holding that “state preference law is an adjunct to, and supplemental of, those powers specifically provided for in the Bankruptcy Code which enable the trustee to avoid certain transfers”
How later courts described this case
- holding that “state preference law is an adjunct to, and supplemental of, those powers specifically provided for in the Bankruptcy Code which enable the trustee to avoid certain transfers”
- “[S]tate ... law is an adjunct to, and supplemental of, those powers specifically provided for in the Bankruptcy Code which enable the trustee to avoid certain transfers.”
Written by the judges who cited it.
The opinion
MERRITT, Chief Judge,
dissenting.
The time limits and the substance of the Kentucky preference statute are flatly in *1226 consistent with the preference provisions of the Bankruptcy Act, 11 U.S.C. § 547 , and there is a serious question in my mind whether the doctrine of preemption of inconsistent state law allows the use of the state statute by the trustee in bankruptcy or its enforcement by the Bankruptcy Court. As the Supreme Court recently reminded us, bankruptcy law leaves to state law the definition of property rights but not the definition of what is a “preference” or a “transfer.” Barnhill v. Johnson, Trustee, — U.S.-, 112 S.Ct. 1386 , 118 L.Ed.2d 39 (1992). These are matters of federal law. Preferences are integrally a part of a collective proceeding (bankruptcy, composition, receivership, and such proceedings that marshall the assets of a debt- or), and once a federal collective proceeding has begun, federal rules and federal policy should prevail. This conflicts question goes to the heart of this case, and I would order the parties to brief the issue on appeal, although it was not raised below, or I would have the issue remanded to the Bankruptcy Court for consideration there.
In addition to the possible preemption problem, it is not clear that the Kentucky preference statute applies in this case. Although KRS 378.060 is referred to as a preference statute, it is in fact designed to begin a state collective proceeding: Under the statute a preference “operate[s] as an assignment and transfer of all the property of the debtor.” KRS 378.060. The statute appears to provide for an alternative collective proceeding under state law existing alongside the federal bankruptcy proceeding. The statute does not appear to provide simply for avoidance or recovery of a particular transfer.
On the state law issue I do not agree that the garnishment in question here was on a “judgment suffered ... with the design to prefer one or more creditors to the exclusion ... of others.” The bankrupt company was forced into the agreed judgment by a lawsuit which at the time would most likely have otherwise ended in disaster. The creditor is simply being punished for settling its case rather than insisting on a contested judgment which would under no circumstances have qualified as a “preferential” transfer under the Kentucky statute. I cannot find any evidence of a “design to prefer” one creditor over another, and I would not presume that such a “design exists in the absence of any evidence.” Accordingly, I respectfully dissent from the views of the panel.