Mortgage Preference: Dilly-Dally Around with Recording and You May Lose

USAA Fed. Sav. Bank v. Hope, 589 B.R. 914 (M.D. Ga. 2018) –

A bankruptcy trustee sought to avoid a security deed granted to a refinancing lender as a preference. In defense the lender asserted that there was a substantially contemporaneous exchange of the grant of the lien for the new loan. The bankruptcy court granted the trustee’s motion for summary judgment and the lender appealed to the district court.

The timeline was as follows:

  • August 26, 2016: The lender made a loan to the debtors with most of the proceeds used to repay an existing mortgage lender. The debtors executed a security deed in favor of the lender to secure the loan.
  • October 6, 2016: The prior lender canceled its security deed.
  • October 17, 2016 – 52 days after loan was made: The refinancing lender’s security deed was filed.
  • January 13, 2017 – 88 days after the security deed was filed: the debtors filed bankruptcy.

Under section 547 of the Bankruptcy Code a trustee may avoid as a preference a transfer (1) to or for the benefit of a creditor, (2) for or on account of an antecedent debt, (3) made while the debtor was insolvent, (4) on or within 90 days before the bankruptcy filing, and (5) that enabled the creditor to receive more than it would in a chapter 7 liquidation.

In this case the debtors’ grant of a lien in the security deed constituted a transfer that was on account of the refinancing loan. The question was whether the transfer occurred within 90 days before the bankruptcy filing (since all of the other elements of a preference were met). Under section 547(e) a transfer is made at the time it takes effect between the parties if it is perfected within 30 days; and for real estate, perfection generally occurs when the security instrument is recorded.

In this case the lien granted by the security deed took effect between the parties on August 26, but was not perfected until 52 days later. So, the transfer was deemed to occur on the date of perfection – which was within 90 days prior to the bankruptcy filing.

On appeal the lender tried to raise an argument that the transfer occurred on October 6 when the prior lender canceled its security deed. It contended that the parties intended for the debtors to convey the “full bucket of rights” in the property, including a first priority lien. This could not have occurred until October 6 since under state law the prior lender held legal title through its security deed until it was canceled. The court rejected this argument for a variety of reasons including the fact that the documents did not support the lender’s characterization of the parties’ intent.

With respect to the lender’s defense, it had the burden of showing that the grant of the lien was intended by the parties to be a contemporaneous exchange for the new loan, and in fact there was a substantially contemporaneous exchange. The parties’ intent was clear, so the question was whether the exchange was in fact substantially contemporaneous.

The court framed the issue as the “objective reasonableness” of the time taken to perfect, the cause of any delay, and the motivations for the delay. The lender had to give some explanation for the delay and show that the delay was not intentional and was not caused by the lender’s negligence. About all the lender did was provide testimony that the delay was not intentional or improperly motivated. There was no explanation for the delay and the lender did not address the issue of negligence.

Accordingly, the court affirmed the bankruptcy court’s grant of summary judgment in favor of the trustee.

Although there is no discussion of how the delay occurred in this case, when title companies handle recording of a residential mortgage it is not uncommon to mail it in as part of a large batch of documents rather than presenting the mortgage for recording at the counter. In addition to the processing time at each end, it is amazing how long it can take mail to go across town. If there is any problem so that the document is rejected and mailed back to the title company, it can easily be a matter of weeks before the mortgage is recorded.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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