On March 12, 2009, Gerald Rote and Annalisa Rote loaned $38,000 to their daughter and son-in-law to buy a home. The Rotes took a mortgage on the home but, to avoid the expense of publicly recording the mortgage, they did not immediately record it. Rather, they waited two years, until May 4, 2011, to record the mortgage. Seven months later, however, the daughter and son-inlaw filed a bankruptcy petition.
The Chapter 7 Trustee challenged the mortgage as a preferential transfer under Section 547(b) of the Bankruptcy Code. While preferences usually occur within 90 days of bankruptcy, here, because the transfer was to a “insider” being a family member, the one year insider preference reach back period applied.
In their defense, the Rotes argued that there was not actually a “transfer” of property when they filed the mortgage in May 2011 because they already had an equitable lien on the home that arose when they took the mortgage in return for the mortgage loan. On appeal from the bankruptcy court’s ruling, the New York district court rejected this argument. The court found that equitable liens are not sustainable under the Bankruptcy Code against a trustee’s powers to avoid a transfer of property that is preferential, while statutory liens, judicial liens and security interests are. Nevertheless, the court affirmed the denial of summary judgment in favor of the Trustee, finding the record to be inadequate on other material elements of the claim, being whether the homeowners were insolvent at the time the mortgage was recorded and whether the parents, in recording the mortgage, received more than they would have had the transfer not been made. Horowitz v. Rote, 13-cv-372-A (W.D.N.Y. Dec. 20, 2013).