Mortgage Recorded Within 90 Days of Debtor''s Bankruptcy Set Aside as a Preferential Transfer
May 16, 2005
Michael Weissman - Chicago
In Superior Bank, FSB v. Boyd, 398 F.3d 735 (6th Cir. 2005) a Chapter 7 trustee, Boyd, succeeded in setting aside, as a preferential transfer under 11 U.S.C. 547, a mortgage that Superior Bank (Superior) recorded within 90 days prior to the filing of the mortgagor’s bankruptcy petition. The bank tried to avoid characterization of the mortgage as a preferential transfer by invoking the doctrine of equitable subrogation but failed.
In December 1998, Kay Lorraine Lewis purchased residential property in Mancelona, Michigan, with funds borrowed from Empire National Bank (Empire). Empire recorded a mortgage on December 17, 1998.
Subsequently, Lewis quitclaimed the property to her son, Ronald Bigger, and his fiancée, Jessica DePeel. When Lewis decided to repay her mortgage at Empire and replace it with financing provided by Superior Bank, Bigger and DePeel quitclaimed the property to themselves and Lewis. On September 9, 1999, Lewis signed a note in favor of Superior and the three titleholders executed a mortgage in favor of Superior. But Superior did not record the mortgage until April 17, 2000, (perhaps explicable by conditions within Superior that led to it being ordered into receivership on July 27, 2001).
On May 4, 2000, Lewis filed a petition for relief under Chapter 7 and the trustee in bankruptcy moved to have Superior’s mortgage set aside as a preferential transfer.
Superior argued that there was no transfer of a property interest because the debtor, Ms. Lewis, had no recorded interest in the property when the bankruptcy petition was filed. This was because the quitclaim deed from Bigger and DePeel to themselves and Lewis had not been recorded on May 4, 2000. The court dismissed this defense because the deed was delivered prior to the filing of the bankruptcy petition and Michigan law makes a deed effective upon delivery, not recording.
Superior’s alternative argument was an effort to invoke the doctrine of equitable subrogation. If applicable, this would mean that Superior took over Empire’s position and that Superior’s lien was deemed to have been perfected long before the 90-day preference period. But, once again, the court ruled against Superior.
The court said that equitable subrogation does not apply where the party seeking subrogation is a volunteer. To avoid being a volunteer, the party seeking subrogation must have made a payment in fulfillment of a legal or equitable duty owed to the subrogor (in this case, Empire). But, said the court, Superior was a volunteer because it had no legal or equitable duty to repay Lewis’ debt to Empire.
Furthermore, the court said the lapse of time is taken into account when determining whether to apply equitable subrogation. It also remarked that “Superior Bank 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 the recording of the mortgage. Its own negligence led to the dilemma created by the debtor’s filing for bankruptcy.”
What’s the point?
Lenders that take collateral from borrowers in financial distress are
well advised to do whatever is needed to keep such borrowers out of
bankruptcy for a period of 90 days.
For more information, e-mail Michael L. Weissman at
michael.weissman@hklaw.com or call toll free, 1-888-688-8500.