Appeals Court Overturns Own Precedent in BK Case

The Court of Appeals for the Seventh Circuit has overturned a bankruptcy court’s decision and remanded a case with instructions to resolve claims from the bankruptcy trustee on the merits after a collection agency garnished an individual’s wages and seized $3,700 within the 90 days before the individual filed for bankruptcy protection. In issuing its ruling, the Appeals Court overturned a nearly 40-year-old precedent from the Seventh Circuit that was trumped by a Supreme Court ruling 30 years ago.

A copy of the ruling in the case of Warsco v. Creditmax Collection Agency can be accessed by clicking here.

The bankruptcy code allows trustees to recover some transfers that are made during the 90 days before an individual files for bankruptcy protection. The trustee in this case discovered that $3,700 had been paid to the defendant during that 90-day period using a garnishment order that had been issued by an Indiana state court more than 90 days before the bankruptcy petition was filed. The trustee attempted to recover that $3,700 in order to distribute it to other creditors, but the defendant fought the ruling using precedent in Coppie, in which the Seventh Circuit determined that state law defines “transfer” and that a “transfer” occurs when a garnishment is entered, not when the money is paid. The bankruptcy judge noted that Coppie may have been wrongly decided, following the Supreme Court’s ruling in Barnhill v. Johnson, but noted that only the Appeals Court could overrule its own decisions.

So that’s what it did. In Barnhill, the Supreme Court ruled that federal law defines “transfer” and that transfer occurs when money changes hands. The Appeals Court noted that the defendant’s citation of Coppie is the first time the case has been cited by the Seventh Circuit since the ruling was issued in 1984.

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