§ 3.13.2.4 Interplay of Arizona Garnishment Law with Federal Bankruptcy Law . A prepetition garnishment of a debtor’s earnings in Arizona may constitute a preference under the federal bankruptcy laws. 11 U.S.C. § 547 . When was the underlying judgment obtained? When was the writ of garnishment served? Was an order of continuing lien entered? If so, when? Is the exception for small transfers (11 U.S.C. §547(c)(8)) applicable?
Even when both the judgment and order of continuing lien are outside the 90-day preference period, it is not clear whether prepetition garnishment can be avoided by the trustee in bankruptcy (except if the exception for small transfers applies, which would, however, be unlikely if the garnishment were in effect for the entire preference period and the “majority rule” were followed).
Generally, payments made within 90 days of bankruptcy are deemed to be “preferences,” and thus recoverable by the debtor or his trustee, subject to certain exceptions. 11 U.S.C. § 547(b). The courts have split on the question of whether a prepetition garnishment of a debtor’s earnings within the 90-day period constitutes a preference. Difficult questions arise in this area although the amount in dispute may be small. For instance, does the service of the writ of garnishment divest the debtor of all rights from the time it is served, or does the garnishment lien attach only as the earnings are earned? Answers vary among states, because state law determines many of the outcomes.
The Second Circuit has held, for example, that, because a wage garnishment operates as a continuing levy once the writ of garnishment is served (in this case well before the 90-day preference period had begun), wages are no longer property of the debtor and the payment of the wages to the creditor within the preference period cannot be avoided. Riddervold v. Saratoga Hospital, 647 F.2d 342 (2d Cir. 1981). See also In re Connor, 733 F.2d 1560 (11th Cir. 1984) (under Georgia law, lien attaches on wages when writ of garnishment is served and payment of wages to creditor cannot be avoided if service made outside 90-day preference period); In re Coppie, 728 F.2d 951(7th Cir. 1984) (prepetition garnishment of wages order is not preferential transfer avoidable by bankruptcy trustee), cert. denied sub nom. Gouveia v. Hammond Clinic, 469 U.S. 1105, 105 S. Ct. 777, 83 L. Ed. 2d 772 (1985). Addressing the argument that the salary first had to be earned by the employee and therefore had to be property of the employee in the hands of the garnishee which would then be “transferred” to the creditor, the court in Riddervold stated: “But this does not require us to hold that the portion of the salary subject to the income execution vests in the employee for a fleeting second after it has been earned, when in fact the employer becomes bound at that very time to pay it to the sheriff.” 647 F.2d at 346. In Coppie, the order for continuing lien had likewise been entered prior to the 90-day preference period. The court analyzed Indiana law, which makes the garnishee accountable to the creditor from the day the writ of garnishment is served for any money owed to the debtor (just as Arizona law does). The court stated:
Following a hearing, a court may order, as apparently happened here, that the judgment be a continuing lien on the future income of the debtor, i.e. continuous garnishment. . . . At the time of the garnishments at issue here, this continuing lien could not exceed 10% of the debtors’ income. . . . In this respect, the Indiana statutes were similar to the New York statutes involved in In re Riddervold, . . . in that the statutes, in effect, worked a novation of 10% of the debtor’s salary. Following court orders that the liens on these debtors’ future income be continuous, the debtors no longer had a property interest in 10% of their future salaries. See In re Woodman...
