Garnished Funds Are Property of the Estate & Avoidable as a Preference

December 22, 2021, District of Puerto Rico – Earlier this year, Educational Technical College Inc. brought a complaint against Atue Real Estate S.E. and its managing partner, alleging that the creditors garnished certain funds several days before the bankruptcy filing pursuant to a writ of execution of judgment entered in a local Court and that those funds must be turned over to Edutec. The complaint included counts for turnover of property under section 542, violation of the stay, and avoidance of preferential transfers under sections 547, 548, and 550.

Edutec argued that garnishment of its funds in favor of Atue constituted an avoidable transfer and that all of the requirements of section 547(b) were met. The defendants countered that once the funds were removed from the Edutech’s accounts at Banco Popular before being turned over to the marshal for the Bayamon court, the funds ceased to be the bankruptcy estate’s property, and section 547 did not apply to the alleged transfer. The defendants also assert that Edutec did not show that it was insolvent as of the time of the transfer and that the transfer enabled Atue to retain more than it would receive if the case were in chapter 7 and the transfer had not been made.

The Court found that the defendants attempted to get around by arguing that once Banco Popular removed the funds from Edutec’s accounts and issued a manager’s check to the marshal for the Bayamon court, those funds were no longer property of the estate and that section 541 did not come into play. The Court disagreed and held that since the defendants cite no statute or case law supporting their position that the sequence of events removed the garnished funds from being the estate’s property, the garnished funds constituted estate property under section 541(a). Regarding insolvency argument, the Court noted that for purposes of section 547, the debtor is “presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.” The Court ruled that the presumption of insolvency applied since the transfer took place five days before the bankruptcy filing. The Court also found that Edutec met its burden regarding the fifth prong of Sec. 547 (b).

Accordingly, the Court held that the garnished funds were the estate’s property under section 541(a) and are entitled to be avoided as a preferential transfer under section 547(b) for the benefit of the bankruptcy of estate.

Educ. Tech. Coll., Inc. v. Atue Real Est. S.E. (In re Educ. Tech. Coll., Inc.), Nos. 21-03292 (EAG), 21-00085 (EAG), 2021 Bankr. LEXIS 3489 (Bankr. D.P.R. December 22, 2021)

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