Monday, April 21, 2008

Split Widened: What Does Substantially Contemporaneous Mean In the Bankruptcy Code?

Per Gordon v. Novastar Mortgage, Inc. (In re Hedrick), 2008 WL 1724009, *19-*33 (11th Cir. Apr. 15, 2008)

In this consolidated case, the debtors refinanced their home mortgages. The debtors paid off the first loans with the finances received from the new creditors. The new loans were secured by first priority security deeds on the debtor’s homes, which deeds were recorded within ninety days of the debtors having declared bankruptcy. In the relevant case of debtor Sharma, the security deed was not submitted to be recorded until eight days after the loan was made. The bankruptcy trustee sought to set aside the security deed of the new creditors.

A bankruptcy trustee may avoid a debtor’s transfer of property to a creditor that was made within ninety days of the filing of a bankruptcy petition when that transfer gave the creditor more than the creditor would otherwise be able to receive under the bankruptcy petition. 11 U.S.C. § 547(b). The trustee, however, is not able to avoid such transfers where they are a substantially contemporaneous exchange giving the debtor new value. 11 U.S.C. § 547(c)(1).

The question whether Sharma’s transfer of his interest in the house was voidable depends on the meaning of the contemporaneous exchange exception. The Eleventh Circuit notes that this issue is one of first impression, and that the other circuits are split. The CAs 1,6 apply a 10-day bright-line rule, whereas the CAs 7,8,9 examine the facts and circumstances of each case to determine whether or not a transfer was substantially contemporaneous.

After initially noting the split, Judge Carnes, on behalf of a unanimous panel, spends much time criticizing the bright-line rule. *21-*30. Why the panel takes the effort to do so, however, is an open question because the result would be the same regardless of what tests applies. The facts and circumstances of this eight day period support the conclusion that the substantially contemporaneous exception applies. The rest of the opinion should beunderstood as dicta offered in the hopes of persuading other courts and circuits to join the CA 11's conclusion.

1 comment:

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