Non-Wage Garnishment and Charging Order Ineffective Under the Barton Doctrine, Argues Cut Through Hydrocarbon Trustee

January 29, 2021, Eastern Kentucky – Certain creditors (Defendants or the “Pratt Creditors”), obtained a judgment in a state action against a Co-Defendant Hurley for $820,806.02. These creditors then served trustee L. Craig Kendrick with a non-wage garnishment. L. Craig Kendrick was the appointed Trustee for the bankruptcy estate of Cut Through Hydrocarbon, LLC. 

A non-wage garnishment is a collection tool, enabling a creditor to step into the shoes of a debtor and recover the assets owed to the debtor. Another defendant Grundy National Bank (“GNB”), also obtained a judgment from a state court against Hurley for about $77k and issued a charging order to the Trustee. 

The orders from the state courts place the Trustee in a no-win situation. The Trustee is required to honor the garnishment and charging order, or he may run afoul of his duties as a trustee, or he may subject himself to contempt of the issuing courts. 

The Trustee, therefore, initiated an action, seeking a declaration that the garnishment and charging order may not be effective against him under the Barton Doctrine because the parties seeking to enforce them failed to obtain leave from the bankruptcy court before having their respective orders issued.

The Trustee further contends that under the common law doctrines of setoff and recoupment, the bankruptcy estate is entitled to apply the amounts due to Hurley against Hurley’s indebtedness to the bankruptcy estate.

An involuntary bankruptcy petition was filed against the Debtor, Cut Through Hydrocarbon, LLC, (“CTH”), on October 26, 2018. The case is In Re: Cut Through Hydrocarbons under Case No: 18-70668 in the United States Bankruptcy Court for the District of Eastern Kentucky. Honorable Judge James R. Ahler is presiding over the Debtor’s bankruptcy case.

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