Battery One-Stop Ltd., In re

• Decision Date: 23 September 1994
• Docket Number: No. 93-3996,ONE-STOP,93-3996
• Citation: 36 F.3d 493
• Parties: Bankr. L. Rep. P 76,102 In re BATTERYLTD., Debtor. BATTERYLTD., Plaintiff-Appellant, v. ATARI CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 493

36 F.3d 493

Bankr. L. Rep. P 76,102

In re BATTERY ONE-STOP LTD., Debtor BATTERY ONE-STOP LTD., Plaintiff-Appellant, v. ATARI CORPORATION, Defendant-Appellee.

No. 93-3996.

United States Court of Appeals Sixth Circuit.

Argued Aug. 4, 1994.

Decided Sept. 23, 1994.

Joseph C. Lucci (argued and briefed), Timothy M. Reardon (briefed), Nadler, Nadler & Burdman, Youngstown, OH, for plaintiff-appellant.

Charles M. Rosenberg (argued and briefed), Jonathan R. Cooper, Benesch, Friedlander, Coplan & Aronoff, Cleveland, OH, for defendant-appellee.

Before: LIVELY, MARTIN, and SUHRHEINRICH, Circuit Judges.

LIVELY, Circuit Judge.

In this bankruptcy case we must determine at what stage in garnishment proceedings under Ohio law a "transfer" takes place for purposes of 11 U.S.C. Sec. 547(b), which permits a trustee in bankruptcy to avoid transfers of interests in a debtor's property made within 90 days before the date of filing a petition in bankruptcy.

I.

A.

The parties filed a stipulation of undisputed facts. Battery One-Stop (Battery) is a national retail dealer of battery-powered products that purchased large quantities of Atari merchandise in 1990. In 1991, Battery could no longer make payments on the debt owing to Atari and delivered a cognovit promissory note to Atari for $137,948.81. Battery eventually defaulted, and on September 11, 1991, Atari took judgment on the note for $106,797.37 in the Mahoning County Ohio Common Pleas Court. That same day, Atari began execution of the judgment by filing with the court an "Affidavit, Order and Notice of Garnishment" (the garnishment order).

On September 17, 1991, the Mahoning County Clerk of Courts Office served the garnishment order on Dollar Savings and Trust Company (Dollar Savings) in Youngstown, Ohio, where Battery had $106,870.01 on deposit. Dollar Savings received the garnishment order on September 19, 1991. Four days later, on September 23, Dollar Savings filed its Answer of Garnishee stating that it was holding the entire amount in Battery's account pursuant to the garnishment order. On September 26, Dollar Savings disbursed a check for $106,870.01 to the Mahoning County Clerk of Courts Office, which received the check on September 27, 1991. The court clerk issued Atari a check for $106,433.02 on October 24, 1991.

Battery filed for Chapter 11 Bankruptcy on December 24, 1991, 96 days after the garnishment order was served on Dollar Savings and 88 days after the Mahoning County Court received the check from the bank. Soon after, Battery's trustee moved the bankruptcy court for an order requiring Atari to turn over the $106,870.01 as a preferential transfer under 11 U.S.C. Sec. 547.

B.

In the proceedings below, the parties agreed that a "transfer" is made at the time a lien is perfected against the debtor's estate, Butz v. BancOhio Nat'l Bank, 13 B.R. 425, 427 (Bankr.S.D. Ohio 1981), and that perfection is determined under Ohio law. In re Ramco American International, Inc., 754 F.2d 130, 132 (3d Cir.1985). The issue presented to the bankruptcy court, therefore, was when Atari's lien became perfected under Ohio law. Battery argued that Atari's garnishment lien was not perfected until the clerk's office received the funds on September 18--88 days before the petition was filed. Atari claimed, on the other hand, that its garnishment lien was perfected when the clerk of courts office served the garnishment order and notice upon the garnishee, Dollar Savings, on September 19--96 days before bankruptcy proceedings commenced.

The bankruptcy court found that under Ohio law a garnishment lien does not become perfected until the funds are transferred by the garnishee to the clerk of courts office. In this case, Dollar Savings did not transfer the money to the clerk until September 27, 1991, less than 90 days before Battery filed for bankruptcy. Therefore the court held that the transfer was a preference and the debtor's estate should recover the funds. The district court reversed, finding that the garnishment lien was perfected when the notice of garnishment was served on Dollar Savings. 155 B.R. 727. Since the notice was served 96 days before Battery filed for bankruptcy, the district court held that there was no preference and that Atari was not required to turn the funds over to the trustee. This appeal followed. For the reasons set forth below, we affirm the judgment of the district court.

II.

A.

