Opinion ID: 2976728
Heading Depth: 5
Heading Rank: 2

Heading: 10 days after such transfer takes effect

Text: between the transferor and the transferee. (3) For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred. 11 U.S.C. § 547(e) (2004). In examining the rationale behind § 547(e), we return briefly to § 547(b), specifically § 547(b)(2), under which a 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.” 11 U.S.C. § 547(b)(2). A debt is antecedent if it is incurred before the transfer in question. See 5 Collier on Bankruptcy ¶547.03[4]. In the context of a loan, the borrower incurs the debt at the time the lender disburses the loan proceeds. See, e.g., Spradlin v. Inez Deposit Bank (In re Lowe), 92 F. App’x 129, 132 (6th Cir. 2003); Burks v. Mortgage Elec. Registration Sys. (In re Pendergrass), 365 B.R. 833, 834 (Bankr. S.D. Ohio 2007). 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.” Superior Bank, FSB v. Boyd (In re Lewis), 398 F.3d 735, 746 (6th Cir. 2005). Such transfers are subject to preferential transfer liability. Under this scenario, a borrower who later becomes a debtor incurs an antecedent and, at the time the mortgage is recorded, a transfer occurs for or on account of the debt that could be challenged as preferential by a trustee. Section 547(e) addresses this potential problem for lenders by providing a grace period for2 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. See In re Arnett, 731 F.2d at 364. 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. Id. Section 547(e) also supplements the Bankruptcy Code’s general definition of “transfer,” which is codified at § 101(54).3 See Barnhill v. Johnson, 503 U.S. 393, 397 (1992) (“Our task, then, is to determine [when], under the definition of transfer provided by § 101(54), and supplemented by § 547(e), the transfer that the trustee seeks to avoid can be said to have occurred.”). As the statute so states, § 547(e) defines when a transfer occurs for purposes of analyzing the avoidability of an alleged preferential transfer. Such a “ transfer in real property is deemed to have taken place ‘at the time the transfer is perfected,’ if the perfection occurred outside of the ten day window.” In re Lewis, 398 F.3d at 748 (Carr, J., concurring) (quoting 11 U.S.C. § 547(e)(2)(B)).4 2 BAPCPA increased the grace period from 10 days to 30 days. The New Mortgage was recorded well outside even the new 30-day grace period and, thus, the result would be the same under either version of the law. 3 Prior to BAPCPA, “transfer” was defined as “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) (amended 2005). Under BAPCPA, the definition of “transfer” is substantially the same, but was amended to expressly include “the creation of a lien,” “the retention of title as a security interest” and “the foreclosure of a debtor’s equity of redemption.” 11 U.S.C. § 101(54). 4 In In re Lewis, the Chapter 7 trustee sought to avoid as a preferential transfer a mortgage the debtor had granted a bank in connection with the debtor’s refinancing of a prior mortgage. The new mortgage was recorded several months after the refinancing and less than 90 days before the debtor filed a bankruptcy petition. 398 F.3d at 738. Under No. 06-1538 In re Lee Page 7 Applying § 547(e) to the facts of this case, we first note that the Debtor incurred his obligation under the New Loan when Chase disbursed the loan proceeds on October 6, 2003. Next, we must determine when the New Mortgage was perfected and whether the perfection occurred within pre-BAPCPA’s 10-day grace period. Under § 547(e)(1)(A), the New Mortgage was perfected “when a bona fide purchaser of [the 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.” Here, the “applicable law” referenced in § 547(e)(1)(A) is the law of Michigan. Under Michigan law, perfection occurs upon recording. See Mich. Comp. Laws Ann. § 565.29 (2007). Therefore, a bona fide purchaser of the Property from the Debtor could have acquired an interest superior to the interest of Chase up until the date that the New Mortgage was recorded. It is undisputed that the New Mortgage was recorded on December 17, 2003, which was 72 days after the loan proceeds were disbursed—well outside the 10-day grace period. As a result, under § 547(e)(2)(B), a transfer of the Debtor’s interest in the Property occurred “at the time such transfer [was] perfected,” on December 17, 2003, and was accordingly made on account of an antecedent debt. Arguing against this result, Chase relies on the undisputed fact that the Discharge was recorded after the New Mortgage was recorded. According to Chase, at all relevant times third parties were on notice of Chase’s secured interest in the Property. But the fact that third parties may have been on notice of Chase’s Original Mortgage is beside the point. A transfer of an interest in real estate is not necessarily perfected for purposes of § 547(e) when third parties have notice that there had been a mortgage on the property. Rather, a transfer 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 the5 transferee.” 11 U.S.C. § 547(e)(1)(A) (emphasis added). In a case involving § 547(e)(1)(B), which, like § 547(e)(1)(A), incorporates the words “when” and “cannot acquire,” the Supreme Court held that: “When” and “cannot acquire” are ostensibly straightforward references to time and action in the real world . . . A creditor “can” acquire such a lien at any time until the secured party performs the acts sufficient to perfect its interest. . . . Not until the secured party actually performs the final act that will perfect its interest can other creditors be foreclosed conclusively from obtaining a superior lien. It is only then that they “cannot” acquire such a lien. Thus, the terms of § 547(e)(1)(B) apparently imply that a transfer is “perfected” only when the secured party has done all the acts required to perfect its interest . . . . these circumstances, we held that the recording constituted a transfer for purposes of § 547 and affirmed the summary judgment entered in favor of the trustee avoiding the bank’s mortgage. Id. at 746-48. See also In re Arnett, 731 F.2d at 363 (“Section 547(e)(2)(A) and (B) . . . provid[e] that a transfer of a security interest relates back to the date of the underlying transaction if perfection occurs no more than 10 days afterwards; if perfection occurs more than 10 days later, the transfer is deemed to occur at the date of perfection.”). 5 Section 547(e)(1)(B) deals with transfers of personal property and fixtures, while § 547(e)(1)(A) governs transfers of real property. Section 547(e)(1)(B) states: (e)(1) For the purposes of this section— (B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. 11 U.S.C. § 547(e)(1)(B). No. 06-1538 In re Lee Page 8 Fidelity Fin. Servs., Inc. v. Fink, 522 U.S. 211, 216 (1998).6 As discussed above, under Michigan law, a lender whose claim is secured by a mortgage on real property has “perform[ed] the final act that will perfect its interest,” Fink, 522 U.S. at 216, only when that interest is recorded. The fact that the Discharge was not recorded until after the recording of the New Mortgage is of no moment. There was no debt to be secured under the Original Mortgage once the Original Loan was paid. Even if the Discharge was not timely recorded by the Register of Deeds (and it was not), there was no debt and a bona-fide purchaser could have relied on the fact that the Original Mortgage had been released when the Original Loan was paid. Thus, it was not until the New Mortgage was recorded that a bona-fide purchaser was “foreclosed conclusively” from obtaining a superior interest in the Property. Fink, 522 U.S. at 216. Under § 547(e)(2), if Chase had taken steps to ensure that the New Mortgage was perfected within 10 days of the Debtor’s granting it, the date on which the transfer would have been considered made would have been October 6, 2003—the date that the transfer “[took] effect between the transferor and the transferee.” If Chase had done so, the New Mortgage would not have been for or on account of an antecedent debt. The New Mortgage, however, was recorded 72 days after the Debtor gave Chase the mortgage and thus constituted a transfer for or on account of an antecedent debt. Therefore the date the transfer was made is December 17, 2003.