Pitman, In re, MID-STATE

• Decision Date: 30 March 1988
• Docket Number: No. 87-5306,MID-STATE,87-5306
• Citation: 843 F.2d 235
• Parties: , Bankr. L. Rep. P 72,240 In re Kenneth Neil PITMAN and Patricia Roberts Pitman, Debtors. Robert H. WALDSCHMIDT, Trustee, Plaintiff-Appellee, v.HOMES, INC., and Jim Walter Homes, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 235

843 F.2d 235

17 Bankr.Ct.Dec. 719, Bankr. L. Rep. P 72,240

In re Kenneth Neil PITMAN and Patricia Roberts Pitman, Debtors Robert H. WALDSCHMIDT, Trustee, Plaintiff-Appellee, v. MID-STATE HOMES, INC., and Jim Walter Homes, Inc. Defendants-Appellants.

No. 87-5306.

United States Court of Appeals Sixth Circuit.

Argued Jan. 7, 1988.

Decided March 30, 1988.

Craig R. Allen, Hall, Haynes, Lusk and Foster, Chattanooga, Tenn., for defendants-appellants.

Robert H. Waldschmidt, Nashville, Tenn., for plaintiff-appellee.

Before MERRITT, KENNEDY and KRUPANSKY, Circuit Judges.

MERRITT, Circuit Judge.

This case raises a significant question in bankruptcy concerning the relationship between the concept of a conditional "antecedent debt" and the concept of "contemporaneous exchange for new value" under the preference section of the Revised Bankruptcy Code of 1978, as amended in 1984, 11 U.S.C. Sec. 547 (Supp. 1986). ¹ The essential question before us is whether the trustee in bankruptcy can avoid as a preference a bankrupt home buyer's mortgage deed given a month before bankruptcy as security for payment of the purchase price of a home. The transfer was made and recorded on the same day that the warranty deed conveying the property to the buyer was transferred and recorded. Both transfers were made in order to perform the mutual conditional promises given in an executory contract of sale made a month before the transfers. The bankruptcy and district courts below held that the mortgage was conveyed solely for an "antecedent debt" created by the executory promises of the land contract, rather than for new value consisting of the warranty deed given contemporaneously in exchange for the mortgage. We hold that such a mutual contemporaneous exchange of "legal" interests in the property in place of the previously existing inchoate "equitable" interests constitutes a valid contemporaneous exchange for "new value" under Sec. 547(c)(1). The mortgage here was exchanged for fair value and does not diminish or impair the bankrupt estate, or create a race to the courthouse by creditors to dismember the estate, or undermine the policy of equality of distribution among creditors--the primary problems concerning pre-petition transfers that the preference section was designed to solve. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 177-79 (1977), U.S Code Cong. & Admin.News 1978, p. 5787.

I.

A. Facts

Pitman, the debtor, filed a Chapter 7 petition in bankruptcy on November 21, 1984. The events that gave rise to the instant case began four months earlier, when Pitman sought to purchase a small home in Kentucky for $20,000 from the seller, Jim Walter Homes, Inc. On July 12th, Pitman executed three documents: a contract of sale containing a so-called "home office acceptance clause," a promissory note, and a mortgage deed covering the property. He mailed these documents to the seller's home office in Tampa. The note and mortgage were documents that would be needed for the closing of the transaction if the offer were accepted. The promissory note was for the purchase price, and the mortgage secured the promissory note. These three instruments together constituted an offer to purchase subject to acceptance by the seller. Upon acceptance they constituted the terms of the contract of sale, to be closed later by delivery and recording of a warranty deed from seller to buyer and by the mortgage deed conveying the security interest to the seller.

The promissory note referred directly to the underlying land transaction for which it was consideration. It stated that the mortgage deed was to be given as security for the installment note. The note provided for even monthly payments of $194.90 for 20 years, covering principle and ten percent interest for a total payment of $42,098.40, with the first payment due on September 5, 1984. The mortgage recited that it was to be security for the promissory note, and contained a long and detailed provision warranting title which began, "Mortgagor hereby covenants with the Mortgagee that the Mortgagor is lawfully seized of the fee simple title to the above property," and continued by warranting that the property was free of every kind of lien or claim on the property or any defect in title. The promissory note referred specifically to this instrument. It therefore seems that the parties understood that the buyer would receive clear title to the property by warranty deed at or before the time the mortgage was conveyed back to the seller as security for the purchase price. The contract of sale confirmed the conditional nature of obligations and contained provisions allowing either the buyer or the seller to "cancel" upon the occurrence of a number of events which gave both parties an easy way of withdrawing from the transaction at any time up until the time the property was actually conveyed.

