In re Hedrick

• Decision Date: 15 April 2008
• Docket Number: No. 07-11179.,No. 07-11187.,07-11179.,07-11187.
• Parties: In Re: Tracy Joseph HEDRICK, Theresa Ann Hedrick, Debtors. Neil C. Gordon, Trustee for the Estate of Tracy Joseph Hedrick and Theresa Ann Hedrick, Plaintiff-Appellant, v. Novastar Mortgage, Inc., Defendant-Appellee. In Re: Som R. Sharma, Debtor. Neil C. Gordon, Trustee for the Estate of Santosh K. Sharma, Plaintiff-Appellant, v. ABN Amro Mortgage Group, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

524 F.3d 1175

In Re: Tracy Joseph HEDRICK, Theresa Ann Hedrick, Debtors.

Neil C. Gordon, Trustee for the Estate of Tracy Joseph Hedrick and Theresa Ann Hedrick, Plaintiff-Appellant, v. Novastar Mortgage, Inc., Defendant-Appellee.

In Re: Som R. Sharma, Debtor.

Neil C. Gordon, Trustee for the Estate of Santosh K. Sharma, Plaintiff-Appellant, v. ABN Amro Mortgage Group, Inc., Defendant-Appellee.

No. 07-11179.

No. 07-11187.

United States Court of Appeals, Eleventh Circuit.

April 15, 2008.

William L. Rothschild, Ellenberg, Ogier & Rothschild, P.C., Atlanta, GA, for Gordon.

Craig K. Pendergrast, Paul Baisier, Matthew N. Foree, Seyfarth Shaw, LLP, Atlanta, GA, for Defendants-Appellees.

Edward D. Burch, Jr., Smith, Gambrell & Russell, LLP, William V. Custer, IV, Powell, Goldstein, Frazer & Murphy, Atlanta, GA, for Amici Curiae, Stewart Title Guaranty Co. and Georgia Bankers Ass'n.

Appeals from the United States District Court for the Northern District of Georgia.

Before CARNES and BARKETT, Circuit Judges, and COHN,^* District Judge.

CARNES, Circuit Judge:

In this consolidated appeal, Neil Gordon, the Chapter 7 Trustee of the bankruptcy estates of Tracy and Theresa Hedrick and Santosh and Som Sharma, appeals the bankruptcy courts' grants of summary judgment to NovaStar Mortgage, Inc. and ABN Amro Mortgage Group, Inc., respectively. The trustee brought the adversary proceedings that gave rise to this appeal to avoid the transfer of security deeds¹ in the debtors' properties under 11 U.S.C. § 547(b) (2000) (amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-9, 119 Stat. 23 (2005)).² That subsection of the Bankruptcy Code permits trustees to avoid certain preferential transfers of interests in a debtor's property that occur within ninety days before the filing of a bankruptcy petition. The effect of doing so is to convert a creditor's claim secured by property of the debtor to an unsecured one against the estate.

The bankruptcy courts granted summary judgment to the defendant companies after concluding that under Georgia's law of equitable subrogation the transfers of the security deeds were "made" for § 547(b)(4) purposes on the date the loans closed instead of on the later date when the security deeds were recorded. That meant in the Hedricks' case that the transfer to NovaStar occurred before the § 547(b) preference avoidance period began and, as a result, the trustee could not avoid the transfer of the security deed. It meant in the Sharmas' case that the transfer qualified for the § 547(c)(1) contemporaneous exchange exception and, as a result, the trustee could not avoid the security deed.

The trustee's appeals of the bankruptcy court judgment in each case were heard by the same district court judge in a joint hearing. The court issued identical orders stating that it found the bankruptcy courts' orders to be well-reasoned, and it affirmed their judgments. This is the trustee's appeal of the bankruptcy courts' grants of summary judgment to the defendant in each of the cases, which we have consolidated.

The undisputed, material facts of both cases are similar. The debtors refinanced debts secured by property interests in their homes, paying off the earlier creditors with loans from the new creditors. The new loans were secured by first priority security deeds on the homes. The cancellations of the earlier deeds to secure debt were not recorded until after the new security deeds had been recorded, and that recording of the new security deeds took place within the ninety-day period preceding the filing of the Chapter 7 petitions. The trustee for the bankruptcy estates initiated adversary proceedings to avoid the new security deeds under § 547(b), which provides for avoiding some preferential transfers that occur in the ninety-day period preceding the filing of a bankruptcy petition.

The significant difference between the two sets of debtors is that the creditors who originally held the security deeds on the Hedricks' home were paid off more than ninety days before the Hedricks filed their joint bankruptcy petition, while the creditors who originally held the security deeds on the Sharmas' home were paid off fewer than ninety days before the Sharmas filed their joint bankruptcy petition. The details and our analysis follow, beginning with the Hedricks' case.

I.

