Karim v. Bayview Loan Servicing, LLC (In re Karim)

• Decision Date: 09 March 2018
• Docket Number: Adversary No. 17 A 00380,Case No. 17–06548
• Citation: 582 B.R. 193
• Parties: IN RE Fayyaz KARIM and Lisa Karim, Debtors. Fayyaz Karim and Lisa Karim, Plaintiffs, v. Bayview Loan Servicing, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

582 B.R. 193

IN RE Fayyaz KARIM and Lisa Karim, Debtors.Fayyaz Karim and Lisa Karim, Plaintiffs,

v.Bayview Loan Servicing, LLC, Defendant.

Case No. 17–06548

Adversary No. 17 A 00380

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed March 9, 2018

David P. Lloyd, David P. Lloyd, Ltd., LaGrange, IL, for Plaintiffs.

Raymond J. Ostler, Gomberg Sharfman Gold et al., Chicago, IL, for Defendant.

MEMORANDUM OPINION

DEBORAH L. THORNE, UNITED STATES BANKRUPTCY JUDGE

Introduction

Fayyaz and Lisa Karim, the Debtors in this chapter 11 case, seek to avoid as a preference the citation lien asserted by Bayview Loan Servicing, LLC ("Bayview") on a check (the "Check") which is the proceeds of the sale of the Karims' home. The parties have filed cross-motions for summary judgment in this adversary as to the avoidability of the asserted citation lien and the ultimate transfer of the Check to Bayview.

Two legal questions require answers. First, have the Karims, under the uncontested facts, met their burden in showing that there was an avoidable preferential transfer made when Bayview acquired a lien in or on the Check? Second, is Bayview entitled to the additional declaration that it seeks, namely that the transfer of possession of the Check from the Karims to it was not preferential? The answer to the first question is yes; the answer to the second is no.

As discussed below, the Karims' motion for summary judgment is granted. The lien on the Check created by the service of the citation did not take effect prior to the time the Karims received the Check. Both Bankruptcy Code sections 101(54) and 547(e)¹ support this finding, and because the Karims acquired the Check within the 90 days prior to filing their bankruptcy petition, both the lien on the Check and the subsequent transfer of the Check itself are preferences and avoidable. This is true despite the arguments asserted by Bayview that the lien attached to the Check prior to its existence at the time the citation was served on the Karims. For all the reasons explained herein, Bayview's motion will be denied.

Background

The facts material to the legal questions before the court are straightforward and undisputed. The Karims filed their bankruptcy case on March 3, 2017 and several months later filed this adversary proceeding.²

Bayview is the Karims' judgment creditor by virtue of a December 2015 state court judgment in the amount of $219,810.01. Def.'s Ex. Statement of Uncontested Facts , Docket No. 15–1, at 2, ¶ 3. On March 20, 2016, Bayview served a citation to discover assets on the Karims, but it did not serve the citation on any third parties either holding property of the Karims or indebted to the Karims. Id. at ¶ 4. The citation was repeatedly continued and remained in continuous, full effect during all material time periods. Id. at ¶ 5.³

The Karims sold their Will County, Illinois real property on December 19, 2016 and received the Check in the amount of $45,799.06 for their share of the sale proceeds on that same day. Id. at ¶ 6; Def.'s Ex. Decl. , Docket No. 15–2, at 4, ¶ 24. There is no evidence in the record showing any preceding agreement for the sale of the land or otherwise showing that any third party was indebted to the Karims with respect to the land. The transaction simply occurred, and the Karims received the Check, which had been made payable to both of them. Def.'s Ex. Statement of Uncontested Facts , Docket No. 15–1, at 3, ¶ 11.

Bayview obtained an order for turnover of the Check in state court on January 31, 2017. Id. at ¶ 9. On February 3, 2017, the Karims delivered the unendorsed Check to Bayview's counsel pursuant to the state court turnover order. Id. at ¶ 10. Thirty days later, the Karims filed their bankruptcy petition.

Discussion ⁴

I. Summary Judgment.

Rule 56 of the Federal Rules of Civil Procedure applies in adversary proceedings. Fed. R. Bankr. P. 7056. "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Neither party contests the facts in this matter; thus, summary judgment is appropriate, as the issues before the court are purely legal.

II. Relevant Statutory Provisions.

The court must examine both Illinois law regarding citations to discover assets and certain sections of the Bankruptcy Code.

a. Proper Service of an Illinois Citation Creates a Lien in the Debtors' Nonexempt Personal Property.

