In re King, No. 07-8045 (B.A.P. 6th Cir. 8/20/2008)
| Decision Date | 20 August 2008 |
| Docket Number | No. 07-8045,07-8045 |
| Parties | In re: RONALD CHRISTOPHER KING and SHERIL LINN KING, Debtors. MICHAEL L. BAKER, Trustee in Bankruptcy, Plaintiff-Appellee, v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., ENCORE CREDIT CORP., and OPTION ONE MORTGAGE CORP., Defendants-Appellants. |
| Court | U.S. Bankruptcy Appellate Panel, Sixth Circuit |
Appeal from the United States Bankruptcy Court for the Eastern District of Kentucky, at Covington. Case No. 05-24988; Adv. Pro No. 06-2093
ARGUED: Norman J. Frankowski II, FLAGEL & PAPAKIRK, Cincinnati, Ohio, for Appellants. Debra S. Pleatman, ZIEGLER & SCHNEIDER, Covington, Kentucky, for Appellee.
ON BRIEF: Norman J. Frankowski II, FLAGEL & PAPAKIRK, Cincinnati, Ohio, for Appellants. Debra S. Pleatman, Michael Burris Baker, ZIEGLER & SCHNEIDER, Covington, Kentucky, for Appellee.
Before: FULTON, PARSONS, and SHEA-STONUM, Bankruptcy Appellate Panel Judges.
In this appeal we address an issue recently decided by the Sixth Circuit Court of Appeals in Chase Manhattan Mortgage Corp v. Shapiro (In re Lee), 530 F.3d 458 (6th Cir. 2008): that a late-perfecting secured creditor in the context of a refinanced mortgage is not protected from preference liability by either the earmarking doctrine or the no-diminution-of-the-estate argument. Finding no determinative factual distinction between Lee and the instant case, we AFFIRM the bankruptcy court's order granting judgment for the bankruptcy trustee in this preference action. In reaching this conclusion, we reject the Appellants' argument that the preferential transfer was excepted from avoidance by the contemporaneous exchange defense of 11 U.S.C. § 547(c)(1). Although this issue was not raised or addressed in Lee, our ruling is controlled by the Sixth Circuit's earlier decision in Ray v. Security Mutual Finance Corp. (In re Arnett), 731 F.2d 358, 360 (6th Cir. 1984).
1. In a refinancing where one secured creditor is substituted for another such that there is arguably no diminution of the estate, does the earmarking doctrine bar the avoidance of a mortgage perfected outside of the 10-day grace period in 11 U.S.C. § 547(e)?
2. Notwithstanding the failure to perfect within 10 days, is avoidance excepted by the contemporaneous exchange defense of 11 U.S.C. § 547(c)(1)?
The Bankruptcy Appellate Panel for the Sixth Circuit (the "Panel") has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and neither party elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A bankruptcy court's final order may be appealed as of right. 28 U.S.C. § 158(a)(1). An order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The bankruptcy court's order granting the trustee's motion for summary judgment is a final order.
On summary judgment, determinations of whether payments are preferential transfers under 11 U.S.C. § 547(b) are conclusions of law reviewed de novo. Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.) 323 F.3d 439, 442 (6th Cir. 2003). "De novo means the appellate court determines the law independently of the trial court's determination." Treinish v. Norwest Bank Minn., NA. (In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir. 2001). "No deference is given to the trial court's conclusions of law." Booher Enters. v. Eastown Auto Co. (In re Eastown Auto Co.), 215 B.R. 960, 964 (B.A.P. 6th Cir. 1998).
In August 2004, Ronald and Sheril King ("Debtors") purchased a home in Independence, Kentucky. In order to finance the purchase, the Debtors borrowed from Homecomings Financial and Wilshire Credit Corporation, granting mortgages in favor of both which were duly recorded on September 30, 2004 ("Original Mortgages").
Less than a year later, the Debtors refinanced their Original Mortgages by obtaining a new loan from Encore Credit Corp. ("Encore") on July 22, 2005, in the amount of $138,600, a sum sufficient to pay off the Original Mortgages and the closing costs on the new loan. That same day, the Debtors executed a mortgage in favor of Mortgage Electronic Registration Systems, Inc. ("MERS"), as nominee for Encore ("New Mortgage"))1 The funds to pay off the two Original Mortgages were advanced on July 28, 2005, but MERS did not record the New Mortgage until August 26, 2005.
