United States Court of Appeals

For the First Circuit

No. 06-1982

IN RE: CHRISTINE H. LAZARUS,

Debtor.

__________

JOSEPH B. COLLINS, TRUSTEE IN BANKRUPTCY OF CHRISTINE H. LAZARUS,

Appellant,

v.

GREATER ATLANTIC MORTGAGE CORPORATION and

 MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.,

Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Michael A. Ponsor, U.S. District Judge]

Before

 Boudin, Chief Judge,

Torruella and Lynch, Circuit Judges.

Steven A. Munson with whom Hendel & Collins, P.C. was on brief

for appellant.

Jennifer Rood with whom Bernstein Shur was on brief for

appellees.

January 9, 2007
GAMC was represented in the papers by its agent, Mortgage 1

Electronic Registration Systems, Inc. ("MERS"), but it simplifies

the discussion to treat GAMC as the affected party.

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BOUDIN, Chief Judge. On August 17, 2001, Christine

Lazarus and her sister purchased real property in Springfield,

Massachusetts--Lazarus' residence--as joint tenants, taking out a

loan secured by a mortgage from Washington Mutual. In a

refinancing on June 22, 2004, both sisters executed a promissory

note, and a mortgage on the property to secure the note, in favor

of Greater Atlantic Mortgage Corporation ("GAMC").1

On July 1, 2004, GAMC paid the funds generated by the

note, in the amount of just over $96,000, to Washington Mutual to

discharge the latter's loan to the sisters and terminate the

latter's mortgage interest. The new mortgage was recorded on July

15, 2004, in the county registry of deeds. The discharge of the

Washington Mutual mortgage was recorded on August 3, 2004. On

September 29, 2004, Lazarus filed for chapter 7 bankruptcy.

In January 2005, the trustee in the Lazarus bankruptcy

case sought to avoid the GAMC mortgage on the ground that it

constituted a preferential transfer of Lazarus' property made

within the 90-day period preceding the filing of the bankruptcy

petition. Under section 547(b) of the Bankruptcy Code, 11 U.S.C.

§ 547(b) (2000): 

[T]he trustee may avoid any transfer of

an interest of the debtor in property–-
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(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) . . . 

(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.

On cross motions for summary judgment, the bankruptcy

judge declined to set aside the mortgage. In re Lazarus, 334 B.R.

542, 553-54 (Bankr. D. Mass. 2005). The judge said that no

creditor could have been prejudiced by GAMC's delay in perfecting

its mortgage because Washington Mutual left its mortgage "on the

books" until after GAMC had recorded its mortgage; thus, the

property never appeared to be unencumbered. The district court

affirmed with a short opinion adopting the reasoning of the

bankruptcy judge.

On this appeal, the trustee claims that the mortgage

should have been set aside, making the secured property or at least
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Lazarus' interest in it–-other than any exempted interest-

–available to all creditors. The issues, matters of law that we

review de novo, In re DN Assocs., 3 F.3d 512, 515 (1st Cir. 1993),

are two: whether there was a preferential transfer under section

547(b) and, if so, whether it was rescued from avoidance by section

547(c), which provides exceptions to section 547(b).

The dispute as to section 547(b) is narrowed by agreement

that the allegedly preferential transfer was of "an interest in

property" (the new mortgage); that it was "to or for the benefit of

a creditor" (GAMC); that the Lazarus note was an "antecedent debt";

that the transfer was made while Lazarus was "insolvent"; and that

it was made within 90 days of Lazarus' later bankruptcy filing.

Further, unless avoided, the mortgage would give GAMC "more than it

would receive" as a general creditor.

GAMC purports to dispute this last proposition by saying

that it would not have made the loan without the mortgage and so no

general creditor was made worse off by the refinancing. This is a

different issue–-a claim of no prejudice–-to which we will return.

But the fact remains that recognizing the mortgage would give GAMC

"more than it would receive" without it, which is why it is

fighting to retain the mortgage. 

