Garcia v. P2 Props. (In re Garcia)

570 B.R. 635

IN RE: Martha E. GARCIA, Debtor.

Martha E. Garcia, Plaintiff,

v.P2 Properties, Defendant.

No. 16–11442–t13

Adv. No. 16–1067 t

United States Bankruptcy Court, D. New Mexico.

Signed April 14, 2017

P. Diane Webb, Albuquerque, NM, for Plaintiff.

P2 Properties, pro se.

OPINION

Honorable David T. Thuma, United States Bankruptcy Judge

The issue before the Court is whether a garnishing creditor is subject to a preference claim when the garnishment was ordered more than 90 days pre-petition, but the wages were earned and paid to the creditor during the preference period. The Court holds that, under such circumstances, the garnishment lien and the paid wages are subject to avoidance under § 547.¹ As the current record does not make clear when the wages were earned by the debtor and paid to the garnishing creditor, the Court will take evidence on that issue before entering a final judgment.

I. FACTS ²

The Court's ruling in based on the following facts:³

Pre-petition, Plaintiff Martha E. Garcia rented a house from Defendant P2 Properties.

Apparently Plaintiff defaulted, for on December 17, 2015 Defendant gave Plaintiff a three-day notice of non-payment of rent.

On December 22, 2015, Defendant filed a petition for writ of restitution in state court. The court entered the writ on January 20, 2016, together with a money judgment against Plaintiff. The judgment originally was for $4,084.49, but later was reduced to $1,622.44.

The state court issued a writ of garnishment on February 4, 2016. The garnishee was Plaintiff's employer, the University of New Mexico Hospitals ("UNM Hospitals"). The hospital answered the writ on February 18, 2016.

On April 12, 2016, the state court entered a judgment on the writ of garnishment, ordering UNM Hospitals to pay Defendant $1,622.44 from Plaintiff's garnished wages.

UNM Hospitals paid the Defendant as ordered. On May 15, 2016, a satisfaction of judgment was entered in the case, followed two days later by a release of the writ of garnishment.

A second writ of garnishment was issued by the state court on May 16, 2016. UNM Hospitals answer the writ on June 6, 2016.

Plaintiff filed this bankruptcy case on June 10, 2016.

The 90–day preference period in this case started March 11, 2016 and ended June 9, 2016. UNM Hospitals paid Defendant $1,991 in Plaintiff's garnished wages. The record does not make clear whether all of such wages were earned and paid during the preference period. In addition, the record is unclear whether the entire $1,991 was paid on account of the first writ of garnishment.

Plaintiff exempted the garnished funds under 11 U.S.C. § 522(d)(5), and has standing to bring this action pursuant § 522(h).

II. DISCUSSION

A. Elements of a Preference Claim .

Plaintiff seeks to recover $1,991 in allegedly preferential transfers. A "transfer" is:

(A) the creation of a lien;

(B) the retention of title as a security interest;

(C) the foreclosure of a debtor's equity of redemption; or

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—

(i) property; or

(ii) an interest in property.

§ 101(54). Section 547(b) provides:

(b) Except as provided in subsections (c) and (i) 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;

or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(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.

Finally, § 547(e)(3) provides:

For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred.

B. The New Mexico Garnishment Statute .

New Mexico's garnishment statute, N.M. Stat. Ann. §§ 35–12–1 et seq. (1978), provides in pertinent part:

§ 35–12–1. Garnishment; affidavit and bond; grounds .

...

B. Garnishment may be issued in aid of execution of judgment entered in a civil action in the magistrate court only upon the filing in the action of an affidavit of the plaintiff that the defendant has no property in his possession within this state subject to execution to satisfy the judgment.

C. Garnishment may be issued in the magistrate court in aid of execution of judgment, which was entered in a civil action in some other court in this state and the unpaid balance of which does not exceed the jurisdictional amount of the magistrate court, only upon the filing of a civil complaint together with a certified copy of the judgment and an affidavit of the plaintiff that the defendant has no property in his possession within this state subject to execution to satisfy the judgment.

