Freedom Group, Inc., Matter of

• Decision Date: 14 March 1995
• Docket Number: LAPHAM-HICKEY,No. 94-3080,94-3080
• Citation: 50 F.3d 408
• Parties: , 32 Collier Bankr.Cas.2d 1958, 26 Bankr.Ct.Dec. 1147, Bankr. L. Rep. P 76421A In the Matter of FREEDOM GROUP, INCORPORATED, doing business as Metro Metals, Debtor. FREEDOM GROUP, INCORPORATED, Plaintiff-Appellant, v.STEEL CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 408

50 F.3d 408

63 USLW 2607, 32 Collier Bankr.Cas.2d 1958,

26 Bankr.Ct.Dec. 1147, Bankr. L. Rep. P 76421A

In the Matter of FREEDOM GROUP, INCORPORATED, doing business as Metro Metals, Debtor FREEDOM GROUP, INCORPORATED, Plaintiff-Appellant, v. LAPHAM-HICKEY STEEL CORPORATION, Defendant-Appellee.

No. 94-3080.

United States Court of Appeals Seventh Circuit.

Argued Jan. 4, 1995.

Decided March 14, 1995.

James M. Lloyd (argued), Julia M. Pike, Michael V. Brodarick, Lloyd & McDaniel, Louisville, KY, for appellee.

John E. Brengle (argued), David M. Cantor, Seiller & Handmaker, New Albany, IN, for debtor-appellant.

Before POSNER, Chief Judge, CUDAHY, Circuit Judge, and GRANT, District Judge. ^*

POSNER, Chief Judge.

Freedom Group, a bankrupt, filed an adversary proceeding against Lapham-Hickey, seeking to undo what it claimed had been a preferential transfer resulting from a judicial seizure of Freedom Group's bank account. 11 U.S.C. Sec. 547. The bankruptcy judge agreed with Freedom Group and ordered Lapham-Hickey to return the money, but the district court reversed, so the case comes to us on Freedom Group's appeal.

The facts were stipulated. On June 2 Lapham-Hickey obtained a judgment for $7,335.49 (plus interest and costs) against Freedom Group in an Indiana state court. Ten days later, the court entered an order called a "notice of garnishment" in favor of Lapham-Hickey, and on June 15 Lapham-Hickey served the order on Freedom Group's bank. The balance in Freedom Group's bank account that day was only $108.25. But on the next day Freedom Group deposited $18,000 in the account. On the following day--June 17, 1992--the state court entered a final order of attachment ( = garnishment), directing the bank to pay any and all money in Freedom Group's account up to the limit of the judgment. In compliance with this order, the bank cut a check to Lapham-Hickey for $7,743.11 (the difference between that amount and the amount of the judgment representing, we assume, interest). Freedom Group declared bankruptcy on September 14, 1992. The sequence, then, was: judgment; notice of garnishment issued; notice of garnishment served on bank; bank account augmented by large deposit; final order of attachment (equivalently, of garnishment) entered; bank pays creditor, pursuant to that final order; debtor declares bankruptcy.

June 15, the day the notice of garnishment was served on the bank, was the ninety-first day before the declaration of bankruptcy. June 16, the day the $18,000 was deposited in Freedom Group's bank account, was the ninetieth day before the bankruptcy. June 17, the day the final order of attachment was issued, was the eighty-ninth day before the bankruptcy. If the transfer of the $7,743.11 occurred within 90 days of the bankruptcy--that is, occurred anytime after June 15--it is avoidable; otherwise not. A preferential transfer is avoidable only if made within 90 days before bankruptcy was declared. 11 U.S.C. Sec. 547(b)(4)(A).