GAMC's concession that the note was for an antecedent

debt requires somewhat more explanation. Although the note and

mortgage were executed and apparently delivered to GAMC on the same
After the events in this case, the time period was extended 2

by Congress to 30 days, but the amendment has no effect on this

case. Bankruptcy Abuse Prevention and Consumer Protection Act of

2005, Pub. L. No. 109-8, § 403 (codified at 11 U.S.C. § 547(e)(2)).

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day, section 547(e) provides that for real property (with an

exception not here relevant), a "transfer is made" when it occurs

only if the transfer is perfected within 10 days of the actual

transfer; otherwise it is deemed made only "at the time such

transfer is perfected." 11 U.S.C. § 547(e)(2)(A), (B).2

Perfection, in this case, required the filing of the

mortgage with the local registry of deeds. Because this filing

occurred 14 days after the initial transfer of funds, section

547(e) requires that the transfer be deemed to have occurred on the

date of perfection. The mortgage, therefore, secured a debt

antecedent to the transfer rather than simultaneous with it. GAMC

does not dispute this reading of the statute.

What GAMC does seriously dispute is that the transferred

property interest was that "of the debtor." This might seem an odd

position–-after all, Lazarus did grant a mortgage interest in favor

of GAMC in property she co-owned. However, GAMC relies on the socalled "earmarking doctrine" in contending that the transfer ought

to be viewed in substance as a transfer of the mortgage from

Washington Mutual to GAMC.

Where funds received by the debtor are "earmarked" for

another, courts have sometimes held that the funds are not "really"
E.g., In re Superior Stamp & Coin Co., 223 F.3d at 1010; 3

Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356

(5th Cir. 1986). Other circuits have recognized the doctrine.

E.g., In re Kumar Bavishi & Assocs., 906 F.2d 942, 944 (3d Cir.

1990); In re Montgomery, 983 F.2d 1389, 1395 (6th Cir. 1993); In re

Kelton Motors, Inc., 97 F.3d 22, 27 (2d Cir. 1996); In re Bohlen

Enters. Ltd., 859 F.2d 561, 566 (8th Cir. 1988) (recognizing, but

expressing doubts). The decisions require that the new creditor

have an agreement with the debtor to pay off a particular creditor.

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the debtor's property so that the retransfer to the final recipient

is not a preference under section 547(b). E.g., In re Superior

Stamp & Coin Co., 223 F.3d 1004, 1010 (9th Cir. 2000). In the

classic case, one who has guaranteed a debt of the debtor gives the

debtor the funds to pay off the creditor and the debtor does so but

then goes bankrupt shortly thereafter.

Under the earmarking approach, courts view the funds as

transferred by the guarantor to the creditor through, but not by,

the debtor. If the earmarked funds were treated as those of the

debtor, the guarantor's payment could often be recaptured from the

original creditor as an avoidable preference and the guarantor

would then have to pay twice. Further, the earmarking approach

leaves the estate no worse off than it would have been if the

guarantor had advanced nothing to the debtor but paid off the debt

directly.

Most circuits who have spoken have extended this

earmarking concept to situations where a new creditor--not a

guarantor--advances funds to the debtor to pay off debts to other

creditors, substituting itself for the old creditor. In the 3
2 Collier on Bankruptcy ¶ 547.03, at 547-24 (15th ed. 2006). 

In this case, the trustee is not seeking to recover for the 4

estate loan proceeds paid on the debtor's behalf by the new lender

to the original lender--which would confront a number of obstacles-

-but only to address the grant of the new mortgage by the debtor to

the new lender.

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substitute creditor case, as with the guarantor example, the

earmarking doctrine relies on a conceptual view that the payment

passing through the debtor's hands is not his and that he is merely

a kind of bailee.

The bankruptcy judge in this case extended the earmarking

approach to the case before us, concluding that there was

effectively a transfer of a security interest from Washington

Mutual to GAMC without disadvantaging the estate. In re Lazarus,

334 B.R. at 553-54. But use of the earmarking doctrine in this

case is not conceptually similar to the guarantor or new creditor

cases where it could plausibly be argued that there was merely an

arrangement between third parties with no property transfer by the

debtor.