§ 35–12–2 Garnishment; service on garnishee .

A. The garnishment shall be served on the garnishee within the magistrate district in the manner provided by law for service of a civil summons in the magistrate court and shall order the garnishee in the action to appear before the magistrate within twenty days from the date of service to answer under oath, as of the date the garnishment was served and also as of the date of his answer:

(1) what, if anything, he is indebted to the defendant and on what account;

(2) what, if any, personal property of the defendant is in his possession; and

(3) what other persons, if any, within his knowledge are indebted to the defendant or have personal property of the defendant in their possession.

§ 35–12–3 Garnishment; effect on garnishee .

A. Except as otherwise provided in this section, service of a garnishment on the garnishee has the effect of attaching all personal property, money, wages or salary in excess of the amount exempt under Section 35–12–7 NMSA 1978, rights, credits, bonds, bills, notes, drafts and other choses in action of the defendant in the garnishee's possession or under his control at the time of service of the garnishment or which may come into his possession or under his control or be owing by him between the time of service and the time of making his answer. The garnishee is not liable for any judgment in money on account of any bonds, bills, notes, drafts, checks or other choses in action unless they are converted into money after service of the garnishment or he fails to deliver them to the magistrate within the time prescribed by the magistrate.

§ 35–12–4. Garnishment; answer by garnishee .

A. If the garnishee answers under oath that he is not at the time of answer, and was not, at the time the garnishment was served on him, indebted to the defendant or in possession of any personal property of the defendant, and if the garnishee's answer is not controverted within twenty days after being made, the magistrate shall enter judgment discharging the garnishee.

B. If the garnishee fails to answer the garnishment under oath within twenty days from the date of its service on him, the magistrate may render judgment by default against the garnishee for the full amount of any judgment rendered against the defendant, together with all interest and costs.

...

D. If the defendant is employed by the garnishee, the magistrate shall render judgment for the plaintiff against the garnishee for the unpaid balance of the plaintiff's judgment against the defendant and order the garnishee to pay to the plaintiff each pay period the defendant's wages or salary, which are not exempt from garnishment under Section 35–12–7 NMSA 1978 and which come due subsequent to the time of answer, until the judgment is satisfied, or, if the employment relationship is terminated, until the garnishee gives the plaintiff written notice that the employment relationship has terminated.

§ 35–12–9. Garnishment; wages and salary; lien; priority .

A. A judgment entered against a garnishee under Section 35–12–4D NMSA 1978 is a lien on the defendant's wages or salary, which are not exempt from garnishment under Section 35–12–7 NMSA 1978 and which come due subsequent to the time of answer, until the judgment against the garnishee is paid or until the employment relationship is terminated.

C. What Transfers are at Issue ?

The key to resolution of this adversary proceeding is to identify the transfers subject to potential avoidance. As pointed out in the dissenting opinion of In re Hagen , 922 F.2d 742 (11th Cir. 1991), there are three transfers in a typical secured transaction:

one transfer between the debtor and the creditor creating the debt, a second one between the debtor and the creditor creating a security interest, and a third one between the debtor and the creditor paying off the debt. But Section 547 is concerned only with the second and third transfers. See Section 547(b)(1) ("transfers to or for the benefit of a creditor"). The dispute before this panel regards the second transfer, which created the security interest.

922 F.2d at 747. Although Hagen dealt with a security interest rather than an involuntary lien, the analogy is valid. Here, Plaintiff incurred a debt for rent (transfer one); Defendant obtained a garnishment lien on Plaintiff's wages (transfer two); and Plaintiff made involuntary payments to Plaintiff (transfer three). The avoidability of the second and third transfers is at issue.

D. Avoidability of Involuntary Liens .

In 2005, Congress amended § 101(54) to include "the creation of a lien" as one type of "transfer." This amendment put to rest any doubt about whether liens could be subject to an avoidable preference attack. See Hopkins v. SunTrust Mortg., Inc. (In re Ellis) , 441 B.R. 656, 662 (Bankr. D. Idaho 2010) (BAPCPA amended the definition of "transfer" to include the...