Seventh Circuit Overrules 1984 Precedent of Defining Bankruptcy ‘Transfer’

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January 09, 2023, US Court of Appeals for the Seventh Circuit – The Seventh Circuit Court of Appeals overruled its 1984 definition of preferential ‘transfer’ laid down in In re Coppie, 728 F.2d 951 (7th Cir. 1984). The Court made the decision addressing a transfer of money made during the preference period pursuant to a garnishment order.

Mark Warsco, the trustee (“Trustee”) in the bankruptcy of Isiah Harris (“Debtor”), sought to claw back the payment made by Debtor to Creditmax, Inc. (“Defendant”) during the 90 days window before the bankruptcy filing. Defendant Creditmax was holding a judgment against Debtor and used it to secure a garnishment order, which required Debtor’s employer to pay some of his wages directly to Creditmax. While the payment was made during the preference period, the garnishment order was issued by a state court in Indiana more than 90 days before the bankruptcy filing.

Creditmax relied on the Seventh Circuit’s ruling in the Coppie case, which states that the definition of a transfer under section 547 of the Bankruptcy Code depends on state law; and that, as a matter of Indiana state law, a “transfer” occurs when a garnishment order is entered, not when money is paid. The Court of Appeals has now overruled this 39 years old ruling in the light of the Supreme Court’s 1992 decision in Barnhill v. Johnson, 503 U.S. 393, 112 S. Ct. 1386 (1992). In Barnhill, the Supreme Court held that federal rather than state law defines the meaning of “transfer” in section 547.

The Court of Appeals followed the Supreme Court’s ruling and upheld the rule that the “transfer” occurs when money changes hands. The Court held that Creditmax could not rely on the Coppie decision as it was wrongly decided. The Court remanded the case with instructions to resolve the Trustee’s claim on the merits.

Warsco v. Creditmax Collection Agency, Inc., 56 F.4th 1134 (7th Cir. 2023)

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