In re Lee

• Citation: 326 B.R. 704
• Decision Date: 08 July 2005
• Docket Number: Adversary No. 04-4442.,Bankruptcy No. 04-46174-R.
• Parties: In re David LEE, Debtor. Mark Shapiro, Trustee, Plaintiff, v. Chase Manhattan Mortgage Corp., Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

326 B.R. 704

In re David LEE, Debtor.

Mark Shapiro, Trustee, Plaintiff, v. Chase Manhattan Mortgage Corp., Defendant.

Bankruptcy No. 04-46174-R.

Adversary No. 04-4442.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

July 8, 2005.

Gary D. Siegel, Waterford, MI, for Debtor.

Supplemental Opinion Regarding Cross-Motions for Summary Judgment

STEVEN RHODES, Chief Judge.

This matter is before the Court on a motion for summary judgment filed by the trustee, Mark Shapiro. Shapiro seeks to avoid as a preferential transfer the security interest of Chase Manhattan Mortgage Corp. in the debtor's residence. Chase filed a cross motion for summary judgment.

The Court heard oral argument on May 26, 2005. At the conclusion of oral argument, the Court ruled in favor of Shapiro. This opinion supplements the Court's decision at that time.

I.

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."... The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor.

United States v. Certain Real Prop., 800 F.Supp. 547, 549-50 (E.D.Mich.1992) (citations omitted). Federal Rule of Civil Procedure 56(c) is made applicable to bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure 7056.

Shapiro and Chase both assert that there are no genuine issues of material fact. The Court agrees that there are no contested facts and that the only issues are legal issues. Accordingly, summary judgment is appropriate.

II.

On March 4, 2004, David Lee filed a voluntary chapter 7 bankruptcy petition. Lee owns real property located in Pontiac, Michigan.

On March 23, 2001, Lee granted a mortgage on the property to Flagstar Bank to secure the purchase price. The Flagstar mortgage was recorded on April 18, 2001. Subsequently, the mortgage was assigned to Chase.

On October 6, 2003, Lee refinanced his mortgage with Chase. All proceeds from the new mortgage were used to pay off the original mortgage and associated costs. The original mortgage was discharged on October 7, 2003. The new mortgage was recorded on December 17, 2003.

In his motion for summary judgment, Shapiro asserts that the security interest perfected on December 17, 2003, should be set aside as a preferential transfer. Shapiro argues that each of the elements of 11 U.S.C. § 547 are present. Further, Shapiro argues that the earmarking doctrine is not applicable to this case.

Chase relies on the earmarking doctrine. Chase argues that the security interest should not be set aside because the transaction was a refinance of its own prior perfected lien. Chase asserts that the bankruptcy estate was not affected since the funds disbursed were never within the control or possession of the debtor.

III.

Section 547(b) provides:

(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b).

The trustee bears the burden of proof regarding each element of § 547(b). See Rieser v. Landis & Gyr Powers, Inc. (In re Bownic Insulation Contractors, Inc.), 134 B.R. 261, 264 (Bankr.S.D.Ohio 1991).

The record establishes that Lee refinanced the Chase mortgage on October 6, 2003. However, Chase did not record its new mortgage until December 17, 2003, seventy-two days later. Therefore, pursuant to § 547(e)(2)(B), the transfer of the security interest did not occur simultaneously with the transfer of the funds for the refinance.

Most of the elements of § 547(b) are not at issue. December 17, 2003, the effective date of the transfer of the security interest, is within the 90 days prior to the date Lee filed his bankruptcy petition. Chase did not challenge the presumption of insolvency under § 547(f). Nor did Chase argue that it is not a creditor.

Chase argues that the security interest should not be set aside as a preference based on the earmarking doctrine. Chase asserts that the funds disbursed by Chase's refinance of its own prior lien were never within the control or possession of the debtor. Therefore, Chase argues that the transfer is not "of an interest of the debtor in property." Additionally, Chase argues that the transfer did not diminish the bankruptcy estate.

Chase's first argument fails to recognize that in the present case there are two distinct transfers. The first is the transfer of funds from Chase to pay off the prior mortgage. The second transfer occurred when the debtor granted a security interest in his property to Chase. The first transfer is protected by the earmarking doctrine; the second is not. See Gold v. Interstate Fin. Corp. (In re Schmiel), 319 B.R. 520, 528-29 (Bankr.E.D.Mich.2005); Shapiro v. Homecomings Fin. Network, Inc. (In re Davis), 319 B.R. 532, 534 (Bankr.E.D.Mich.2005); Scaffidi v. Kenosha City Credit Union (In re Moeri), 300 B.R. 326 (Bankr.E.D.Wis.2003); Sheehan v. Valley Nat'l Bank (In re Shreves), 272 B.R. 614 (Bankr.N.D.W.Va.2001); Vieira v. Anna Nat'l Bank (In re Messamore), 250 B.R. 913, 916 (Bankr.S.D.Ill.2000).

The facts of the present case are very similar to the facts in Messamore. The court in In re Messamore noted:

The earmarking doctrine, as developed in case law, is clearly applicable in a refinancing situation to determine whether the debtor's payment of an existing creditor with funds borrowed from a new creditor constitutes a preferential transfer — that is, whether such payment is a transfer of the debtor's "interest in property" to pay the debt owed to the first creditor. This case, however, presents an entirely different question. Here, it is not the transfer of funds to the debtors' original creditor, Green Point, that is at issue, but the transfer that occurred when the new creditor, Anna Bank, perfected its lien on the debtors' mobile home more than 10 days after execution of the parties' loan agreement. Under the definition of "transfer" applicable in preference actions, the debtors' transfer of an interest in their mobile home did not occur at the time of the loan transaction when they incurred their obligation to Anna Bank. Rather, because Anna Bank failed to perfect within 10 days after the parties' transaction, transfer of the debtors' interest is deemed to have occurred at the time Anna Bank perfected its lien over two months later. See 11 U.S.C. § 547(e)(2)(B). It is this latter transfer, the transfer of the debtors' interest in the mobile home to Anna Bank to secure the pre-existent obligation, that the trustee alleges is preferential.

Although the debtors' transfer to Anna Bank arose in the context of a refinancing arrangement, it did not involve the payment of funds by a third party or, indeed,...