DEBTORS                                                                                        CASE NO. 06-70372



           This matter is before the court on the Debtors’ Motion to Challenge Non-Wage Garnishment, filed herein on December 21, 2006. The Affidavit of Debtor John M. Adams (“the Affidavit”) accompanies the Motion. The creditor, Community Trust Bank (“CTB”) filed an Objection to Motion to Challenge Non-Wage Garnishment on January 9, 2007. The Motion and the Objection were heard on January 10, 2007, and submitted for ruling by the court.

           The Motion seeks to have the court enter an order setting aside funds attached from the Debtors’ Whitaker Bank checking account on November 16, 2006. The Debtor alleges certain facts in his Affidavit which states the following:

1.Affiant is a Debtor in the above-styled case and the Judgment Debtor in Letcher Circuit Court Case: Community Trust Bank vs. John M. Adams.


2.That Community Trust Bank obtained a Judgment against him on October 26, 2006, and issued a non-wage garnishment on Whitaker Bank checking account no: 80479591 on November 16, 2006.


3.Affiant immediately filed an Affidavit to Challenge the garnishment in Letcher Circuit Court and proceeded to file this bankruptcy.


4.At the hearing in Letcher Circuit Court on December 20, 2006, Judge Samuel T. Wright declined to rule on the Challenge by stating that the Bankruptcy Court now had jurisdiction.


5.Affiant’s wages are paid on the 15th and 30th of each month and he is an employee of the Commonwealth of Kentucky. Affiant’s wages are paid by direct deposit into Whitaker Bank checking account no: 80479591.


           6.        On November 15, 2006, Affiant’s net wages were deposited into the Whitaker Bank Account.


7.On November 16, 2006, a “Non-Wage” garnishment was served on Whitaker Bank and $1187.23 was seized from Affiant’s account. Whitaker Bank is holding said funds pending resolution of this Motion.


8.Affiant asserts that this was essentially a “Wage” garnishment and that the funds should be exempt to the extent provided by KRS §427.010(2)(a).


9.Affiant further states that he is known to Community Trust Bank to be a state employee and it is widely known that state employees are paid on the 15th and 30th of each month.

Affiant believes this was an attempt, by Community Trust Bank, to circumvent the limitations placed on wage assignments by the Commonwealth of Kentucky.

           The Debtors filed their Chapter 7 petition in this court on November 30, 2006. They do not list the subject funds on any of their schedules. A debtor has no basis for claiming an exemption in property that is not estate property, but the subject funds are estate property, whether or not the Debtors included them in their schedules. Their Schedule C - Property Claimed as Exempt indicates they claim exemptions to which they are entitled under Bankruptcy Code section 522(b)(2), which identifies the property which may be claimed as exempt as that specified under Code section 522(d). Section 522(d) does not provide for the exemption of wages.

           Although the Debtors chose the federal exemption scheme rather than the state exemption scheme, they appear to invoke the protection of KRS 427.010(2)(a) which provides:

(2) Except as provided in subsection (3) of this section and KRS 427.050, the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed the lesser of either:

(a)Twenty-five percent (25%) of his disposable earnings for that week, or There the court overturned a decision by the trial court that wages in the appellant’s checking account were not subject to garnishment, . . . .

KRS 427.010(2)(a). That statute has been interpreted in Brown v. Commonwealth, 40 S.W.3d 873, Ky.App. (1999). The Brown court overturned a trial court decision that wages in the appellant’s checking account were not subject to garnishment. In doing so, it engaged in a lengthy discussion of the statute:

This statute is modeled upon the federal Consumer Creditor Protection Act (the ‘CCPA’). That act requires state garnishment exemption statutes to comply with federal limitations on amounts that may be garnished. . . .

[T]he federal CCPA did not create a true exemption applicable to bankruptcy proceedings, but sought instead to prevent bankruptcies by protecting the debtor’s employment. This protection consisted of a limitation on the portion of earnings subject to the employer’s garnishment . . . .

The act’s reference to wages ‘payable or paid’ has also required interpretation. Is it applicable only to wages still under the employer’s control, or is it meant to apply to wages even after they have been transferred to the employee? In light of the CCPA’s limited purpose, virtually all of the courts to consider whether that act applies to wages deposited into bank accounts or otherwise removed from the employer’s control have found that it does not.

Id. at 876-77. The court went on to compare KRS 427.010(2) with KRS 342.180, which makes workers’ compensation benefits unassignable and exempt from the claims of creditors. The court commented that when the Kentucky General Assembly intends an exemption it uses clear language to do so, and that it did not do so in crafting KRS 427.010(2). The court concluded that

KRS 427.010(2) and (3) provide only for limited debtor protection and not for a broader exemption such as that created by KRS 432.180 and similar statutes. We conclude further that the limited protection is the same found to have been provided by the federal CCPA, that is, a limitation only on the extent to which an employee’s earnings may be garnished at his or her workplace.

Id. at 878-79.

           It is clear that case law does not support the Debtors’ contention that the funds in their Whitaker Bank checking account retain their character as wages and are exempt from garnishment, and their Motion to Challenge Non-Wage Garnishment must be overruled. The sequence of events outlined in the Affidavit, however, raise the issue of the preferential nature of the garnishment. The act of procuring a garnishment order directed to the funds in the Whitaker Bank checking account is a transfer within the meaning of Bankruptcy Code section 547(b). This section provides that the trustee may avoid a transfer of an interest in property of the debtor made

(1) to or for the benefit of a creditor;


(2) for or on account of an antecedent debt owed by the debtor before the transfer was made;


(3) while the debtor was insolvent;


(4) on or within 90 days before the filing of the bankruptcy petition;


(5) that enables such creditor to receive more than such creditor would receive if the case were a case under Chapter 7, the transfer had not been made, and the creditor received payment of the debt to the extent provided by the provisions of title 11.

11 U.S.C. § 547(b).

           Case law generally supports the contention that the acquisition of a garnishment lien is a "transfer". See In re Wade, 219 B.R. 815 (8th Cir. BAP 1998); Matter of Freedom Group, Inc., 50 F.3d 408 (7th Cir. 1995). The trustee has not filed any action to recover the funds, however, and since the Debtors may not claim them as exempt, they have no authority to proceed under Bankruptcy Code section 522(h). That section allows a debtor to avoid a transfer of property in which he could have claimed an exemption under section 522(g)(1) if the transfer is avoidable by the trustee, but the trustee does not attempt to avoid such a transfer.

           The court therefore orders that the Debtors’ Motion to Challenge Non-Wage Garnishment is overruled.

Copies to:

Jeanne K. Channell, Esq.

Adam M. Back, Esq.

Phaedra Spradlin, Esq., Trustee