In late July the seller accepted the offer verbally but not in writing and delivered possession of the house to Pitman by giving him the keys. On September 14 the seller formally accepted the offer in writing by mail. The seller did not immediately convey, deliver or record the warranty deed or record the mortgage which it had received from Pitman in July. Rather--and here is the event on which the courts below made the preference question turn--the seller waited until October 16, a month later, to have both the deed and the mortgage recorded in the local Kentucky courthouse. The seller mailed the two instruments on October 22 to Pitman. Although the first payment on the note originally was due September 5, Pitman did not make his first payment until after he had the deed.

B. The Preference Section

Section 547 on preferences is complex both in language and in theory. See Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand.L.Rev. 713 (1985) (116 page article devoted to interpretation of Sec. 547). Section 547 first states a set of definitions [Sec. 547(a) ], then creates a rule of avoidance [Sec. 547(b) ], then establishes a set of exceptions to the rule [Sec. 547(c) ], and finally specifies a series of timing principles that govern the effective dates of critical statutory events such as "transfer" and "perfection" [Sec. 547(e) ]. The rule [Sec. 547(b) ] declares that the bankruptcy trustee "may avoid any transfer" of the debtor's property to a creditor "for or on account of an antecedent debt owed by the debtor before such transfer was made" that diminishes the estate or creates an inequality among classes of creditors, if the debtor was insolvent, and the transfer was made within 90 days of the filing of the petition. Excepted from this rule are five types of transfers [Sec. 547(c) ]. We are concerned here with the exception for transfers that constitute "a contemporaneous exchange for new value given to the debtor," [Sec. 547(c)(1) ].

The timing principles [Sec. 547(e) ] emphasize the importance of when a transfer is "perfected" because a transfer normally must be perfected in the hands of the transferee if it is not to be treated as a preference. They first provide that a "transfer ... is perfected when" the transferee has acquired an interest superior to a bona fide purchaser. The provisions then become somewhat confusing. They use the word "transfer" in three separate senses; "transfers made," "transfers perfected," and "transfers which take effect," without indicating precisely in what sense the word "transfer" is used in the other parts of Sec. 547. Thus: "For purposes of this section ... a transfer is made ... (A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected [e.g., recorded]" within 10 days, or (B) when perfected, if perfected outside the 10 day period, or (C) at the time of filing of the petition if the transfer has not been perfected by that time. The last provision [Sec. 547(e)(3) ] says that "a transfer" should not be interpreted as "made until the debtor has acquired rights in the property transferred," meaning apparently that the transferor must acquire the property interest in question before he can be considered to have transferred it.

C. Proceedings Below

Confronted with these facts and this admittedly difficult statutory scheme, the essential conclusions of the bankruptcy judge were:

[From the time the contract was accepted,] the debtor had an obligation under the sales contract to make periodic payments to Jim Walter. The sales contract was accepted by Jim Walter no later than mid-September.... Since the debtor's obligation was created at least one month prior to the October 16 transfer, the court finds that there was an antecedent debt in this case....

Second, the court looks to the section 547(c)(1) contemporaneous exchange defense asserted by defendant.... The court holds that the equitable title to the realty was transferred [in mid-September] to the Pitmans prior to the October 16 transfer that occurred upon recordation of the mortgage.

App. 48-51.

Thus, the court held that because the transfer of equitable title "took effect" 32 days before rather than "within 10 days" before the mortgage was "perfected" by recording, the transfer of equitable title and the transfer of the mortgage were not contemporaneous because not within 10 days of each other.

The district judge wrote a brief opinion on appeal accepting the bankruptcy court's reasoning, 78 B.R. 882. He stated that "when acceptance was made" a contract of sale was formed, and "immediate recordation of the [mortgage] deed was essential to preclude the creation of a preferential transfer" even though there was no warranty deed conveying a mortgageable title to Pitman at that time. "The appellants [the seller] will not be heard to say," the District Court observed, "that a 32-day-old debt is not antecedent." Thus both courts below held that once a contract of sale of real estate is formed which promises installment payments and a transfer...