In re Mycro-Tek, Inc., Bankruptcy No. 93-10302. Adv. No. 94-5132.
| Decision Date | 11 January 1996 |
| Docket Number | Bankruptcy No. 93-10302. Adv. No. 94-5132. |
| Citation | 191 BR 188 |
| Parties | In re MYCRO-TEK, INC., Debtor. Lynn D. ALLISON, Trustee, Plaintiff, v. GATE ELECTRONICS, INC., Defendant. Union Bank, f/d/b/a California First Bank, Garnishee. |
| Court | U.S. Bankruptcy Court — District of Kansas |
J. Michael Morris, Wichita, KS, for Plaintiff Trustee.
Robert E. Nugent, Morris, Laing, Evans, Brock & Kennedy, Wichita, KS, for Defendant Garnishee.
This matter comes on for consideration of the plaintiff Trustee's motion for judgment against defendant garnishee Union Bank, f/d/b/a California First Bank. The Trustee appears by counsel J. Michael Morris. The defendant garnishee appears by counsel Robert E. Nugent. In its answer, the Bank asserted an intervening claim or alternatively a right of setoff in the funds. The parties have submitted this matter on stipulations and memoranda of law and the matter is now ready for decision.
The parties have stipulated to the following facts:
1. By order filed August 8, 1994, the Trustee obtained a default judgment in Adversary No. 94-5132 against Gate Electronics, Inc. ("Gate") in the amount of $18,787.11, plus costs of $120.00 and post-judgment interest at the federal judgment interest rate.
2. On April 6, 1995, the Clerk issued a Writ of Garnishment to Garnishee Union Bank (the "Bank") in the amount of $28,360.66 (representing 1-½ times the amount of the judgment, costs and interest to that date, pursuant to K.S.A. 60-726).
3. The Writ was mailed on April 11, 1995, by first class mail addressed to "President, Union Bank, 17951 MacArthur Blvd., Irvine, California 92714."
4. On April 28, 1995, the Bank not having filed an Answer, the Trustee served a Motion for Judgment against Garnishee. Such motion was filed May 1, 1995.
5. On or about May 5, 1995, the Bank filed its: (1) Special Appearance Without Waiver of Service of Process; (2) Objection to Trustee's Motion for Default Judgment; and (3) Motion for Leave to File Answer Out of Time.
6. The Trustee agreed to allow the Bank to file an Answer out of time and on or about May 12, 1995, the Bank filed its Special Appearance and Answer of Garnishee, indicating that as of May 5, 1995, it held $318.36.
7. On May 15, 1995, the Trustee filed his Reply to Special Appearance and Answer of Garnishee.
8. Union Bank asserts that it maintains a valid and perfected security interest in the depository accounts of judgment debtor Gate Electronics, Inc. pursuant to its loan documents and Cal.Com.Code § 9302(1)(g).
In addition, the parties stipulated that certain documents should be included in the record, to wit: the Writ of Garnishment; the Motion for Judgment against Garnishee; the Bank's Special Appearance without Waiver of Service of Process; the Bank's Objection to Trustee's Motion for Default Judgment; the Bank's Motion for Leave to File Answer Out of Time; the Bank's Special Appearance and Answer of Garnishee; Trustee's Reply to Special Appearance and Answer of Garnishee; and copies of bank statements and other records showing the account balances of Gate at the Bank for April, May and part of June, 1995.
The Court has reviewed these documents and finds as follows:
1. On or about February 19, 1987, Gate and the Bank executed a security agreement that granted to the Bank a security interest in a variety of types of personal property, including equipment, inventory, and "demand accounts." This security agreement secured Gate's obligation to the Bank on a note. The only note submitted on stipulation is one dated January 31, 1994 in the amount of $475,492.43. The record does not reflect the amount of Gate's debt to the Bank secured by the security agreement on the date the writ of garnishment was served.
