530 F.3d 458 (6th Cir. 2008), 06-1538, In re Lee
|Citation:||530 F.3d 458|
|Party Name:||In re David Scott LEE, Debtor. Chase Manhattan Mortgage Corporation, Plaintiff-Appellee, v. Mark H. Shapiro, Trustee, Defendant-Appellant.|
|Case Date:||June 26, 2008|
|Court:||United States Courts of Appeals, Court of Appeals for the Sixth Circuit|
Argued: Dec. 6, 2007.
[Copyrighted Material Omitted]
Tracy M. Clark, Steinberg, Shapiro & Clark, Southfield, Michigan, for Appellant. Kelly A. Myers , Myers & Myers, Brighton, Michigan, for Appellee. Samuel K. Crocker , Crocker & Niarhos, Nashville, Tennessee, for Amicus Curiae.
Tracy M. Clark , Steinberg, Shapiro & Clark, Southfield, Michigan, for Appellant. Kelly A. Myers , Myers & Myers, Brighton, Michigan, Jessica B. Allmand , McDonald Hopkins, LLC, Bloomfield Hills, Michigan, for Appellee. Samuel K. Crocker , Crocker & Niarhos, Nashville, Tennessee, for Amicus Curiae.
Before: MERRITT , COLE , and GRIFFIN , Circuit Judges.
COLE , J., delivered the opinion of the court, in which GRIFFIN , J., joined. MERRITT , J. (p. 474), delivered a separate dissenting opinion.
R. GUY COLE, JR. , Circuit Judge.
Approximately six months before he filed a voluntary Chapter 7 bankruptcy petition, David Scott Lee (“Lee" or “Debtor" ) refinanced a residential mortgage loan with Chase Manhattan Mortgage Corporation (“Chase" ), which was both the holder of the original mortgage and the refinanced mortgage. Seventy-seven days before Lee filed his bankruptcy case, and seventy-two days after Chase had distributed the funds that were used to discharge the original mortgage, a new mortgage on
his residential real estate was recorded in favor of Chase to secure Lee's obligation to repay the new loan. At issue in this appeal is whether Chase's new mortgage lien may be avoided as a preferential transfer under 11 U.S.C. § 547 . For the reasons below, we hold that the earmarking doctrine does not provide a refuge for late-perfecting secured creditors and thus does not shield Chase from preference exposure. We also reject Chase's contention that perfection of its mortgage during the 90-day preference period did not result in diminution of Lee's bankruptcy estate. Accordingly, we REVERSE the order of the district court and reinstate the bankruptcy court's judgment in favor of the Trustee.
In early 2001, the Debtor purchased the premises located at 129 West New York Avenue, Pontiac, Michigan (“Property" ) and obtained a thirty-year mortgage loan in the principal amount of $108,000 from Flagstar Bank, FSB (“Flagstar" ). The Debtor executed and delivered to Flagstar a promissory note (“Promissory Note" ) that was secured by a mortgage on the Property (“Original Mortgage" ). The Original Mortgage was properly recorded by the Clerk/Register of Deeds of Oakland County, Michigan (“Register of Deeds" ).
Later in 2001, Flagstar assigned the Promissory Note and the Original Mortgage to the Federal National Mortgage Association, in care of Chase Mortgage Company, an Ohio Corporation (“Chase Ohio" ), pursuant to an Assignment of Mortgage that was recorded by the Register of Deeds in early 2002. By merger of Chase Ohio into Chase, Chase became the holder of both the Original Mortgage and the loan evidenced by the Promissory Note (“Original Loan" ).
On October 6, 2003, the Debtor refinanced the Original Loan. The Debtor obtained another mortgage loan (“New Loan" ) from Chase, and used the proceeds to pay off the Original Loan. The Debtor also granted Chase a new 30-year mortgage (“New Mortgage" ). By a “Discharge of Mortgage" dated October 27, 2003 (“Discharge" ), Chase discharged the Original Mortgage. The Discharge stated that the Original Mortgage was “fully paid, satisfied and discharged." The Register of Deeds received the Discharge on November 12, 2003 and recorded it on January 16, 2004. On December 17, 2003-51 days after Chase discharged the Original Mortgage and 72 days after the closing of the New Loan-the Register of Deeds recorded the New Mortgage.
