In re Momentum Computer Systems Intern.
| Decision Date | 28 October 1986 |
| Docket Number | Adv. No. 850479.,Bankruptcy No. 585-00602-M,No. C 86-4367 SC,C 86-4367 SC |
| Citation | 66 BR 512 |
| Parties | In re MOMENTUM COMPUTER SYSTEMS INTERNATIONAL, Debtor. MOMENTUM COMPUTER SYSTEMS INTERNATIONAL, Appellee/Plaintiff, v. CORTANI.BROWN.RIGOLI, Appellant/Defendant. |
| Court | U.S. District Court — Northern District of California |
James R. Hagan, Palo Alto, Cal., for appellee/plaintiff.
Ream, Train & Roskoph, Palo Alto, Cal., for appellant/defendant.
Momentum Computer Systems International filed a Chapter 11 petition on March 4, 1985. In February 1985, Sytek, Inc. paid $7,923.09 to the Sheriff of Santa Clara County, for the benefit of Cortani.Brown. Rigoli. The Bankruptcy Judge found that this payment was a voidable preference under section 547 of the Bankruptcy Code. The matter is before the court on appeal from this ruling.
Cortani.Brown.Rigoli ("CBR") performed public relations services for Momentum Computer Systems International ("Momentum"). Momentum failed to pay CBR the full amount due, and CBR obtained a judgment against Momentum for $31,013.89. Sytek, Inc. was a customer of Momentum, and so it sometimes owed money to Momentum.
On July 6, 1984, the Superior Court of Santa Clara County issued a writ of execution on CBR's judgment. CBR served notices of levy on Sytek on July 10, 1984, and on November 29, 1984. Momentum made a sale to Sytek and delivered goods on February 1, 1985. Instead of paying Momentum, Sytek paid $7,337.59 to the Sheriff of Santa Clara County on February 13, 1985. Momentum also delivered a smaller shipment of goods to Sytek on January 7, 1985. Instead of paying Momentum, Sytek paid $585.50 to the Sheriff on February 8, 1985. Sytek made these payments to the Sheriff for the benefit of CBR, as the notice of levy directed. The Sheriff paid these amounts, $7,923.09, to CBR on March 15, 1985.
Section 547 of the Bankruptcy Code governs voidable preferences. The trustee in bankruptcy may avoid certain transfers of property of the debtor made within the ninety day period before filing. 11 U.S.C. § 547. Momentum filed its bankruptcy petition on March 4, 1985. Ninety days before filing was December 4, 1984. Sytek paid $7,923.09 to the Sheriff within the ninety day period. Momentum sued CBR to recover this payment. The Bankruptcy Judge found that Sytek's payment to the Sheriff was a voidable preference. This court reverses.
CBR served Sytek with a notice of levy on November 29, 1984. The notice of levy gave Sytek duties under California Code of Civil Procedure § 701.010.
California Code of Civil Procedure § 701.010. The notice of levy obligated Sytek to pay to the Sheriff both amounts due and payable at the time of levy and amounts that would become due and payable thereafter. Thus CBR possessed a continuing lien. As obligations to Momentum accrued, the statute required Sytek to make continuing payments for the benefit of CBR. If Sytek had paid Momentum instead — or if Sytek had failed to pay the Sheriff for any other reason — CBR could have sued Sytek for these amounts. California Code of Civil Procedure § 701.020.
CBR argues as follows: "Due to the pre-existing execution lien . . . any amounts that became due to Debtor from Sytek, up to the level of the execution lien, already belonged to CBR and never vested, even for a moment, in Debtor's possession and never were `property of the debtor' under Bankruptcy Code § 547(b)." Opening Brief of Appellant CBR, p. 7.
Momentum argues that these amounts were property of the debtor. The Sheriff could only take the money from Sytek, it argues, because Momentum had a right to receive the money. Thus the money must have been property of the debtor.