Rather, in refinancing there are multiple transactions,

including a new loan to the debtor, a mortgage back from the debtor

to the new lender, a pre-arranged use of the proceeds of the loan

to pay off the old loan and the release of the old mortgage. Thus,

new proceeds are generated, nominally for the benefit of the

debtor, and the debtor, by making a new mortgage, transfers a

property interest to the new lender.4
E.g., In re Messamore, 250 B.R. 913, 917 (Bankr. S.D. Ill. 5

2000); In re Shreves, 272 B.R. 614, 625 (Bankr. N.D. W. Va. 2001);

In re Schmiel, 319 B.R. 520, 528 (Bankr. E.D. Mich. 2005). See

generally Rogers, Applicability of the Earmarking Defense to a

Preference Action, 25 Am. Bankr. Inst. J. 20 (May 2006).

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Thus, in this case, Lazarus made a new mortgage in favor

of GAMC, probably on different terms than the original (or there

would have been no benefit to refinancing). Then, when GAMC paid

off Washington Mutual's loan, the latter released its own mortgage.

This did not transfer the old mortgage to GAMC; it merely meant

that GAMC's mortgage was now first in line rather than a

subordinate mortgage. The debtor did not act merely as a bailee

with the mortgage passing through her hands from Washington Mutual

to GAMC.

Thus, the earmarking concept does not provide GAMC an

escape from the plain language of section 547(b) in the case of a

belatedly-perfected transfer of a security interest. Although one

circuit supports the bankruptcy judge's use of the earmarking

doctrine in a like case, In re Heitkamp, 137 F.3d 1087, 1089 (8th

Cir. 1998); see also In re Lee, 339 B.R. 165, 170 (E.D. Mich.

2006), this approach has been justly opposed on the ground that it

amounts to ignoring the statutory language. To avoid the 5

statutory language, GAMC resorts to the underlying policy arguments

ably argued by GAMC's counsel.

GAMC's first point in response is that although formally

the mortgage was given for an antecedent debt, the preexisting
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creditors would be in about the same position if no refinancing had

occurred. Nor is there any indication that any new creditor lent

money, during the refinancing, believing that the Washington Mutual

mortgage had been released; indeed, as the bankruptcy judge noted,

the old mortgage was discharged but the discharge was itself not

timely recorded.

Conversely, if the transaction is deemed an avoidable

preference, GAMC will still hold the unpaid note but GAMC seemingly

will lose its status as a secured creditor of Lazarus vis à vis the

other creditors. This may, or may not, be as bad as a guarantor

having to pay twice; but it is certainly a penalty. But the

penalty is not without a general benefit–-pour encourager les

autres–-and is easily avoided by recording within 10 days as the

statute directed.

Probably other creditors were not prejudiced in this

instance; but the formal requirements of section 547 were designed

to work mechanically, avoiding the necessity of demonstrating

prejudice. The Code lays down formal requirements with substantive

consequences. The litigation in this case is one of the costs of

ignoring the statute; the costs would be greatly multiplied if in

each instance inquiry had to be made as to whether or not prejudice

had occurred. 

The avoidable preference provision first appeared in the

1898 Code, framed in general terms. A preference was created when
The grace period was added in response to concerns (well- 6

founded or not) that courts would strictly interpret the concept of

"antecedent debt" without consideration of the necessary lag

between transfer and recording. Morris, Bankruptcy Law Reform:

Preferences, Secret Liens and Floating Liens, 54 Minn. L. Rev. 737,

750-51 (1970)

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an insolvent debtor made a transfer within four months of filing

that enabled a creditor to obtain more than the other creditors in

his class. Act of July 1, 1898, ch. 541, § 60, 30 Stat. 544, 562.

Then, after an abortive experiment in 1903, Act of Feb. 5, 1903,

ch. 487, § 13, 32 Stat. 797, 799-800, Congress in 1910 introduced

into the section what was effectively a recording requirement for

mortgages, albeit without a grace period. Act of June 25, 1910,

ch. 412, § 11, 36 Stat. 840, 842.

