Rescinding the satisfaction of a mortgage is not a “transfer” and thus cannot form the basis for a fraudulent transfer, according to Bankruptcy Judge Deborah L. Thorne of Chicago.
A mortgage lender mistakenly recorded a satisfaction of mortgage. More than a year before the debtor’s bankruptcy, the lender discovered the mistake and recorded a cancellation of the satisfaction. While the mortgage was unperfected, the debtor continued paying, evidently not knowing about the lender’s mistake.
In her Sept. 11 opinion, Judge Thorne intimated that the reperfection of the mortgage could have been avoided as a preference had the debtor filed bankruptcy within 90 days.
Since reperfection was outside the preference period, the chapter 11 debtor initiated an adversary proceeding alleging that recordation of the cancellation of satisfaction was a fraudulent transfer.
Although “transfer” includes the creation of a lien, Judge Thorne dismissed the suit because there was no transfer to underpin a suit under Section 548(a)(1).
To effect a transfer, Judge Thorne said that a “debtor must relinquish some” property interest. Between the lender and the debtor, the debtor relinquished an interest in the property on granting the mortgage 10 years earlier. Recording the mortgage, she said, “does nothing to alter the rights and obligations of the parties to the mortgage as between themselves. . . . The recording of a mortgage only serves to put later parties . . . on notice that they cannot take a superior legal position in the property.”
The transfer, Judge Thorne said, took place in 2006 when the mortgage was granted and properly recorded. Erroneously filing the satisfaction a year before bankruptcy temporarily rendered the mortgage unperfected, but “the mortgage and assignment of rents remained perfectly valid as between the parties,” the judge said.
Consequently, Judge Thorne held that “the only relevant ‘transfer’ was the granting of the mortgage.” On reperfection, there was no transfer and therefore no basis for a fraudulent transfer because “the entirety of the mortgage had already been conveyed.”