UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

RANDALL KEITH GRAY

JEANNETTE LEE GRAY

DEBTORS CASE NO. 99-51486

RANDALL KEITH GRAY PLAINTIFF

VS. ADV. NO. 99-5131

GOLD KEY LEASE, INC. DEFENDANT

MEMORANDUM OPINION

This matter is before the Court for resolution of the issue of whether the defendant violated 11 U.S.C. §362 in retaining certain garnished wages of the plaintiff, and whether any such violation was willful. The defendant filed a Motion for Summary Judgment on April 20, 2000. The plaintiff filed his Response to Motion for Summary Judgment on May 3, 2000. The matter was heard on May 4, 2000, the defendant was allowed time to reply, and did so on May 25, 2000, after which the matter was taken under submission for decision by the Court. This Court has jurisdiction of this matter pursuant to 28 U.S.C. §1334(b); it is a core proceeding pursuant to 28 U.S.C. §157(b)(2).

The parties have entered into Joint Stipulations which set out the following facts:

“1. Randall Keith Gray entered into a Vehicle Lease Agreement for the lease of a new 1997 Plymouth Voyager van on January 11, 1997. The lease was assigned to Gold Key Lease, Inc.

2. Mr. Gray defaulted under the lease agreement and a legal action to recover the deficiency balance was filed in the Madison Circuit Court, Civil Action No. 98-CI-00325.

3. A Default Judgment was entered in the above-referenced civil action on March 12, 1999, in the amount of $9,199.07 plus interest at the annual rate of 8.000% from January 8, 1998 until date of Judgment, then at the annual rate of 12.000%. A true copy of the Judgment is attached.

4. Pursuant to an Affidavit for an Order of Wage Garnishment, a continuous wage garnishment was issued by the Madison Circuit Court on March 31, 1999, in favor of Gold Key Lease, Inc. A true copy of the Affidavit for Wage Garnishment is attached.

5. The wage garnishment was served upon Mr. Gray’s employer in early April, 1999.

6. Gold Key Lease, Inc. received a garnishment payment in the amount of $115.42 on May 28, 1999.

7. Gold Key Lease, Inc. received a garnishment payment in the amount of $292.60 on June 11, 1999.

8. Defendant filed a petition under Chapter 7 of the Bankruptcy Code, Case No. 99-51486 on June 17, 1999.

9. Gold Key Lease, Inc., received actual notice of the bankruptcy on June 18, 1999. A true copy of said notice is attached.

10. Gold Key Lease, Inc., caused a garnishment release to be prepared on June 21, 1999, and to be mailed to Mr. Gray’s employer on June 23, 1999.

11. Gold Key Lease, Inc., received a garnishment payment in the amount of $324.97 on June 30, 1999. This payment was for wages earned on or before June 13, 1999. A copy of the check stub for this payment is attached.

12. Gold Key Lease, Inc., received a garnishment payment in the amount of $348.83 on July 9, 1999. This garnishment payment was for the pay period from June 14 to June 27, 1999. A true copy of the check stub is attached.

13. Gold Key Lease, Inc., caused a telephone message to be left with Mr. Gray’s employer on July 8, 1999 to stop the wage garnishment.

14. Gold Key Lease, Inc., caused its agents to speak with Mr. Gray’s employer on July 12, 1999 with a request to stop the garnishment.

15. Gold Key Lease, Inc., through its agents attempted to verify the days covered by the garnishment check received on July 9, 1999 by contacts made on July 16, July 19, and July 26, 1999.

16. Gold Key Lease, Inc., refunded the sum of $274.10 to Mr. Gray’s counsel on September 1, 1999. This figure was calculated by dividing the amount of the July 9, 1999 check by the 14 days worked, retaining the portion attributable to the three days worked prior to the filing of Mr. Gray’s petition, and refunding the amount attributable to the 11 days of wages earned after the filing of his petition.

17. Mr. Gray amended Schedules B and C of his petition on August 20, 1999 to exempt the amount of $582.75 in weekly wages under KRS 427.010(2).

18. Mr. Gray received a discharge on November 22, 1999.

19. Neither Mr. Gray nor his counsel contacted Mr. Gray’s employer subsequent to the filing of his bankruptcy petition to request that the wage garnishment in place against Mr. Gray’s wages be stopped.” (The Court notes that ¶8 incorrectly identifies Mr. Gray as the defendant.)

From the facts set out above, it appears that the defendant did attempt to halt the garnishment when it was notified of the filing of the plaintiff’s bankruptcy petition. The defendant takes the position, however, that because three days of the June 14-27, 1999 pay period fell before the filing of the petition, it was entitled to keep the amounts earned on those days. The defendant argues that pursuant to KRS 425.005 and 425.506, a garnishment lien attached to the plaintiff’s non-exempt wages as soon as they were earned, and he therefore never acquired a property interest in them. The defendant maintains that keeping the subject funds cannot be a violation of the automatic stay.

Both parties acknowledge this Court’s prior opinion in a case proceeding, Joseph Lee Williams and Dava Lynn Williams, Case No. 89-00467; Joseph Lee Williams v. MGM Collection Agency, Adv. No. 89-0233 (E.D.Ky., August 24, 1990). In that proceeding, a check was retained by the creditor representing sums earned before the debtor filed his bankruptcy petition. In the course of its opinion, the Court made the following statement:

As concerns the check for $74.21 still being held by the defendant’s attorney, while the defendant may argue that an ‘invoice’ date prior to the bankruptcy filing entitles it to the monies represented by the check, they were paid after the filing and should be returned to the plaintiff. In any event, the Court would tend to look upon such a payment to a creditor as a potential preferential transfer.

The defendant proposes that the Court took this position because the garnishing creditor in Williams did not “strongly argue[]” the issue of retention of the garnished funds. The defendant asks the Court to reconsider its decision in Williams “based on the facts of this case and the applicable law.”

The Court does not find the facts of this matter to be significantly different from those in Williams. As far as the law is concerned, the garnishing creditor’s failure to raise the issue of when a garnishment lien attaches to wages notwithstanding, the Court does not agree with the defendant’s interpretation of the significance of that issue where funds earned before filing are retained by the garnishing creditor after filing. In fact, the question of when a garnishment lien is created and when it attaches is implicated in the issue of the preferential nature of the transfers to the garnishing creditor.

While this proceeding was not filed as a preference action, consideration of the preferential nature of the transaction at issue may be helpful in determining whether the defendant was justified in retaining the subject payment. In In re Edwards, 219 B.R. 970 (Bkrtcy.W.D.Ky. 1998), the court stated:

In order to avoid a post-judgment garnishment as a preference, the garnishment order must be served within the preference period. ....

According to KRS 425.506(1), the date of the transfer is the date the garnishment lien is created, which is the date of service of the garnishment order upon the garnishee.

At 972. The stipulated facts in this matter show that the garnishment order was served upon the plaintiff’s employer in early April 1999, and that he filed his Chapter 7 petition on June 17, 1999. The date of transfer therefore falls well within the 90 day preference period. This situation is analogous to that in which a creditor acquires a security interest in a piece of property purchased by the plaintiff within the 90 day period.

This Court is of the opinion that as in Williams, supra, the defendant here made a good faith effort to stop the garnishment and so is not subject to sanctions under 11 U.S.C. §362(h). Its retention of sums representing three days wages from the June 14-27, 1999 pay period because they fell before the filing of the petition is, however, not justified due to the preferential nature of the transfer, and that amount should be returned. An order in conformity with this opinion will be entered separately.

Dated:

By the Court -

Judge William S. Howard

Copies to:

Gerry L. Harris, Esq.

Dean A. Langdon, Esq.