Illinois law provides that the proper service of a citation to discover assets creates a "lien" binding the "nonexempt personal property" of the judgment debtor. 735 Ill. Comp. Stat. 5/2–1402(m).⁵ The concept of a lien is the same under Illinois law as it is under federal bankruptcy law. See N.C. ex rel. L.C. v. A.W. ex rel. R.W. , 305 Ill. App. 3d 773, 775, 239 Ill.Dec. 244, 713 N.E.2d 775, 776 (1999) ; Gaskill v. Robert E. Sanders Disposal Hauling , 249 Ill. App. 3d 673, 676, 188 Ill.Dec. 871, 619 N.E.2d 235, 237 (1993) ; accord 11 U.S.C. § 101(37).⁶ A tangible check, as opposed to the intangible rights it may represent or evidence, is itself nonexempt personal property under Illinois law because, for instance, a check may be the object of the tort of conversion, indicating that Illinois law treats the tangible check as valuable personal property. 810 Ill. Comp. Stat. 5/3–104(b), (e), (f) ; id. 5/3–420(a); Hayes v. Massachusetts Mut. Life Ins. Co. , 125 Ill. 626, 633, 18 N.E. 322, 325 (1888). Thus, the Illinois citation lien attached to the Check when it became the Karims' personal property. The question is: did attachment occur within the 90–day preference period, thereby making the lien attachment an avoidable preference?⁷

b. Section 547(b) Governs Preferential Avoidance Actions.

Section 547 of the Bankruptcy Code provides that the trustee may avoid certain transfers that occur during the 90 days prior to the filing of the Debtors' bankruptcy petition.⁸ The Code states that a "transfer" is avoidable as a preference if it was "of an interest of the debtor in property" and:

[I]t (1) was made to or for the benefit of a creditor, (2) was for or on account of an antecedent debt, (3) was made while the debtor was insolvent, (4) was made on or within 90 days before the date of the filing of the petition, and (5) allowed the creditor to receive more than it otherwise would have.

Warsco v. Preferred Tech. Grp. , 258 F.3d 557, 564 (7th Cir. 2001) (citing 11 U.S.C. § 547(b) ). The only element in dispute in this case is whether the transfer occurred within 90 days before the date of the filing of the petition.⁹

c. Section 101(54) Preliminarily Governs When the Transfer Occurred.

Whether and when a transfer has occurred is a question of federal law, being governed in the first instance by section 101(54). See Barnhill v. Johnson , 503 U.S. 393, 397–98, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) (citing McKenzie v. Irving Trust Co. , 323 U.S. 365, 369–70, 65 S.Ct. 405, 89 L.Ed. 305 (1945) ). Under section 101(54), a transfer occurs if, for example, a lien is created or if an interest in property has otherwise been parted with, whether voluntarily or involuntarily. 11 U.S.C. § 101(54)(A), (D). To determine when those events happen under section 101(54), however, state law must be consulted, since, absent a controlling federal interest, the property interests capable of being transferred are "creatures of state law." Barnhill , 503 U.S. at 398, 112 S.Ct. 1386 ; Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

d. Section 547(e) Ultimately Governs When the Transfer Occurred.

Section 547(e) specifically makes the concept of perfection, which tends to govern only priority between competing creditors, see Matter of Freedom Grp., Inc. , 50 F.3d 408, 411 (7th Cir. 1995), relevant to determining the date of the transfer between the immediate parties for purposes of applying the preference provisions in the Bankruptcy Code. See 11 U.S.C. § 547(e)(2). In deeming the date of perfection the relevant date of the transfer between the parties in certain scenarios, the section aims to "combat secret liens," In re Lazarus , 478 F.3d 12, 18 (1st Cir. 2007), thereby discouraging creditors "from waiting until the debtor's financial troubles become all-too-manifest before recording security interests." In re Arnett , 731 F.2d 358, 363 (6th Cir. 1984).

First, section 547(e)(1)(B) states as follows:

[A] transfer of a fixture or property other than real property 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. § 547(e)(1)(B).

Sections 547(e)(2) and (e)(3) then interact and apply in the following manner, as noted by one court:

Putting [these sections] together, one should conclude that a transfer takes place for bankruptcy purposes on the later of four dates:

(1) The date when it is ... effective between the transferor and transferee if it is perfected within [30] days [ § 547(e)(2)(A) ];

(2) If not perfected within [30] days, then the date when it is perfected [ § 547(e)(2)(B) ]; but

(3) If not perfected prior to the petition or within [30] days of [effectiveness between the transferor and transferee], then the date immediately before the filing of the petition [ § 547(e)(2)(C) ]; but

(4) In no case is the transfer effective "... until the debtor has acquired rights in the property transferred" [ § 547(e)(3) ].

In re Dunn , 56 B.R. 275, 278 (Bankr. M.D. La. 1985) (emphasis added). As a result, a transfer cannot occur under section 547(e) until the debtor actually acquires rights that are capable of being transferred.¹⁰

III. On What Date Did the Transfer Occur?

The Karims maintain that the avoidable transfer occurred on the date they received the Check at the closing of the sale of their real property. Bayview contends that the transfer is not avoidable because it occurred on the date the citation was served on the Karims...