Opinion ID: 1189483
Heading Depth: 3
Heading Rank: 4

Heading: Chase's Policy Argument

Text: Chase argues that imposing preference liability on it would be unfair and against public policy because the refinancing transaction involved a mere substitution of its New Mortgage for the Original Mortgage and ultimately benefitted the Debtor's other creditors, not Chase. According to Chase, the refinancing reduced the amount of the Debtor's monthly mortgage payments, causing more funds to be available for other creditors. Moreover, Chase argues, it derived no benefit from the refinancing transaction and should not be penalized for assisting the Debtor in his attempt to avoid bankruptcy. However, whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). See also Southmark Corp. v. Grosz (In re Southmark Corp.), 49 F.3d 1111, 1116 (5th Cir.1995) (Although § 105(a) of the Bankruptcy Code authorizes bankruptcy courts to fashion such orders as are necessary to further the substantive provisions of the Code, that provision does not ... empower bankruptcy courts ... to act as roving commissions to do equity.) (quotations omitted). The problems that arise when courts effectively rewrite bankruptcy statutes in order to reach a result deemed equitable are illustrated by the bankruptcy court's decision that was reversed by In re Lazarus. Apparently recognizing the potentially open-ended effect of its ruling, the bankruptcy court there stated that it was not holding that the earmarking doctrine necessarily applies to a refinancing transaction where the length of time between the transfer of value to the old creditor and the perfection of the new security interest is so extensive that a material issue of fact has arisen relative to the parties' intention. In re Lazarus, 334 B.R. at 553. But that begs the question: What length of time period would be too extensivesix months, one year, longer? The approach taken by that court, overturned by the First Circuit in In re Lazarus, and the approach advocated by Chase here substitutes the judgment of the courts for that of Congress. Congress, by enacting § 547(e)(2), has determined the appropriate length of time between a creditor's transfer of value and perfection: originally 10 days, now expanded to 30 days by BAPCPA. By hewing to the plain meaning of the Code and respecting Congress's judgment in enacting § 547(e)(2), our holding today fosters predictability in the law of preferences. Moreover, the result in this case, although arguably harsh, could have readily been prevented by Chase. On this point, our prior decision in In re Lewis is instructive. There, a late-perfecting mortgagee argued that we should apply the doctrine of equitable subrogation to insulate it from preference liability. In re Lewis, 398 F.3d at 746-47. In declining to apply the equitable subrogation doctrine to shield the late-perfecting mortgagee from preference liability, we noted that the mortgagee was a sophisticated creditor facing a problem of its own making: [The late-perfecting mortgagee] is a sophisticated creditor who had complete control over the recording of the signed mortgage. It offers no explanation for the more than seven-month delay between the signing and recording of the mortgage. Its own negligence led to the dilemma created by the debtor's filing for bankruptcy. Id. at 747. See also In re Lazarus, 478 F.3d at 16 ([T]he penalty [of lien avoidance] is not without a general benefit pour encourager les autres  and is easily avoided by recording within 10 days as the statute directed.). Chase is a sophisticated lender well aware of the consequences of failing to perfect its security interest within the grace period afforded by § 547(e)(2)a deadline in effect since the enactment of the Bankruptcy Code more than a quarter century ago. We simply are not at liberty to rewrite the Code's preference provision under the rubric of doing equity to protect late-perfecting secured creditors.