Judge Diehl: Undisbursed Funds Paid Into Court For Garnishment Are P...

In In re Cochran, Ch. 7 Case No. 13-43242, 2014 Bankr. LEXIS 1178 (Bankr. N.D. Ga. Feb. 10, 2014), the issue in the motion to avoid lien was whether funds paid into court pursuant to a Summons of Garnishment are property of the Bankruptcy estate after a case is filed.  Judge Mary Grace Diehl held as follows:

1. Garnished funds already disbursed to the creditor before the Chapter 7 case was filed are property of the creditor and the debtor and estate have no interest in those funds.  See O.C.G.A. § 18-4-93. The exception is when the court improperly disburses the funds before the  fifteen day objection period required by O.C.G.A. § 18-4-89, in which case the debtor still retains an interest in the funds until the 15 days has run.  Although the debtor argued that he could avoid the disbursement as a preferential transfer and exempt the funds, no avoidance action had been filed and the Judge declined to rule on that issue.
2. Garnished funds not disbursed by Court, but subject to Order of Disbursement.  Where the state court had entered pre-petition orders of disbursement, but the funds had not yet been disbursed, the debtor still had the right to file a traverse and other parties who asserted a higher priority lien could also contest disbursement.  See O.C.G.A. § 18-4-93, § 18-4-95. Therefore, the debtor still had an interest in the funds not yet disbursed and, therefore, they were property of the Chapter 7 estate.  The lien could be avoided pursuant to §522(b)(1).

It follows that funds held by the state court that are not the subject of an order of disbursement are also property of the estate.  See also In re Williams, 460 B.R. 915 (Bankr. N.D. Ga. 2011)(J. Drake)(debtor retained an interest in the garnished funds until at least the time for filing a traverse has expired, and creditor’s lien could be avoided).