In 1938, through the Chandler Act, Congress introduced a

more detailed definition of preference, Act of June 22, 1938, ch.

575, § 60, 52 Stat. 840, 869, and in 1950, a 21-day grace period

for perfection was added. Act of Mar. 18, 1950, ch. 70, § 1, 64 6

Stat. 24, 26. The legislative history reveals that this last was

designed to create "an appropriately rigid time limitation." H.R.

Rep. No. 81-1293 (1949). Then, in 1978, the then-new Bankruptcy

Code reduced the time limit for perfection to 10 days, as it

remained during the transactions in this case. Bankruptcy Reform

Act of 1978, Pub. L. No. 109-279, § 547(e)(2).

It is one thing to impose a gloss on the statute, such as

the earmarking doctrine, that achieves formal compliance with the
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statute to rescue a transaction where no prejudice occurred. It is

another to make lack of prejudice itself a substitute for formal

compliance. The history of section 547 just recounted is of

amendments that try to make the statute self-executing to avoid

uncertainty and litigation costs; we will not undo that effort.

GAMC suggests an alternative route to the bankruptcy

judge's outcome. Section 547(b) is itself subject to exceptions

set forth in section 547(c). In particular, section 547(c)(1)

excludes an otherwise avoidable transfer

to the extent that such transfer was—-

(A) intended by the debtor and the creditor to

or for whose benefit such transfer was made to

be a contemporaneous exchange for new value

given to the debtor; and

(B) in fact a substantially contemporaneous

exchange.

The first of these two requirements is arguably

satisfied. The transfer being attacked--Lazarus' grant of a

mortgage to GAMC–-was intended to be a contemporaneous exchange for

new value given to the debtor, namely, the loan to Lazarus from

GAMC used to pay off Lazarus' debt to Washington Mutual. The

question, then, is whether under subsection (B) the exchange was in

fact "substantially contemporaneous."

Because of the failure to perfect within 10 days, we must

(under section 547(e)(2)(B)) treat the property transfer as

occurring on recordation on July 15, 2004; because the debt arose
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earlier–-either on June 22 (when the note was signed) or July 1

(when the funds were disbursed)--it is antecedent but by only two

or three weeks. GAMC says that this is contemporaneous enough; the

trustee, that the 10-day period specified in section 547(e)(2)

should control.

GAMC's plight, although of its own making, invites some

sympathy, especially because there probably was no prejudice to

creditors. At first blush the phrasing of section 547(c)(1)--the

contemporaneous requirement--looks as if it affords us flexibility.

However, the seeming flexibility is deceptive. We conclude that to

expand the 10-day limitation would defy the governing canon of

construction and specifically undercut Congress' purpose. 

Section 547(c)(1) was aimed, as its legislative history

shows, at a generic problem: those on the verge of bankruptcy

still need to buy things (e.g., groceries or household items) and

the fact that checks are used (with a brief gap between purchase

and payment) ought not render the payment avoidable as one made for

an antecedent debt. H.R. Rep. No. 95-595, at 373 (1977).

By contrast, section 547(e)'s 10-day limit is directed

specifically to mortgages and applies even if the loan and mortgage

are exchanged simultaneously. Congress' concern, therefore, was

not with whether the exchange was simultaneous or nearly so, but

with getting the mortgage recorded within a reasonably brief and
In 1973, the Commission assisting Congress in drafting what 7

would become the 1978 Code, noted that "[o]ne of the essential

features of any bankruptcy law is the inclusion of provisions

designed to invalidate secret transfers." Transmitting a Report of

the Commission on the Bankruptcy Laws of the United States, at 18

(Sept. 6, 1973). See also Weisberg, Commercial Morality, the

Merchant Character, and the History of the Voidable Preference, 39

Stan. L. Rev. 3 (1986).

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predefined period. The aim was to combat secret liens and protect

those who might lend in ignorance of the mortgage.