The general question on appeal is whether Dollar Savings' garnishment payment to Atari constituted a voidable preference, allowing the bankruptcy trustee to recover the funds for Battery's bankruptcy estate. The Bankruptcy Code deals with preferences in 11 U.S.C. Sec. 547 (1988). This case concerns 11 U.S.C. Sec. 547(b)(4)(A), which provides that a trustee can "avoid any transfer of an interest of the debtor in property ... made on or within 90 days before the date of the filing of the petition." A "transfer" is subsequently defined in 11 U.S.C. Sec. 547(e)(2)(B), which states that "a transfer is made ... at the time such transfer is perfected...." The Code defines when perfection occurs by providing that a transfer is perfected "when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee." 11 U.S.C. Sec. 547(e)(1)(B). A more precise definition of "perfection" is left to state law. In re Belknap, Inc., 909 F.2d 879, 882 (6th Cir.1990) (citing 4 Collier on Bankruptcy p 547.16 (L. King 15th ed.1990)). Treating the perfection of Atari's garnishment lien as perfection of a transfer of Battery's property for purposes of the preference statute, we must determine when that lien was perfected under Ohio law.

B.

Returning to their arguments in the bankruptcy court and the district court, Atari contends that the transfer was perfected when the garnishment order and notice was served on the bank while Battery maintains that perfection did not occur until the bank disbursed the garnished funds to the clerk of the state court.

Atari relies on Ohio Revised Code Annotated (O.R.C.) Sec. 2716.13(B), which provides that the order of garnishment "shall bind the property ... of the judgment debtor in the possession of the garnishee from the time of service." Atari claims, and the district court agreed, that the word "bind" is equivalent to perfection. Further evidence favoring this interpretation is found in O.R.C. Sec. 2716.21(D), which states that "[a] garnishee is liable to the judgment creditor for all money, property, and credits, other than personal earnings, of the judgment debtor in his possession or under his control ... from the time the garnishee is served with the written notice required in section ... 2716.13 of the Revised Code."

Battery argues that the correct answer to the question of when perfection occurs is found in cases holding that an order of garnishment does not perfect the garnishment lien, but merely "binds" the property until a court can identify the interests involved. One such case is Januzzi v. Hickman, 61 Ohio St.3d 40, 44, 572 N.E.2d 642 (1991), where the Ohio Supreme Court held that the garnishee is merely a "stakeholder" in the garnishment proceedings, and that "the order to a garnishee to pay into court is merely preparatory to further proceedings. It does not finally determine the garnishee's liability." Id. at 43-44, 572 N.E.2d 642. The bankruptcy court in the instant case used this language to find that providing notice to Dollar Savings only initiated the garnishment proceedings, and that "the right of the garnisheeing judgment creditor to the judgment debtor's property held by the garnishee matures upon the Court's issuance of the order to pay the property to the judgment creditor."

C.

No Ohio court has directly held that "bind" means perfection under section 2716.13(B). However, one court has analyzed similar language found in O.R.C. Sec. 2329.03, which provides that "goods and chattels of a judgment debtor shall be bound from the time they are seized in execution." In re Veteran Plate Glass Co., Inc., 71 B.R. 74 (Bankr.N.D. Ohio 1987). In Veteran Plate Glass, a judgment creditor executed its judgment by seizing a debtor's computer and pickup truck. The court found "[i]t is clear that by virtue of this provision of Ohio law [Sec. 2329.03], [the judgment creditor] is the holder of an execution lien, which lien became perfected at the time the subject property was seized by the Sheriff." Id. at 75. Since the debtor's property was taken within 90 days of the debtor's filing for bankruptcy, the court held that the execution on the judgment was a preference requiring the creditor to return the property to the debtor's estate. The district court in the instant case, by analogy, interpreted the "bind" language of section 2716.13(B) to mean that a garnishment lien is perfected when the garnishee receives the notice of garnishment. See also Butz v. BancOhio Nat'l Bank, 13 B.R. 425, 428 (Bankr.S.D. Ohio 1981) (under Sec. 2329.03 execution is perfected when sheriff seizes property).

III.

In order to discover the date of the transfer's perfection we must determine the time at which "a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee [Atari]." 11 U.S.C. Sec. 547(e)(1)(B).

A.

O.R.C. Sec. 2716.13(B) provides that the order of garnishment binds the property of the judgment debtor in possession of the garnishee from the time of service of the order and notice required by the statute. O.R.C. Sec. 2716.21(D) states that a garnishee is liable to the judgment creditor for property of the judgment debtor in the garnishee's possession "from the time the garnishee is served with the written notice required in ... section 2716.13 of the Revised Code." Taken together these two statutory provisions tell us that no creditor on a simple contract could acquire a lien superior to the transferee, in this case the judgment creditor Atari.

B.

W...