Transfers Made to Creditor Through its Law Firm Are Preferential, Including Portions Retained by Firm Under Fee Agreement
January 27, 2021, Eastern District of Michigan– Defendant Wanigas Credit Union garnished a certain amount from Debtor Candise Hooker’s wages during a ninety-day preference period before Hooker filed for bankruptcy. Hooker’s employer sent the money to Wanigas’ law firm, Shek Law Offices, which retained a part of that amount under a contingency-fee agreement between Shek and Wanigas before sending the remaining balance to Wanigas. After filing for Chapter 7 bankruptcy, Hooker demanded that Wanigas return the garnished wages as a preferential transfer under 11 U.S.C. § 547 (b)(1) of the Bankruptcy Code.
Since Wanigas only returned the amount it had received, Hooker sought to recover the remaining balance via filing an adversary proceeding in the bankruptcy court. Wanigas moved for summary judgment, asserting that the unpaid balance did not qualify as an avoidable preferential transfer under § 547 because the money never landed in Wanigas’s coffers and was also subject to an attorney-charging lien. The Court denied the motion. Wanigas filed an interlocutory appeal in the district court.
The District Court affirmed the bankruptcy court ruling. The Court reasoned that the alleged transfer was made “to” a creditor. Wanigas’ law firm received the transfer in its capacity as an agent of the credit union. Thus, the law firm received payments only on behalf of Wanigas. The entire transfer was “for” the benefit of Wanigas. The transfer benefitted Wanigas by satisfying its obligations to the law firm under their fee agreement. Thus, the Court ruled that Wanigas could not sidestep avoidance simply because its agent received a transfer on its behalf and then retained a portion to satisfy the credit union’s obligation to it. The Court also ruled that the existence of a lien was irrelevant because the law firm was Wanigas’s creditor and not Hooker’s.
Thus, the Court held the bankruptcy court did not err when it denied Wanigas’s motion for summary judgment because Wanigas failed to show that the transfer to the law firm on behalf of Wanigas was not a transfer “to or for the benefit of a creditor.”
Hooker v. Wanigas Credit Union, No. 20-2252, 2021 U.S. App. LEXIS 2062 (6th Cir. Jan. 26, 2021)