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Home Casual Enterprise, Ltd. v. Kasdorf

United States District Court, W.D. Wisconsin

September 30, 2017

ROBERT T. KASDORF, Trustee of Home Casual, LLC, Appellee.



         Appellants Home Casual Enterprise, Ltd., Zhejiang Hemei Leisure Products Co., Ltd., Hangzhou Volly Garden Furniture Co., Ltd., and Hangzhou King-Rex Furniture Industry Co., Ltd., appeal from a final decision of the United States Bankruptcy Court for the Western District of Wisconsin, which voided their garnishment of a debt owed by a third party to the debtor, Home Casual, LLC, and allowed the bankruptcy trustee, appellee Robert Kasdorff, to recover the garnished funds from appellants for the benefit of the bankruptcy estate. After reviewing the parties' submissions and the bankruptcy record, the court will affirm the bankruptcy court's decision.


         Some background information is necessary to understand the bankruptcy court's decision and the issues on appeal, although a more fulsome description of the facts, which were uncontested by the parties, can be found in the bankruptcy court's decision, from which this brief summary is drawn. See Dkt. # 1, exh. # 1; Kasdorff v. Home Casual Enterprise, Ltd. et als., Adv. No. 15-00043 (Bankr. W.D. Wis.) (Bankr. dkt. #69).[1]

         Appellants are Home Casual Enterprise, Ltd. ("HCEL") and several Chinese factories-Zhejiang Hemei Leisure Products, Hangzhou Volly Garden Furniture, and Hangzhou King-Rex Furniture Industry-that supplied outdoor furniture to Home Casual LLC, the underlying debtor in this case. In September 2011, while in default to appellants, the debtor assigned in excess of $79 million in purchase orders to HCEL. Because this assignment failed to satisfy all of the debtor's obligations, appellants filed a diversity action in federal court to collect from the debtor, and on November 19, 2012, appellants obtained a judgment in the amount of $10, 813, 493.00.

         Appellants then filed a non-earnings garnishment action in the Dane County Circuit Court against Brian Sanderson, who had issued a promissory note to the debtor. Sanderson accepted service of the complaint on December 28, 2012, and the state circuit court granted judgment in favor of appellants on March 19, 2013. The state court then ordered Sanderson to pay appellants the $250, 000 due under the promissory note, which Sanderson ultimately did on April 1, 2013. However, HCEL subsequently returned the payment to Sanderson, and the payment was not credited toward appellants' judgment against the debtor.

         The debtor filed a chapter 11 bankruptcy case in the bankruptcy court on March 29, 2013, which was converted to a chapter 7 on April 23, 2013. On March 26, 2015, appellee Robert Kasdorf, the chapter 7 trustee, commenced an adversary proceeding against appellants in order to avoid transfers, compel turnover, and disallow claims with respect to the debtor's property.

         Following a trial in the bankruptcy court on August 14, 2015, Judge Martin issued a decision, which held that the garnishment of Sanderson's debt was an avoidable transfer under 11 U.S.C. § 547 received within 90 days of the filing of the bankruptcy case. Particularly relevant to the pending appeal, Judge Martin specifically rejected appellants' contention that their lien arose when Sanderson accepted service of the garnishment complaint on December 28, 2012, and instead found that they obtained a lien when the state court entered the garnishment judgment on March 19, 2013. Because the bankruptcy court did not authorize Anderson's subsequent payment to appellants on April 1, 2013, Judge Martin held that it was a voidable, post-petition transfer of estate property under 11 U.S.C. § 549, which the trustee could recover from the appellants for the benefit of the estate under § 550. Judge Martin further found that: (1) appellants' unexplained return of funds to Sanderson did not change his analysis; and (2) all of the appellants' claims against the debtor should be disallowed and payment delayed until appellants paid to the trustee the amount transferred from the Sanderson promissory note, plus interest.


         "In a bankruptcy appeal, issues of law are reviewed de novo; factual findings may be set aside only if they are clearly erroneous." In re Kelly, 392 B.R. 750, 754 (W.D. Wis. 2007) (citing Fed.R.Bankr.P. 8013). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." In re Smith, 582 F.3d 767, 777 (7th Cir. 2009) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)).

         Relevant to this appeal is 11 U.S.C. §§ 547(b)(4), 549(a), and 550, which allow a bankruptcy trustee to avoid and recover the transfer of a debtor's property that was not authorized by the bankruptcy court and was made within 90 days before the debtor filed for bankruptcy. The parties refer to this provision as the "90-day preference period." In particular, section 101(54)(A) of the bankruptcy code defines the term "transfer" to include the "creation of a lien, " which is in turn defined under § 101(37) as a "charge against or interest in property to secure payment of a debt or performance of an obligation." The bankruptcy code does not define what constitutes an "interest in property, " but the parties agree that state law defines the term in the absence of a federal definition. See Butner v. United States, 440 U.S. 48, 54-55 (1979); In re Freedom Group, 50 F.3d 410 (7th Cir. 1995); In re Wayco, Inc., 947 F.2d 1330 (7th Cir. 1991).

         Appellants argue that the bankruptcy court erred in finding that their lien on the Sanderson promissory note arose during the 90-day preference period, thereby allowing the bankruptcy trustee to avoid and recover the $250, 000 that appellants garnished. The undisputed facts show that the debtor in this case filed for bankruptcy on March 29, 2013, which means that the 90-day preference period began to run on December 29, 2012. While appellants obtained a judgment against the debtor on November 19, 2012, and Sanderson accepted service of appellants' garnishment complaint on December 28, 2012, both of which occurred before the start of the 90-day preference period, appellants did not obtain the garnishment judgment until March 19, 2013, still within the 90-day preference period.

         This appeal turns then on the bankruptcy court's rejection of appellants' contention that their lien arose when Sanderson accepted service of the garnishment complaint and determination that the lien arose when the state court entered the garnishment judgment. In reaching his decision, Judge Martin looked to Wisconsin state law regarding garnishments to determine at what point a lien or an interest in property arises in a garnishment action. While noting that there is no mention of the term "lien" in the state garnishment statute, Wis.Stat. § 812.18(1), he pointed out that the Wisconsin Supreme Court has drawn a relevant distinction between equitable and actual liens in the context of garnishment actions:

It is clear that under our statutes a garnishment does not create a lien, strictly so called, on the property of the principal debtor in the hands of the garnishee. The interest obtained is of an inchoate character. It does not reach the property so as to constitute an actual interest therein, though it is true that such interest has been commonly called, by this and other courts, an equitable lien. The plaintiff cannot follow the property on the strength of any legal or even equitable interest therein, from the mere fact of the service of ...

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