In re Schmiel, Bankruptcy No. 03-66533-PJS.
Decision Date | 20 January 2005 |
Docket Number | Adversary No. 04-4023.,Bankruptcy No. 03-66533-PJS. |
Citation | 319 B.R. 520 |
Parties | In the matter of Richard Alan SCHMIEL and Lynn Marie Schmiel, Debtors. Stuart A. Gold, Trustee, Plaintiff, v. Interstate Financial Corporation, Defendant. |
Court | U.S. Bankruptcy Court — Eastern District of Michigan |
COPYRIGHT MATERIAL OMITTED
Stuart A. Gold Law Offices of Gold & Lang, Southfield, MI, trustee.
Robert W. Lee, Harrison Township, MI, for debtors.
OPINION DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
The Trustee in this chapter 7 case seeks to avoid a mortgage given by the Debtors to Defendant Interstate Financial Corp. ("Interstate") as a preferential transfer under 11 U.S.C. § 547(b). The parties agree on the following relevant facts. On April 25, 2003, the Debtors refinanced the mortgage on their residence located at 1073 Truwood, Rochester Hills, Michigan by obtaining a mortgage loan from Interstate. The prior mortgage was held by Wells Fargo Home Mortgage, Inc. ("Wells Fargo"). The new mortgage was granted to Interstate to secure the payment of $151,945. On April 30, 2003, Craig Helmer, an employee of Wilson Title Company, delivered the mortgage to the Oakland County Register of Deeds. That same day, the title company wire transferred $150,100.88 to pay off the Wells Fargo mortgage. Despite the fact that the new mortgage was delivered to Oakland County on April 30, 2003, it was not recorded by the Oakland County Register of Deeds until July 30, 2003, ninety-six days after the April 25, 2003 closing. The Debtors filed their chapter 7 petition on September 26, 2003, and Stuart A. Gold was appointed as the trustee.
Because Interstate recorded its mortgage within the 90-day preference period under 11 U.S.C. § 547, the Trustee seeks to avoid it. Interstate filed a motion for summary judgment based solely on its assertion that, under the "earmarking doctrine," there was no preferential transfer because the Interstate loan proceeds were earmarked to pay the antecedent debt owed to Wells Fargo. Although Interstate also contends that it has other defenses to the Trustee's complaint (including an argument that its mortgage should be "deemed" recorded upon delivery of the mortgage to the Oakland County Register of Deeds), Interstate's motion is brought only on application of the "earmarking doctrine". A hearing on the Trustee's motion was held on January 7, 2005 at which time the Court took the matter under advisement. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(F) and (K).
Federal Rule of Civil Procedure 56(c) for summary judgment is incorporated into Federal Rule of Bankruptcy Procedure 7056(c). Summary judgment is only appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48, 106 S.Ct. 2505. A "genuine" issue is one where no reasonable factfinder could return a judgment in favor of the non-moving party. Berryman v. Rieger, 150 F.3d 561, 566 (6th Cir.1998) (citing Anderson, 447 U.S. at 248, 100 S.Ct. 2124). The parties having agreed to all material facts, this matter is ripe for summary judgment.
In order to prevail in its action against Interstate, the Trustee must prove each of the following elements under § 547(b):
11 U.S.C. § 547(b).
Interstate's motion asserts that the Trustee, as a matter of law, cannot prove a necessary element of § 547(b)—that there was a "transfer of an interest of the debtor in property" to Interstate. In paragraph 11 of the Trustee's amended complaint (Docket No. 3), the Trustee defines "the transfer" in this action as the July 30, 2003 recording of Interstate's mortgage with the Oakland County Register of Deeds. (Amended Compl. ¶ 11 ().) A more accurate definition of "the transfer" would be the granting of the mortgage by the Debtors to Interstate.1
Section 101 of the Bankruptcy Code contains definitions of various terms used in the Bankruptcy Code. Section 101(54) defines a transfer as follows:
"transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption ....
11 U.S.C. § 101(54). Accordingly, the transfer must be of an interest in property. "A mortgage is an interest in land created by a written instrument providing security for the performance of a duty or the payment of a debt." Black's Law Dictionary at 911 (5th ed.1979); see also In re Van Duzer, 390 Mich. 571, 213 N.W.2d 167, 170 (1973) ( ). When the Debtors granted Interstate a mortgage on the Truwood property, they transferred an interest in that property to Interstate. Therefore, there were two transfers of property in this case: the payment of funds to Wells Fargo and the grant of the mortgage to Interstate. It is the second transfer that the Trustee seeks to avoid.2
11 U.S.C. § 547(e)(2). Section 547(e)(1)(A) addresses when perfection occurs with respect to real property:
A transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, 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 ....
11 U.S.C. § 547(e)(1)(A). In Michigan, perfection occurs upon recording. See Mich. Comp. Laws Ann. § 565.29 (West 1988) ().
In this case, the Oakland County Register of Deeds indisputably recorded Interstate's mortgage on July 30, 2003.3 That is the date of perfection under § 547(e)(1)(A). That date is more than ten days after the transfer took effect between the Debtors and Wells Fargo on April 25, 2003. Therefore, for purposes of § 547(b), the transfer of the mortgage lien to Interstate is deemed to have occurred on July 30, 2003 pursuant to § 547(e)(2)(B), even though the Debtors granted Interstate the mortgage lien on April 25, 2003. The perfection of the mortgage on that date fixes the date of the transfer to Interstate, which is now within the 90-day perfection period and subject to avoidance by the Trustee.
Interstate argues that the "earmarking doctrine" precludes a finding of a preferential transfer to it. Interstate asserts that the earmarking doctrine is applicable to this case because the Interstate mortgage was used to pay off the existing Wells Fargo mortgage, the Debtors never had control over the funds, and the Debtors' bankruptcy estate was not diminished. The earmarking doctrine has been described as a judicially created exception to § 547(b). See Buckley v. Jeld-Wen, Inc. (In re Interior Wood Products Co.), 986 F.2d 228, 231 (8th Cir.1993). It is probably more accurate to say that it represents a judicial recognition of the proposition of law that there cannot be a preferential transfer under § 547(b) in an earmarking situation because the so-called earmarked funds are not property of the debtor, as is required by § 547(b). Under the doctrine, if a third party provides funds for the specific purpose of paying a creditor of the debtor, the funds may not be recoverable as a preferential transfer because the proceeds never become part of the debtor's assets.
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