2. The Bank admits receiving the writ of garnishment by first class mail on April 17, 1995. The writ of garnishment ordered the Bank to file an answer stating whether the Bank is indebted to Gate or whether it has any of Gate's property in its possession. The writ further ordered the Bank to withhold the payment of any indebtedness or the delivery of any of Gate's property until further order of the Court.
3. On April 17, 1995 there was $18,952.66 on deposit in Gate's demand account at the Bank. From April 17 to May 5, 1995, when the Bank answered the garnishment, Gate had deposited a total of $25,453.54 in the account. But by May 5, the Bank had honored $44,434.88 in checks and withdrawals such that the bank statement showed a negative balance of $28.68 on May 5.
The Bank's threshold contention is that the Court lacks personal jurisdiction over the Bank because the Trustee failed to properly serve the Writ of Garnishment. The Bank argues that proper service is governed by California law. The Bank cites Cal.Civ.Proc. Code § 684.110 and argues that a writ of levy or garnishment served upon a financial institution must be served at the office or branch at which the deposit account is carried and be served on the officer, manager, or other person in charge of such office or branch. The Writ of Garnishment was not served on the branch at which Gate's account was carried, and service was effected by mail. The Bank also cites Cal.Civ.Proc.Code §§ 413.10, 415.10 and 415.20, and argues that those sections require personal service or substituted service, unless such service cannot be made upon reasonable diligence, and provide that service by mail is only complete upon receipt by the serving party of a written acknowledgment of receipt.
The Bank further argues that even if Kansas law governs the manner of service, the Trustee failed to properly serve the Bank. The Bank cites Land Mfg., Inc. v. Highland Park State Bank, 205 Kan. 526, 470 P.2d 782 (1970), where the Kansas Supreme Court held that a Kansas court could not attach or garnish property outside of the state, even though the court has personal jurisdiction over the garnishee. "In the case of foreign attachment or garnishment proceedings against a nonresident defendant, the existence of property within the jurisdiction of the court is essential." Id. at 529, 470 P.2d 782 (quoting 6 Am.Jur.2d Attachment and Garnishment § 19, p. 574).
Service on the Bank was effected in accordance with Fed.R.Bankr.P. 7069, which incorporates Fed.R.Civ.P. 69, which states in pertinent part as follows:
(a) In General. Process to enforce a judgment for the payment of money shall be a writ of execution, unless the court directs otherwise. The procedure on execution, in proceedings supplementary to and in aid of a judgment, and in proceedings on and in aid of execution shall be in accordance with the practice and procedure of the state in which the district court is held, existing at the time the remedy is sought, except that any statute of the United States governs to the extent that it is applicable.
The Court agrees with the court's analysis in In re American Freight System, Inc., 173 B.R. 739, 742-43 (Bankr.D.Kan.1994) J. Pusateri, that this rule requires garnishments issued by a bankruptcy court in Kansas to be served in accordance with the law of Kansas, unless there is a specific federal rule controlling the manner of service of process. Rule 7004 is such a specific federal rule, and thus supersedes the Kansas procedure for service of process. Fed.R.Bankr.P. 7004(d) provides for nationwide service of process of summons, complaints or any other process except a subpoena. Fed.R.Bankr.P. 7004(b)(3) provides that service may be made by first class mail, postage prepaid, upon a domestic or foreign corporation, by mailing a copy of the summons, complaint or process to the attention of an officer, a managing or general agent, or any other agent authorized by appointment or by law to receive service. The Trustee complied with this section of Rule 7004.
Rule 7004 was amended by the Bankruptcy Reform Act of 1994 (the "Act"), to provide a more precise method of service on insured depository institutions. The Act added Rule 7004(h) to the Federal Rules of Bankruptcy Procedure. Rule 7004(h) requires that:
The Trustee argues that the amendment did not apply to the instant adversary proceeding, because it was filed in early 1994, before the Act was enacted on October 22, 1994. The Bank counters that the Act was effective on April 11, 1995, when the trustee mailed the Writ of Garnishment. Rule 7004(h) was added by Section 114 of the Act. Section 702 of the Act provides that:
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