Chase Manhattan Mortgage Corporation v. Shapiro

Facts

In early 2001, Lee purchased the premises and obtained a thirty-year mortgage loan in the principal amount of $108,000 from Flagstar Bank. A promissory note was secured by a mortgage on the Property and it was recorded. Flagstar assigned the Promissory Note and the Original Mortgage to the Federal National Mortgage Association, in care of D pursuant to an Assignment of Mortgage that was recorded by the Register of Deeds in early 2002. On October 6, 2003, Lee refinanced the Original Loan by obtaining another mortgage loan from D. The new loan discharged the first loan. Lee got a new 30-year mortgage. By a 'Discharge of Mortgage' dated October 27, 2003, P discharged the Original Mortgage. The Register of Deeds received the Discharge on November 12, 2003, and recorded it on January 16, 2004. On December 17, 2003--51 days after D discharged the Original Mortgage and 72 days after the closing of the New Loan--the Register of Deeds recorded the New Mortgage. On March 4, 2004, 77 days after the New Mortgage was recorded, Lee filed Chapter 7. On April 20, 2004, P filed an adversary complaint against D, seeking to avoid the New Mortgage as a preferential transfer under 11 U.S.C. § 547(b). The bankruptcy court avoided the New Mortgage finding that P had met its burden under § 547(b) and that the earmarking doctrine did not apply. It held that the New Mortgage was not recorded and perfected for more than two months after the initial transaction, the perfection did not relate back to the initial transfer pursuant to § 547(e)(2)(B). The court rejected the earmarking argument, finding that there were two transfers in this case: the October 6 transfer of funds from Chase to Lee to release the Original Mortgage and the transfer perfecting the security interest through the recording of the New Mortgage on December 17. The court held that the earmarking doctrine protected only the first transfer. Because D delayed in perfecting its mortgage lien, the Court could not treat the October 6 refinancing as part of the same transaction as the transfer of the lien recorded on December 17. The two transactions were separate transactions and the diminution requirement was met because the perfection of the New Mortgage elevated D from unsecured to secured status, resulting in fewer assets for other unsecured creditors. The court granted P's motion for summary judgment because the secured interest was an avoidable preference. D appealed. The district court explained that treating the entire refinancing process as a whole, the value of the estate did not decrease. Before the whole transaction, the Property was secured by a mortgage with minimum monthly payments of $942.16. The property was still secured by a mortgage but Lee had to make minimum monthly payments of $567.31. The district court concluded the estate's assets increased because the monthly payments and interest rate decreased following the New Loan. The court treated the refinancing transaction as a whole and determined that the earmarking doctrine protected D even if P had met all of § 547(b)'s requirements. P appealed. Even though the recorded interest occurred outside the 10-day period of § 547(e), 'the granting of the loan and recording the mortgage are two sides of the same coin, they are one transaction. To view it any other way would be to elevate form over substance.'

Issues

Rule of Law

Holding and Decision

Legal Analysis

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