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).