Less than 90 days later on October 16, 2005,2 the Debtors filed a voluntary petition for relief under chapter 7. On November 9, 2006, the chapter 7 trustee, Michael Baker ("Trustee"), commenced this adversary proceeding, asserting that the New Mortgage was avoidable as a preferential transfer under § 547 because it had been recorded more than 10 days after it was executed by the Debtors and less than 90 days before the filing of the bankruptcy petition. Both parties moved for summary judgment, agreeing that no facts were in dispute and that the only legal issues were application of the earmarking doctrine and the contemporaneous exchange defense. Rejecting these arguments, the bankruptcy court granted summary judgment for the Trustee, finding the New Mortgage to be avoidable. The Appellants timely filed this appeal.
Under § 547 of the Bankruptcy Code, a trustee may avoid certain transfers made to creditors within 90 days prior to the commencement of the bankruptcy case. The elements of a preferential transfer are set forth in § 547(b), which states:
Except as provided in subsections (c) and (i) 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.
"All five elements are prerequisites to the finding of a voidable preference." In re Arnett, 731 F.2d at 360.
As noted, this preference statute, as well as the earmarking doctrine, was recently considered by the Sixth Circuit Court of Appeals in Lee, a case with very similar facts to the instant case. In Lee, the debtor purchased a residence in Michigan, with the purchase financed by a mortgage loan and secured by a recorded mortgage on the realty. Chase Mortgage Company ("Chase") eventually became the holder of the loan note and the mortgage. Approximately six months before the debtor's bankruptcy filing, the debtor refinanced his residential mortgage loan with Chase. On October 6, 2003, Chase disbursed the new loan proceeds to pay off the earlier loan held by it, but the new mortgage granted Chase was not recorded until December 17, 2003, 72 days later. The debtor filed for bankruptcy relief under chapter 7 on March 4, 2004, 77 days after the recording of Chase's new mortgage. The chapter 7 trustee sought to avoid the new mortgage granted Chase as a preferential transfer under § 547(b). The bankruptcy court granted summary judgment for the trustee, finding that the trustee had met his burden on all elements under § 547(b) and that the earmarking doctrine did not apply. Chase Manhattan Mortgage Corp v. Shapiro (In re Lee), 326 B.R. 704, 708 (Bankr. E.D. Mich. 2005), rev'd 339 B.R. 165 (E.D. Mich. 2006). Although the district court reversed, the court of appeals reinstated the bankruptcy court's judgment in favor of the trustee. In re Lee, 530 F.3d 458.
As in the instant case, the preference defendant in Lee, Chase, did not dispute that the trustee had established the elements of an avoidable preference set forth in subsections (b)(1), (b)(3) and (b)(4) of § 547. Id. at 467. The court of appeals explained that under subsection (b)(2), the trustee must demonstrate that the transfer was made "for or on account of an antecedent debt owed by the debtor before such transfer was made." Id. at 464 (quoting § 547(b)(2)).
A debt is antecedent if it is incurred before the transfer in question. In the context of a loan, the borrower incurs the debt at the time the lender disburses the loan proceeds. Therefore, lenders who advance loan proceeds prior to the recording of the mortgage are undertaking a transfer of an interest in the subject property for purposes of § 547. Such transfers are subject to preferential transfer liability.
Id. at 464-65 (internal citations and quotations omitted).
The court of appeals noted that this potential problem for lenders is addressed by § 547(e) of the Code by providing a grace period for perfecting a security interest.
As long as the mortgage is recorded within the 10-day time period, the associated mortgage debt will not be deemed antecedent. On the other hand if perfection occurs more than ten days after the transfer takes effect, the transfer occurs at the time of the perfection, and the debt thus will be an antecedent one."3
Id. at 465 (internal citations and footnote omitted).4 Under Michigan law, perfection occurs upon recording.5 Because Chase's new mortgage was recorded 72 days after the loan proceeds were disbursed, well outside the 10-day grace period, the transfer was made on account of an antecedent debt. Id. at 466.
The Lee court...
To continue reading
Request your trial