In re Schmiel

• Decision Date: 27 February 2007
• Docket Number: Adversary No. 04-4023.,Bankruptcy No. 03-66533.
• Citation: 362 B.R. 802
• Parties: In re 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

362 B.R. 802

In re Richard Alan SCHMIEL and Lynn Marie Schmiel, Debtors Stuart A. Gold, Trustee, Plaintiff, v. Interstate Financial Corporation, Defendant.

Bankruptcy No. 03-66533.

Adversary No. 04-4023.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

February 27, 2007.

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Robert W. Lee, Harrison Township, MI, for Debtors.

Stuart A. Gold, Gold, Lange & Majoros PC, Southfield, MI, for trustee.

Elias T. Majoros, Southfield, MI, for Plaintiff.

Darrin S. Elias, Oak Park, MI, Jessica B. Allmand, Myers & Allmand, PLLC, Brighton, MI, for Defendant.

OPINION REGARDING WHEN A MORTGAGE IS RECORDED UNDER MICHIGAN LAW IN ABSENCE OF THE MAINTENANCE OF AN "ENTRY BOOK"

PHILLIP J. SHEFFERLY, Bankruptcy Judge.

1. Introduction

This opinion addresses a legal issue that has arisen in this adversary proceeding and in numerous other adversary proceedings in the Bankruptcy Court. The issue is when a county register of deeds does not maintain an "entry book" as required by Michigan law, when, if ever, is a mortgage deemed "recorded"? For the reasons that follow, the Court concludes that even absent the maintenance of an entry book by a county register of deeds, under Michigan law a mortgage is recorded at the time that it is received by the county register of deeds for recording, provided that it is in recordable form when received and the statutory recording fee was paid when the mortgage was left for record. If those conditions are met, recording occurs upon receipt by the register of deeds even if there is no entry book and even if there is a delay in the review by the county register of deeds to determine whether the mortgage is in recordable form.

2. Jurisdiction

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).

3. Facts

The following facts are not in dispute in this case. Richard and Lynn Schmiel are the Debtors in this Chapter 7 case. Prior to the commencement of this case, they owned a residence located at 1073 Truwood, Rochester Hills, Michigan. On April 25, 2003, they refinanced the mortgage on their residence by obtaining a mortgage loan from Interstate Financial Corp. ("Interstate"). Proceeds from the refinancing paid off the existing mortgage on the residence held by Wells Fargo Home Mortgage, Inc. ("Wells Fargo"). (Def.'s Br., Exs. D, G (docket # 25).) The Debtors granted the new mortgage to Interstate to secure the payment of $151,945. (Def.'s Br., Ex. C. (docket # 25).) Wilson Title Company handled the mortgage closing for Interstate. On April 30, 2003, Craig Helmer, an employee of Wilson Title, delivered-the mortgage to the Oakland County Register of Deeds by dropping it in a "bin" at the Oakland County Register of Deeds office, along with four unrelated instruments. (Def.'s Br., Ex. E, Aff. of Craig Helmer ¶ 4 (docket # 25).) The Oakland County Register of Deeds did not make any notation on the mortgage to show the date and time that it was received by the Oakland County Register of Deeds. Check No. 3632, dated June 17, 2003, from Wilson Title to the Oakland County Register of Deeds for $169, included the fee for recording the mortgage. (Def.'s Br., Ex. D (docket # 58).) The Oakland County Register of Deeds deposited check No. 3632 on July 30, 2003. (Def.'s Br., Ex. F (docket # 25); Pl.'s Br., Ex. D (docket # 54).) The Oakland County Register of Deeds stamped the mortgage with a liber and page number on July 30, 2003, (Aff. of James H. VanLeuven, Jr., ¶ 3 (docket # 86); Compl. Ex. A), 96 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 in their Chapter 7 case.

