When the debtor’s mother made a direct payment to one of the debtor’s creditors from an account over which the debtor had no interest or control, the transfer was not an avoidable preferential transfer under section 547(b). Walters v. Stevens, Littman, Biddison, Tharp and Weinberg, LLC. (In re Wagenknecht), No. 19-1206 (10th Cir. Aug. 24, 2020). [Read more…] about Debt Paid by Mother Pre-Bankruptcy Not Preferential Transfer
Property Purchased in Tax Sale for Less than Its Value Is Preferential Transfer
The Third Circuit affirmed that because New Jersey’s tax foreclosure sales are not tied to the value of the property, the transfer of property worth more than what the purchaser would have received in a Chapter 7 distribution may be avoided as a preferential transfer. Hackler v. Arianna Holdings Company, LLC., No. 18-1650 (3rd Cir. Sept. 12, 2019). NCBRC filed an amicus brief in support of the debtors.
Frank and Dawn Hackler failed to pay taxes on their residence. The property was sold in a tax sale according to New Jersey tax foreclosure procedures under which the public bids only on the interest rate for the unpaid taxes with the property going to the lowest bidder. A tax purchaser won the bid, and then sold the property, valued at $335,000, to Arianna Holding Co. LLC. for $45,000. The Hacklers filed for Chapter 13 bankruptcy and the trustee sought to avoid the transfer to Arianna as a preferential transfer under section 547(b). The bankruptcy court granted the trustee’s motion and the district court affirmed (blogged here). Arianna appealed to the Third Circuit. [Read more…] about Property Purchased in Tax Sale for Less than Its Value Is Preferential Transfer
Third Circuit Rejects Preference Argument in 547 Context
Denying the debtor’s claim of preferential transfer, the Third Circuit applied a presumption that the foreclosure sale of the debtor’s property resulted in a purchase price equivalent to what the property could have garnered in a chapter 7 liquidation sale. Veltre v. Fifth Third Bank, No. 17-2889 (3rd. Cir. July 19, 2018) (unpublished).
The junior mortgagee, Fifth Third Bank, bought Margaret Veltre’s home in a pre-bankruptcy foreclosure sale for an amount sufficient to satisfy the first mortgage. Ms. Veltre subsequently filed for bankruptcy and initiated an adversary proceeding seeking to have the foreclosure sale avoided as a preferential transfer. [Read more…] about Third Circuit Rejects Preference Argument in 547 Context
Tax Sale Certificate Transfer Was Avoidable Preference
A transfer of a tax sale certificate from the initial tax purchaser to the bankruptcy creditor was an avoidable preference where it resulted in the creditor obtaining greater value than it would have received in a chapter 7 liquidation. Hackler v. Arianna Holding Company, LLC., No. 17-6589 (D. N.J. March 22, 2018).
The chapter 13 debtors, Frank and Dawn Hackler, owned real property valued at $335,000. The property was sold in a tax sale to Phoenix Funding Inc. Phoenix sent a notice of foreclosure to the Hacklers then assigned the tax lien to Arianna Holding Company, LLC. The Hacklers filed for chapter 13 bankruptcy but that case was dismissed due to their failure to attend the 341 meeting of creditors. A month later, Arianna obtained a Final Judgment in Foreclosure vesting the property in itself. Within three months, the Hacklers again filed for chapter 13 bankruptcy listing the value of Arianna’s lien at $45,000. The Hacklers filed an adversary proceeding against Arianna seeking to avoid the transfer from Phoenix. The bankruptcy court found the transfer was an avoidable preference under section 547(b) and granted summary judgment in favor of the Hacklers. In re Hackler, 2017 Bankr. LEXIS 2437 (Bankr. D. N.J. Aug. 28, 2017). [Read more…] about Tax Sale Certificate Transfer Was Avoidable Preference
Debt to DHS Not Domestic Support Obligation
A payment on a debt to the DHS based on an overpayment of food stamp benefits does not fall under the preferential transfer exception for domestic support obligations simply because the overpayment was made under a program for the support of the debtor’s children. Halbert v. Dimas (In re Halbert), No. 16-13005, Adv. Proc. No. 16-479 (Bankr. N.D. Ill. Nov. 16, 2017).