The Bankruptcy Code defines "transfer" broadly, as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property," 11 U.S.C. Sec. 101(54), and provides, so far as bears on this case, that a preferential transfer "is made ... at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time." 11 U.S.C. Sec. 547(e)(2)(A). But although the Code defines transfer and specifies when a transfer is made--thus making whether and when a transfer occurs issues of federal law, Barnhill v. Johnson, 503 U.S. 393, 397-98, 112 S.Ct. 1386, 1389, 118 L.Ed.2d 39 (1992)--it looks to state law for the definition of "property" and "interest in property." Id. at 397-98, 112 S.Ct. at 1389; McKenzie v. Irving Trust Co., 323 U.S. 365, 370, 65 S.Ct. 405, 408, 89 L.Ed. 305 (1945). Under Indiana law a notice of garnishment not only prevents the debtor from withdrawing the funds in his bank account but also gives the judgment creditor who procured the notice a lien against the funds up to the amount of the judgment. Lakeshore Bank & Trust Co. v. United Farm Bureau Mutual Ins. Co., 474 N.E.2d 1024, 1026-27 (Ind.App.1985); Deetz v. McGowan, 403 N.E.2d 1160, 1165 (Ind.App.1980). A lien is a property interest, and it was acquired by Lapham-Hickey. The funds themselves were not transferred to Lapham-Hickey. They were merely frozen, until the final order of attachment was issued and complied with--and if the transfer did not occur until then, it came too late for Lapham-Hickey to avert a finding of preferential transfer. Lapham-Hickey argues, however, that a "transfer" within the meaning of the Bankruptcy Code is any mode of disposing of an interest in property; a lien--a right to satisfy a judgment out of specific property (here, Freedom Group's bank account)--is an interest in that property; that right was "disposed of" to Lapham-Hickey by the notice of garnishment; therefore the transfer occurred before the ninety-day portcullis descended. It is a nice, tidy, "logical" argument but so manifestly contrary to the purpose of the statute as to incite grave doubts, at least in judges who are not in thrall to the syllogistic style of legal reasoning.

The purpose of allowing preferential transfers to be set aside is to prevent debtors who are tottering toward bankruptcy from playing favorites among their creditors, trying to keep alive a little longer by placating the most importunate ones. The reason for worrying about this favoritism is that the possibility of it makes creditors less likely to forbear--more likely to insist on immediate payment--and, if immediate payment is not forthcoming, to sue and obtain judgments, thus increasing the costs to all creditors, retarding an orderly liquidation, and hurrying the debtor into bankruptcy faster than if creditors did not have to fear each other. In re Taxman Clothing Co., 905 F.2d 166, 169 (7th Cir.1990); Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 892 n. 1 (7th Cir.1988); Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 14-17, 128 (1986); Douglas G. Baird, The Elements of Bankruptcy 165-66 (rev. ed. 1993). The statute reduces the debtor's ability to play favorites, and hence the anxiety of creditors, and hence the costly melee that such anxiety can engender, by telling the favored creditor that if the debtor goes broke within ninety days after the transfer, the transfer will be undone and the favored creditor tossed back in the pool with the rest of the creditors.

The position for which Lapham-Hickey contends undermines this policy in two ways. The first has to do with the continuing character of the notice of garnishment. The notice does not freeze just the amount of money in the garnished bank account on the date of the notice. It freezes any increments up until the service of the final order of attachment. When that order is served, the judgment creditor becomes entitled to whatever money has accumulated in the account, up to the level of the judgment. How much that shall be is within the debtor's discretion to decide. Freedom Group did not have to deposit $18,000--or 1cents--in its bank account after the notice of garnishment was issued. That was a decision made (or effectuated) by Freedom Group within ninety days of declaring bankruptcy, and thus during the period of avoidable preferences. The effect was to put one of its creditors, the one that had succeeded in garnishing its bank account, ahead of the others--and that is just the sort of thing that the preferential-transfer statute is intended to prevent. Compare Jackson, supra, at 145.

Lapham-Hickey argues that even though it did not pocket the $18,000 until after the ninety-day countdown to bankruptcy began, the transfer relates back to the ninety-first day, the day of the notice of garnishment, because the notice "perfected" Lapham-Hickey's claim to the contents of Freedom Group's...