Fifth Circuit Case Strengthens Trustee's Ability to Recover Pre-petition Garnishments

Recently the Court of Appeals for the Fifth Circuit (which covers Texas, Louisiana and Mississippi) held in Tower Credit, Incorporated v. Martin A. Schott (In re Jackson), No. 16-30274 (5th Cir. March 13, 2017), that a judgment creditor had to return to the bankruptcy trustee the wages that it recovered from a prebankruptcy wage garnishment against the debtor. The Fifth Circuit reasoned that under federal law an individual does not acquire rights in wages until the services have been performed. This meant that there was a transfer of property through the garnishment each time wages were paid. Thus, wages that were seized under the garnishment within the 90-day period before bankruptcy were recoverable preferences, even though the garnishment had been served outside the 90-day preference period (it was served on January 19, 2012 and the bankruptcy was filed November 12, 2012). The Fifth Circuit noted there was a "split" in the Circuits on this issue, with the Fifth and Sixth Circuit in alignment on the trustee's ability to recover wage garnishments within the preference period, and the Eleventh, Seventh and Second Circuits holding to the contrary, although the Seventh Circuit had disavowed its earlier case based upon the Supreme Court decision in Barnhill v. Johnson, 503 U.S. 393 (1992), which held that the time of a transfer is governed by federal law, not state law.