B. Procedural History
On March 4, 2004, 77 days after the New Mortgage was recorded, the Debtor commenced his bankruptcy case by filing a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court, Eastern District of Michigan. On April 20, 2004, the Chapter 7 Trustee Mark H. Shapiro (“Trustee" ) filed an adversary complaint in the bankruptcy court against Chase, seeking to avoid the New Mortgage as a preferential transfer under 11 U.S.C. § 547(b) . On April 6, 2005, the Trustee filed a Motion for Summary Judgment in the adversary proceeding, arguing that he had met all elements of § 547(b) and that the New Mortgage should be avoided. On April 21, 2005, Chase filed a Response to the Trustee's Motion for Summary Judgment and a Cross-Motion for Summary Judgment, asserting the earmarking doctrine as a defense to the Trustee's § 547(b) preference claim. On May 6, 2005, the Trustee filed a Response to Chase's Cross-Motion for Summary Judgment. Chase, on May 20,
2005, filed a Reply to the Trustee's Response and argued that, in addition to the earmarking doctrine, the Trustee had not met all elements of § 547(b) because the Trustee had failed to prove that the New Mortgage caused diminution of the estate's assets under § 547(b)(5) , where diminution in this case would be a showing that Chase's perfection of the New Mortgage resulted in a diminished estate from which the Debtor's other creditors could recover.
1. Bankruptcy Court Decision
The bankruptcy court avoided the New Mortgage as a preferential transfer because it found that the Trustee had met its burden on all elements under § 547(b) and found that the earmarking doctrine did not apply. See Shapiro v. Chase Manhattan Mortgage Corp. (In re Lee), 326 B.R. 704 (Bankr.E.D.Mich.2005) , rev'd, 339 B.R. 165 (E.D.Mich.2006) . The bankruptcy court reasoned that because the New Mortgage was not recorded and perfected for more than two months after the initial transaction, the perfection did not relate back to the initial transfer pursuant to § 547(e)(2)(B) . The court rejected Chase's earmarking argument, finding that there were two transfers in this case: the October 6 transfer of funds from Chase to the debtor to release the Original Mortgage and the transfer perfecting the security interest through the recording of the New Mortgage on December 17. The court held that the earmarking doctrine protected only the first transfer.
The court next rejected Chase's argument that there was no diminution of the Debtor-estate's assets, finding that because Chase delayed in perfecting its mortgage lien, the Court could not treat the October 6 refinancing as part of the same transaction as the transfer of the lien recorded on December 17. Because the two transactions were separate transactions, the diminution requirement was met because perfection of the New Mortgage elevated Chase from unsecured to secured status, resulting in fewer assets of the Debtor's estate for other unsecured creditors. The court granted the Trustee's motion for summary judgment, holding that the estate was diminished by the December 17 perfection of the New Mortgage, and that the secured interest was an avoidable preference.
2. District Court Decision
On appeal, the district court found that the Trustee did not establish diminution as required by § 547(b) . See Shapiro v. Chase Manhattan Mortgage Corp. (In re Lee), 339 B.R. 165 (E.D.Mich.2006) . The court explained that, treating the entire refinancing process as a whole, the value of the estate did not decrease. That is, before the whole transaction, the Debtor's Property was secured by a mortgage and the Debtor had to make minimum monthly payments of $942.16, and following the whole transaction, the Debtor's Property was still secured by a mortgage and the Debtor had to make minimum monthly payments of $567.31. Thus, the district court concluded, the estate's assets arguably increased because the monthly payments and interest rate decreased following the New Loan. The court next treated the refinancing transaction as a whole and determined that the earmarking doctrine protected Chase even if the Trustee had met all of § 547(b) 's requirements.
The district court's rationale for treating the entirety of the refinancing as one transaction was that even though the recorded interest occurred outside the 10-day period of § 547(e) , “[t]he granting of the loan and recording the mortgage are two sides of the same coin, they are one transaction. To view it any other way would be to elevate form over substance."
In reaching this conclusion, the district court cited Kaler v. Community First National Bank (In re Heitkamp), 137 F.3d 1087, 1089 (8th Cir.1998) , which relied solely on the earmarking doctrine when upholding a bank's security interest that was perfected outside the 10-day period in § 547(e) and within the 90-day period before the debtor filed for Chapter 7 bankruptcy.
The Trustee filed a timely Notice of Appeal on April 4, 2006.
II. LEGAL ANALYSIS
When reviewing an order of a bankruptcy court on appeal from a decision of a district court, we review the bankruptcy court's order directly and give no deference to the district court's decision. See Rogan v. Bank One, Nat'l Ass'n (In re Cook), 457 F.3d 561, 565 (6th Cir.2006) . We review the bankruptcy court's findings of fact under the clearly erroneous standard, asking only whether we are left with a definite and firm conviction that a mistake has been committed. We review conclusions of law made by the bankruptcy court de novo. See id.
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