Johnson v. Star

Background

A group of creditors had a judgment for a small sum against a Dallas manufacturing company. The company, insolvent and owing many unsecured debts, made a voluntary assignment of all its property to a person appointed to convert assets into cash and distribute the proceeds to creditors under Texas law. The creditors refused to accept under that assignment and sued the assignee in state court, seeking to garnish the cash the assignee held.

Reasoning

The central question was whether the Texas statutes governing voluntary assignments conflicted with the federal Bankruptcy Act — in other words, whether the state law could keep assigned funds from being seized by an individual creditor. The Texas courts construed their statutes to allow such voluntary assignments that provide for equal distribution to consenting creditors and held they were not in conflict with the federal law as applied in this case. The opinion noted prior Texas decisions and explained that these assignments are valid except as against timely federal bankruptcy proceedings. Relying on that construction, the Court agreed the state law was not repugnant to the Bankruptcy Act and that the money in the assignee’s hands was not subject to garnishment.

Real world impact

The ruling means funds gathered by an assignee under the Texas assignment process will generally be preserved for equal distribution to accepting creditors rather than seized by a single objecting creditor. It affects judgment creditors, insolvent businesses using voluntary assignments, and assignees who administer such funds. The Court’s view also leaves open the possibility that a prompt federal bankruptcy filing could alter the result.