Astoria Federal Savings and Countrywide Home Loans, Inc. each held a security deed on the Hedricks' home. On December 4, 2003, the Hedricks refinanced the debts secured by those deeds, paying off Astoria and Countrywide with $148,000 borrowed from NovaStar. The Hedricks' loan from NovaStar was secured by a first priority security deed on their home.

The federally mandated three business day rescission period on the refinancing loan expired on December 9, 2003. On December 10 NovaStar delivered checks to Astoria and Countrywide, paying off the Hedricks' debts to them in full. That same day NovaStar sent its new security deed to the county clerk to be recorded, but the document was not actually recorded until January 7, 2004. The cancellations of the old security deeds to Astoria and Countrywide were recorded on January 22, 2004.

On April 5, 2004, the Hedricks filed a joint petition for Chapter 7 bankruptcy. Thereafter the trustee asked the bankruptcy court to avoid NovaStar's security deed on the Hedricks' property under § 547(b)(4)(A). In order to rule on that request the court had to determine when the transfer of the security deed was "made."

Section 547(e)(2)(A), the relation-back provision, states that a transfer is "made" at the time of the exchange if the interest received is perfected within ten days. The bankruptcy court applied Georgia's doctrine of equitable subrogation to find that the transfer of the security deed from the Hedricks to NovaStar was made when NovaStar paid off Astoria and Countrywide, which was on December 10, 2003. That date was within ten days of the exchange at the refinance loan closing. As a result, under § 547(e)(2)(A) the transfer was "made" at the time of the exchange, which was more than ninety days before the Hedricks filed their joint bankruptcy petition. Because the date of the exchange was more than ninety days before the bankruptcy petition was filed, the bankruptcy court held that the trustee was not entitled to avoid the transfer under § 547(b)(4)(A).

The court also held that, in any event, the trustee had failed to introduce sufficient evidence to survive summary judgment on one of the other elements of the avoidance provision: the requirement that the party seeking to avoid the transfer prove that the transferee received more from the transfer than it would have from Chapter 7 proceedings. See 11 U.S.C. § 547(b)(5)(A). On both of those grounds the bankruptcy court granted summary judgment to NovaStar. The district court did, too, and for the same reasons.

Whether the grant of summary judgment to NovaStar was correct depends on whether the transfer of interest in the Hedricks' property was "made" outside the ninety-day preference avoidance period under § 547(b)(4)(A), which in turn depends on when NovaStar's security deed was perfected. See 11 U.S.C. § 547(b)(4)(A) (conditioning the trustee's ability to avoid the transfer on it having been "made ... on or within 90 days before the date of the filing of the petition").

When a transfer is "made" for § 547(b)(4)(A) purposes depends on when it is perfected. If the transfer is perfected within ten days of the exchange, it is considered to have been made when it occurred. 11 U.S.C. § 547(e)(2)(A). If the transfer is perfected more than ten days after the exchange, it is considered to have been made at the time it is perfected, which will be after the transfer occurred. Id. § 547(e)(2)(B). A transfer "is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee." Id. § 547(e)(1)(A).

The Bankruptcy Code does not define the term "bona fide purchaser." Straight v. First Interstate Bank of Commerce (In re Straight), 207 B.R. 217, 228 (10th Cir. BAP 1997). However, that term in the federal statute takes its common, ordinary meaning. See id. (applying the definition of "bona fide purchaser" in Black's Law Dictionary to the term in § 545 of the Bankruptcy Code); see also United States v. Watkins, 320 F.3d 1279, 1284 (11th Cir.2003) (using the term "bona fide purchasers[,] as that term is commonly defined," in applying a federal civil forfeiture statute); United States v. Hunter (In re Walter), 45 F.3d 1023, 1030 (6th Cir.1995) ("Where a statutory lien is created by federal law ... the characteristics of a bona fide purchaser will ... be determined by federal law."); see generally Griffith v. United States (In re Griffith), 206 F.3d 1389, 1392 (11th Cir.2000) (en banc) ("In interpreting the language of a statute, we generally give the words used their ordinary meaning." (quoting Moskal v. United States, 498 U.S. 103, 108, 111 S.Ct. 461, 465, 112 L.Ed.2d 449 (1990)) (internal quotation marks omitted)). The common, ordinary meaning of a "bona fide purchaser" is "[o]ne who buys something for value without notice of another's claim to the property and without actual or constructive notice of any defects in or infirmities, claims, or equities against the seller's title; one who has in good faith paid valuable consideration for property without notice of prior adverse claims." Black's Law Dictionary 1271 (8th ed.1999).

Whether an event is enough to put a purchaser on notice so that a bona fide purchaser "cannot acquire an interest that is superior to the interest of the transferee" is determined, the statute tells us by "applicable law," 11 U.S.C. § 547(e)(1)(A), which is to say the law of the state where the property is located. See Gen. Motors Acceptance Corp. v....