The DHS overpaid funds to the debtor, Tyeane Halbert, under its Supplemental Nutrition Assistance Program (“SNAP”). Within ninety days of Ms. Halbert’s bankruptcy petition, the DHS intercepted her tax refund to offset the debt based on the overpayment. Ms. Halbert sought to recover the refund under section 522(h) on the grounds that the transfer was a preference under section 547(b). The DHS argued that the payment fell under section 547(c)(7)’s exception to preferences for “domestic support obligations,” pointing to the definition of that term in section 101(14A)(ii) as a debt owed to a governmental unit which is “in the nature of . . . support.”
The court began its analysis with a look at Wisconsin Dep’t of Workforce Dev. v. Ratliff (In re Ratliff), 390 B.R. 607 (E.D. Wis. 2008), where that court found a debt based on overpayment of food stamp benefits was excepted from discharge under section 523(a) as a domestic support obligation. The court in Ratliff, and courts reaching similar holdings, based its conclusion on a finding of causal connection between the purpose of the original payment for support and the debt that arose out of the overpayment.
Cases finding the other way, such as In re Vanhook, 426 B.R. 296, 301 (Bankr. N.D. Ill. 2010), hold that the debt arising out of an overpayment (or wrongful payment), generally has a different character than the original purpose of the payment. While the original payment was intended for support, the debt arose out of a separate obligation arising out of the excess payment amount and does not serve any purpose related to domestic support. As the court in In re Lutzke, 223 B.R. 552, 554 (Bankr. D. Or. 1998), pointed out, any payment on the debt based on overpayment is not intended for the domestic support of the creditor. [The court noted, however, that where one spouse with a child-support obligation overpays to the other spouse sharing child-support, the overpayment debt could be considered to retain the “nature of support” in that it could go to the creditor spouse’s actual child support obligations.]
The court noted that most debts owed to a governmental unit would be the result of an overpayment of support in one form or another and, therefore, finding that the ensuing debt retains the nature of support would apply too broadly. Rather, the court reasoned, the type of domestic support obligations owed to a governmental unit that would be covered by the definition in section 101(14A)(ii) would more appropriately be the type of debt where the support obligation is assigned to the government, or where the payment is owed to the government in situations of “foster care, wardship or residential treatment centers.”
The court thus concluded that the transfer was preferential under section 547(b) and did not fall under the exception set forth in section 547(c) and granted summary judgment in favor of Ms. Halbert.
Chapter 11 Preferential Transfer Avoidable under 547(b)
Three days before Diamond sought debt relief
The owner took steps on misguided belief
He transferred some money
To his marital honey
And claimed it was business in chief.
Though they argued the transfer was usual,
The court found their statements refutable.
In the absence of evidence;
The court was incredulous,
So their hope for relief was delusional.
In re Diamond Insulation Inc., No, 15-1448, Adv. Proc. No. 17-9015 (Bankr. N.D. Ia. Sept. 1, 2017)
Preferential Transfer Governed by Date Garnished Wages Earned
It is not the date the garnishment order is served on the employer, but the date the debtor earns the wages that governs whether garnishment of those earnings is a preferential transfer. Tower Credit Inc. v. Schott (In re Jackson), No. 16-30274 (5th Cir. March 13, 2017).
Pursuant to a state court judgment, Tower Credit garnished the wages of the chapter 7 debtor, Christon Jackson. When he filed for bankruptcy, the trustee, Martin Schott, moved for turnover of the garnished wages as preferential transfers. Section 547(b) empowers a trustee to avoid a transfer made within 90 days of bankruptcy filing. The bankruptcy court granted summary judgment in favor of Mr. Schott. The district court affirmed.
On appeal, the Fifth Circuit began with section 547(e)(2)(B), under which a transfer is made when it is “perfected,” which “in the context of nonreal property, occurs when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. § 547(e)(1)(B).” Tower Credit argued that this milestone occurred when it served the garnishment order on Mr. Jackson’s employer.
Section 547(e)(3), however, says that the transfer does not occur until the debtor acquires rights in the property transferred. Under the reasoning in Local Loan Co. v. Hunt, 292 U.S. 234 (1934) (addressing a discharge dispute), that defining event does not happen until the debtor actually earns the wages. Because federal rather than state law determines when a transfer of property occurs, the court rejected Tower Credit’s argument that state transfer laws governed the issue. Furthermore, the court distinguished cases cited by Tower Credit as not addressing the impact of section 547(e)(3), or as, in the case of In re Coppie, 728 F. 2d 951 (7th Cir. 1984), incorrectly finding that section inapplicable.
The court concluded that “[t]he combination of Supreme Court precedent and the overwhelming weight of persuasive authority applying § 547(e)(3) make clear that a debtor’s wages cannot be transferred until they are earned.” It affirmed.