The House Report on the 1910 amendment, which introduced

the modern perfection requirement, explained: "[A]s to other

creditors and the rest of the outer world, the 'transfer' is . . .

not a complete 'transfer' . . . at all until recording . . . .

[This is] the bottom principle of the right to legislate against

secret liens." H.R. Rep. No. 61-511, at 8 (1910). See generally

Morris, Bankruptcy Law Reform: Preferences, Secret Liens and

Floating Liens, 54 Minn. L. Rev. 737 (1970). 

7

True, the later 10-day grace period was an arbitrary

compromise--mechanical deadlines almost always are--and can result

in losing security even where no one was prejudiced. But such

deadlines have the benefit of being specific and avoiding

litigation about actual prejudice. This was the approach Congress

chose. To enlarge the 10-day deadline for secured interests is to

undo Congress' choice.

The cases on this precise issue are few and are divided.

One circuit has flatly rejected the attempt to use section
Compare In re Arnett, 731 F.2d 358, 364 (6th Cir. 1984), with 8

In re Dorholt Inc., 224 F.3d 871, 874 (8th Cir. 2000), and In re

Marino, 193 B.R. 907, 915 (B.A.P. 9th Cir. 1996), aff'd, 117 F.3d

1425 (9th Cir. 1997). Yet another circuit decided a similar issue

in the state insurance context (relying on interpretations of the

federal bankruptcy code), Pine Top Ins. Co. v. Bank of Am. Nat'l

Trust and Sav. Ass'n, 969 F.2d 321 (7th Cir. 1992), and its holding

has been expanded by other courts to federal bankruptcy. See In re

McLaughlin, 183 B.R. 171, 175 (Bankr. W.D. Wis. 1995). But see In

re Messamore, 250 B.R. at 920 & n.11 (noting that Pine Top might

not be controlling, but finding a failure to meet even this

flexible standard). In the context of section 547(c)(3), other

circuits have held that section 547(c)(1) cannot be used to give

more flexibility to the limitation given in section 547(c)(3).

See, e.g., In re Davis, 734 F.2d 604, 606-07 (11th Cir. 1984).

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547(c)(1) to extend the 10-day period, while another has allowed

such an extension, supported by a summary affirmance in another

circuit of such an extension by a bankruptcy appellate panel where

the delay in perfection was satisfactorily explained. But nothing 8

in the latter two cases does anything to answer our concern that

this is simply an end run around the 10-day limit and so a

disregard of Congress' specific intent.

In statutory construction, the more specific treatment

prevails over the general. United States v. Lara, 181 F.3d 183,

198 (1st Cir. 1999); Diaz v. Cobb, 435 F. Supp. 2d 1206, 1213 n.7

(S.D. Fla. 2006) (lex specialis derogat lex generalis). No direct

conflict is required: the rationale against applying a general

provision in this circumstance is to protect against "undermin[ing]

limitations created by a more specific provision." Varity Corp. v.

Howe, 516 U.S. 489, 511 (1996).
Seemingly two issues remain to be litigated. 11 U.S.C. § 9

550(a) states that "to the extent that a transfer is avoided under

section . . . 547 . . ., the trustee may recover, for the benefit

of the estate, the property transferred, or, if the court so

orders, the value of such property." In the bankruptcy court, the

trustee argued for the value of the mortgage to return to the

estate and GAMC argued for the mortgage itself to become property

of the estate. The second issue is that of the debtor's non-debtor

co-mortgagor and the effect her interest has on the avoidance of

the transfer.

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Our case illustrates this warning. Congress has been

laboring for many years to devise and refine a specific, largely

mechanical test to govern security interests in the context of

antecedent debt. The contemporaneousness test was added late in

the day to address a much broader generic problem--ordinary

exchange of goods for check or credit payment--where recording and

other perfection devices do not exist. The test was assuredly not

meant to override the specific 10-day requirement.

The judgment must be vacated and the case remanded for

further proceedings. The parties apparently disagree about the

consequences of triggering section 547(b); but those issues have

not been briefed to this court and must be litigated at the trial

level in the first instance. Each side will bear its own costs on 9

this appeal.

It is so ordered.