United States District Court, W.D. Wisconsin
HOME CASUAL ENTERPRISE, LTD., ZHEJIANG HEMEI LEISURE PRODUCTS CO., LTD., HANGZHOU VOLLY GARDEN FURNITURE CO., LTD., And HANGZHOU KING-REX FURNITURE INDUSTRY CO., LTD., Appellants,
ROBERT T. KASDORF, Trustee of Home Casual, LLC, Appellee.
OPINION AND ORDER
WILLIAM M. CONLEY, DISTRICT JUDGE
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.
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).
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,
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.
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
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
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)).
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).
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.
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 ...