Judge Friendly addressed the present question in In re Riddervold, 647 F.2d 342 (2d Cir.1981). In Riddervold, the debtor owed money to a hospital. The hospital won a judgment. The hospital served an execution on the employer, garnishing a portion of the debtor's wages. The employer paid this portion to the hospital, as directed. The debtor then filed for bankruptcy. The hospital had served the execution before the preferential transfer period. The employer had made payments to the hospital within the preferential transfer period. The debtor argued that payment to the hospital was a voidable preference. In order to rule on this claim, the court had to determine whether the garnished wages were "property of the debtor" under section 547(b).
As Riddervold noted, there are two ways to approach the issue. On the first view, one might argue that the notice of execution created a continuing levy. Under this theory, the employer was obligated to pay the judgment creditor as soon as salary accrued. Thus the salary never become the property of the debtor, even for "a fleeting second." 647 F.2d at 346. On the alternative view, one might argue that the employer's duty to pay the judgment creditor did not arise until the debtor had earned his salary. Thus the salary first became the property of the debtor, "for a fleeting second," and then became the property of the judgment creditor.
Riddervold adopted the continuing levy theory. Under New York law, it noted, the judgment creditor could sue to recover the garnished amounts from the employer. "Service of the income execution on the employer in effect works a novation whereby the employer owes 10% of the employee's salary not to the employee but to the sheriff for the benefit of the judgment creditor." Riddervold, 647 F.2d at 346. The Seventh Circuit has also adopted this view. Matter of Coppie, 728 F.2d 951 (7th Cir.1984). Many bankruptcy courts, however, have adopted the alternative view. See, e.g., In re Dunn, 56 B.R. 275 (Bankr. M.D.La.1985), In re Perry, 48 B.R. 591 (Bankr.M.D.Tenn.1985), and In re Tabita, 38 B.R. 511 (Bankr.E.D.Pa.1984). These cases reject Riddervold.
Under the continuing levy theory, in this case, Sytek was obligated to pay CBR as soon as Sytek incurred its debt to Momentum. By operation of California Code of Civil Procedure § 701.010, the funds automatically became the property of CBR. The funds were never the property of Momentum. Under the alternative theory, Sytek's duty to pay CBR did not arise until Momentum delivered goods to Sytek. Thus the funds first became the property of Momentum, and then became the property of CBR.
This court adopts the continuing levy theory, following Riddervold. California law required Sytek to pay the funds to the Sheriff for the benefit of CBR. CBR had a statutory right to sue Sytek if Sytek failed to do so. Therefore the funds were not the property of Momentum.
Two factors explain why Dunn, Perry, and other cases have adopted the alternative view. First, these cases interpret the law of other states. Dunn found that under Louisiana law "the Debtor retains some ownership interest" in the subject property. 56 B.R. at 276. Likewise, Perry found that under Tennessee law, the employee retained a property interest in all of his wages even after garnishment. These cases do not affect the result under California law. Second, these cases adopt an expansive reading of Bankruptcy Code section 547(e)(3). This court finds that section 547(e)(3) does not have such a broad effect. (See below.)
The Bankruptcy Code defines "transfer" as follows:
"transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest.
11 U.S.C. § 101(40). When CBR served notice of levy on Sytek, this constituted a "transfer" under the Code's definition.
Within section 547 of the Bankruptcy Code, subsections (e)(1)-(3) govern the timing of transfer. The relevant portions provide as follows:
11 U.S.C. § 547(e). The court now applies these provisions to determine whether there has been a voidable preference.
First, a transfer took place when CBR served notice of levy on Sytek. Under subsection (e)(1), this transfer was perfected when a creditor could not acquire a superior lien. State law determines when a creditor could not acquire a superior lien. See In re Madrid, 725 F.2d 1197, 1200 (9th Cir.1984). The Sheriff served on Sytek a notice of levy, pursuant to California Code of Civil Procedure, § 700.170(a). CBR then held an execution lien. This execution lien had priority over any other judgment liens that might be applied later. California Code of Civil Procedure, § 697.600. Thus transfer to CBR was perfected.
Second, under subsection (e)(2), the transfer was made when perfected. The transfer took place in ...
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