March 27, 2019, Northern District of Georgia – Trustee Jason L. Pettie, for the estate of Debtor Mark Louis Greiner, brought a lawsuit against a Defendant Quicken Loans, Inc. to recover and avoid a transfer as a preference under 11 U.S.C. § 547(b) when it recorded a security deed on the Debtor’s residence 56 days after its execution and 73 days before the filing of the Debtor’s chapter 7 case.
Earlier in February 2016, the Debtor purchased a residence in Cobb County, Georgia for $260,000. They financed the property with a loan from Mortgage Lenders of America, LLC (“MLC”) in the original principal amount of $268,580 and secured it with a security deed in its favor. About two years later on January 30, 2018, the Debtor refinanced the residence with a loan from the Defendant for $269,134 and executed a security deed conveying the residence to the Defendant to secure the note. The proceeds of the loan were used to pay off the existing purchase-money note in favor of MLC, and the purchase-money security deed was canceled of record on February 26, 2018. The Defendant recorded its security deed on March 17, 2018. The Debtor filed his Chapter 7 petition on June 8, 2018. Thus, the Defendant’s recordation of its security deed occurred 56 days after its execution and 73 days before the filing of the petition.
The Trustee contended that, under the applicable Georgia law, a bona fide purchaser of the Debtor’s residence would acquire title to it unencumbered by Quicken’s security deed until its recordation on March 17, 2018. The Defendant defended on the ground that the perfection under § 547(e)(1) occurred upon the execution of the deed on January 30, 2018, and asserted that the transfer also happened on that date under § 547(e)(2). According to the Defendant, the Trustee’s preference claim failed because January 30 was outside the 90-day preference period. The Defendant next contended that the Debtor used the proceeds from the loan to pay off an existing purchase-money note and security deed on the residence. Since, the current security deed was not canceled in the real estate records until February 26, 2018, invoking the doctrine of equitable subrogation, the Defendant asserted that its security deed would have the same priority as the earlier security deed to establish perfection until cancellation of the previous security deed.
The Court found that Quicken did advance funds to pay off the note secured by the existing security deed, which permitted it to claim equitable subrogation rights. Thus, Quicken may defend on the ground that its security deed had the same priority as the existing security deed and, that it was superior to the rights of a bona fide purchaser. However, the Court noted that Quicken’s equitable subrogation rights that give priority over a purchaser expired when the existing security deed was canceled of record. The Court stated that equitable subrogation principles work in tandem with the inquiry notice provisions of Georgia’s real estate recordation law. The rule is that, if an existing security deed is of record, a purchaser has inquiry notice of the existence of an encumbrance and cannot be a bona fide purchaser. Upon cancellation of the security deed, however, the basis for inquiry notice no longer exists.
Under these principles, the Court concluded that Quicken’s interest in the Debtor’s residence was perfected until the cancellation of the earlier security deed on February 26, 2018. Quicken did not record its security deed until March 17, 2018. Between those two dates, a purchaser for value could have acquired title to the property superior to Quicken’s unrecorded security deed unless it was charged with notice of it. The Court added that although Quicken may invoke the doctrine of equitable subrogation to establish perfection until cancellation of the prior security deed, its allegations as a matter of law did not prove that perfection, and therefore transfer occurred when Quicken recorded its security deed on March 17. The Court held that the allegations concerning the status of a bona fide purchaser after the cancellation of the existing security deed, therefore, stated an insufficient defense that should be stricken under Rule 12(f).