## Facts

- On June 2, 1992, Lapham-Hickey Steel Corporation (creditor) obtained an Indiana state-court judgment against Freedom Group, Inc. (debtor) for $7,335.49 plus interest and costs.
- The state court issued a “notice of garnishment” in Lapham-Hickey’s favor, and Lapham-Hickey served it on Freedom’s bank on June 15, 1992.
- When the bank was served, Freedom’s account balance was $108.25.
- On June 16, 1992, Freedom deposited $18,000 into the account. Ninety days before Freedom’s September 14, 1992 bankruptcy filing was June 16.
- On June 17, 1992, the state court entered a final garnishment (attachment) order directing the bank to pay funds from Freedom’s account up to the amount of the judgment.
- The bank complied and paid Lapham-Hickey $7,743.11 (judgment amount plus interest).
- After filing bankruptcy on September 14, 1992, Freedom brought an adversary proceeding under 11 U.S.C. § 547 to avoid the garnishment payment as a preferential transfer.
- The bankruptcy court ruled for Freedom and ordered Lapham-Hickey to return the money to the estate, but the district court reversed, concluding the “transfer” occurred when the bank was served (June 15), outside the 90-day period.
- Freedom appealed to the Seventh Circuit.

## Issues

1. For purposes of 11 U.S.C. § 547(b)(4)(A), when is a “transfer” made in a bank-account garnishment: when the garnishment notice is served (and a lien may be created or perfected under state law), or when the bank actually pays the creditor under a final garnishment order?
2. How do the Bankruptcy Code’s timing provisions, including § 547(e), affect a creditor’s argument that a later payment “relates back” to an earlier garnishment step taken outside the 90-day preference period?

## Decision

- The Seventh Circuit reversed the district court and reinstated the bankruptcy court’s judgment for Freedom.
- The court held that, for § 547 preference timing, the relevant “transfer” occurred when the garnishment produced an actual payment to Lapham-Hickey (June 17), which was within 90 days of the September 14 bankruptcy filing.
- The court rejected the argument that service of the June 15 garnishment notice controlled the transfer date merely because it may have perfected a state-law lien or priority as to the bank account.

## Legal Principles

- Federal bankruptcy law determines when a “transfer” is made for purposes of § 547, even though state law helps identify the debtor’s property interests and the effect of collection procedures.
- A creditor’s perfection of an interest and the debtor’s transfer of property are separate concepts; an earlier step that may establish or perfect a lien under state law does not automatically fix the transfer date for § 547(b)(4)(A).
- Under § 547(e)(3), a transfer is not “made” until the debtor has rights in the property transferred; a creditor cannot receive a preference transfer of funds that were not yet in the debtor’s account.
- Applying the Supreme Court’s approach in Barnhill v. Johnson, the operative moment for a preference “transfer” is when the transaction becomes effective to divest the debtor of property and place it beyond the debtor’s control—here, when the bank paid the creditor pursuant to the final garnishment order.
- A garnishment that results in payment during the 90-day period can be avoided as a preference if the other elements of § 547(b) are satisfied, even if an earlier garnishment notice was served outside the 90-day period.

## Conclusion

The Seventh Circuit held that Freedom’s garnishment loss was a preferential transfer because the debtor’s property was not transferred for § 547 purposes until the bank actually paid Lapham-Hickey under the final garnishment order, and that payment occurred within 90 days before Freedom filed bankruptcy; the court therefore reinstated the bankruptcy court’s order requiring Lapham-Hickey to return the funds.


Freedom Group, Inc. v. Lapham-Hickey Steel Corp. (In re Freedom Group, Inc.), 50 F.3d 408 (1995)