The Trustee commenced this adversary proceeding by filing a "complaint to avoid preferential transfer." The complaint alleges that Interstate's mortgage was recorded by the Oakland County Register of Deeds on July 30, 2003, when the liber and page number were assigned, and that the recording constitutes a "transfer." (Compl. ¶ 9.) The complaint further alleges that because this transfer was made within 90 days before the Debtors' Chapter 7 petition date of September 26, 2003, the Trustee may avoid the mortgage under § 547(b) of the Bankruptcy Code because this transfer was made for the benefit of a creditor, on account of an antecedent debt, while the Debtors were insolvent, and that it enabled Interstate to receive more than it would have received in a case under Chapter 7. (Compl. ¶¶ 11-14.) Michigan recording law intersects federal bankruptcy law in this case because the Trustee's success depends on the date of the transfer, which in turn depends on when Interstate's mortgage was recorded under the Michigan recording statutes.

4. The Bankruptcy Issue

Resolution of the matter now before the Court first requires a review of the applicable provisions of the Bankruptcy Code that create the context for the issue of state law. The Trustee's complaint in this adversary proceeding is brought under § 547(b) of the Bankruptcy Code.¹ To prevail, the Trustee has the burden of proving all of the elements of a preferential transfer under § 547(b) of the Bankruptcy Code. 11 U.S.C. § 547(g); Lim v. Chase Home Finance, LLC (In re Comps), 334 B.R. 235, 238 (Bankr. E.D.Mich.2005) (citing Waldschmidt v. Ranier (In re Fulghum Construction Corp.), 706 F.2d 171, 172 (6th Cir.1983)). One of those elements is that the preferential transfer sought to be avoided must be "made [] on or within 90 days before the date of the filing of the petition...." 11 U.S.C. § 547(b)(4)(A).

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) (defining mortgage as "[a] conveyance of an interest in real estate to secure the performance of an obligation"). When the Debtors granted Interstate a mortgage on the Truwood property, they transferred an interest in that property to Interstate.

Because the Trustee must prove under § 547(b)(4)(A) that the transfer sought to be avoided was made within 90 days before the date of the bankruptcy petition, ascertaining the timing of an alleged preferential transfer is essential. The Bankruptcy Code provides guidance for determining when a transfer occurs. Pursuant to § 547(e)(2), a transfer is made

(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 10 days after, such time, except as provided in subsection (c)(3)(B);

(B) at the time such transfer is perfected, if such transfer is perfected after such 10 days; or

(C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of —

(i) the commencement of the case; or

(ii) 10 days after such transfer takes effect between the transferor and the transferee.

11 U.S.C. § 547(e)(2).² Under this section, the time a transfer is made turns upon perfection.

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).

Thus, the bankruptcy law issue in this case is when was Interstate's mortgage on the Truwood property perfected under Michigan real property law? If Interstate's mortgage was perfected before the 90-day preference period, the transfer is not subject to avoidance by the Trustee. On the other hand, if the mortgage was perfected within that period, § 547(b)(4)(A) has been met, and the mortgage may be avoided.

5. The Motions for Summary Judgment

Interstate filed a motion for summary judgment based on its assertion that the mortgage did not constitute a transfer of property of the Debtors under what is known as the "earmarking doctrine." The Court denied that motion on January 20 2005 in Gold v. Interstate Financial Corp. (In re Schmiel), 319 B.R. 520 (Bankr. E.D.Mich.2005) and concluded that the grant of the mortgage to Interstate by the Debtors was a transfer within the meaning of § 101(54) of the Bankruptcy Code. (For convenience, the Court will refer to this opinion as "Schmiel I.") Schmiel I specifically left open the merits of a second defense raised by Interstate in its answer to the complaint but which was not the basis for its first motion for summary judgment. That defense pertained to when the transfer to Interstate took place. More specifically, it focused on when its mortgage should be considered as recorded, and therefore perfected, under Michigan law. See Schmiel I, 319 B.R. at 525 n. 3 (expressly stating that its decision was "without prejudice to Interstate's argument that the mortgage should be `deemed recorded' upon presentation to the Register of Deeds").

Interstate then filed a second motion for summary judgment based on when the transfer of interest of the Debtors' property took place. The Trustee filed a cross motion for summary judgment regarding this issue. Although ...