Opinion ID: 789296
Heading Depth: 2
Heading Rank: 1

Heading: Preferential Transfer and Equitable Subrogation

Text: 58 The bankruptcy code allows a trustee in bankruptcy to avoid any transfer that is made ninety days prior to the date of the filing of the bankruptcy petition as being a preferential transfer. 11 U.S.C. § 547(b)(4)(A). Section 547(e)(2)(A) defines a transfer in real property as taking place when the transfer took place so long as the transfer is perfected within ten days. Otherwise, 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. 11 U.S.C. § 547(e)(2)(B) (emphasis added). 59 It is undisputed that Superior Bank did not perfect its security interest in the property until the recordation fell within the ninety-day period prior to the bankruptcy. Under the Bankruptcy Code, the transfer of the interest in property to Superior Bank was deemed to have occurred at the time of the perfection. Under the plain and unambiguous meaning of the bankruptcy code, the trustee in bankruptcy is allowed to avoid this transfer. However, Superior Bank argued that they should be equitably subrogated to Empire National Bank's mortgage, which was recorded prior to the start of the preferential transfer period. If Superior Bank's contention was correct, the trustee in bankruptcy's effort to avoid Superior Bank's interest would be thwarted. 60 Equitable subrogation is a legal fiction through which a person who pays a debt for which another is primarily responsible is substituted or subrogated to all the rights and remedies of the other. Hartford Accident & Indem. Co. v. The Used Car Factory, Inc., 461 Mich. 210, 600 N.W.2d 630, 632 (1999). Further, the subrogee must have some obligation to pay the debt of another and not be a mere volunteer. Id.; see also Lentz v. Stoflet, 280 Mich. 446, 273 N.W. 763, 764 (1937). 61 Most cases involving equitable subrogation involve some sort of contractual or insurance responsibility/relationship by one party to pay a third party. See In re Glade Springs, Inc., 826 F.2d 440 (6th Cir.1987) (applying Michigan law, holding a confirming bank contractually obligated to pay on a letter of credit could equitably subrogate to the rights of the party that should have been paid on the letter against the issuing bank); Commercial Union Ins. Co. v. Med. Protective Co., 426 Mich. 109, 393 N.W.2d 479 (1986) (excess insurer may be equitably subrogated to insured party — and be allowed to sue a primary insurer — when it pays a claim on behalf of an insured party that the primary insurer declined to pay; because the excess insurer was contractually bound to pay the debt of the insured party, they were a party for whom equitable subrogation was appropriate); Allstate Ins. Co. v. Snarski, 174 Mich.App. 148, 435 N.W.2d 408 (1988) (in an automobile accident, the insurance company that paid a claim to its own insured when the driver at fault's insurance company should have paid was properly equitably subrogated to their insured's claim against the at-fault driver). But see Robinson Trust, v. Ardmore Acres, Inc., 6 F.Supp.2d 640 (E.D.Mich.1998) (a good faith purchaser for value and without notice of an existing tax lien can subrogate to a senior lienholder and claim a priority over the federal tax lien). 1 62 The Supreme Court of Michigan applies a three part test to determine if a party is one which should be allowed to exercise equitable subrogation rights. See Hartford Accident, 600 N.W.2d at 633. The test is: 63 (1) a special relationship must exist between the client and the third party in which the potential for conflicts of interest is eliminated..., 64 (2) the third party must lack any other available legal remedy, and 65 (3) the third party must not be a mere volunteer, i.e., the damage must have been incurred as a consequence of the third party's fulfillment of a legal or equitable duty the third party owed to the client. 66 Id. The first part of this test is not in dispute. However, Superior Bank does not prevail on parts two and three. 67 As to part two of the test, Superior Bank had another legal remedy: if Superior Bank had perfected its security interest in time, or at least one day before the ninety-day preference period had begun, it would never have been in a situation where its security interest was avoidable. Superior Bank's legal remedy was timely recordation. We now should not allow Superior Bank to claim a right of equitable subrogation when it had an available — and easy to accomplish — legal remedy to protect itself. 68 As to part three of the test, Superior argued that, because it refinanced the debtor's prior loan, in essence paying a debt for which another is primarily responsible, it was not a mere volunteer, but rather the type of party that the Michigan equitable subrogation doctrine envisions. This is simply incorrect. Although Superior Bank eventually was bound to pay the loan to Empire, Superior Bank entered into this contract for its own pecuniary gain, thereby volunteering to pay the debt. Superior Bank was not an insurance company or surety, but rather a mortgage refinancer. Superior Bank did not pay Empire because a contractual provision between Empire and Superior Bank so required, but rather because it was part of the refinancing deal between itself and the debtor. 69 Even if Superior Bank was correct that equitable subrogation law says that, because it was contractually bound to pay the debtor's debt, it is a party that is properly equitably subrogated, Superior Bank would be subrogated to the rights of the debtor, and not to Empire. 2 Superior Bank cannot subrogate to Empire's security interest. Superior Bank was not contractually obligated by Empire to pay Empire. Superior Bank was contractually obligated by the debtor to pay Empire. The only party to whom FSB could possibly subrogate itself to is the debtor. 70 For the aforementioned reasons, I concur with the majority opinion. Superior Bank should not be equitably subrogated to Empire's rights and, therefore, its security interest was properly avoided.