Borrowers often seek to refinance their home loan mortgages in order to attain more favorable interest rates and other terms. Essentially, in these refinancing transactions, “the parties are looking simply to exchange one more expensive secured loan for another less expensive secured loan.” Typically, as part of the transaction, a refinancing lender will discharge the original mortgage and record a new mortgage. It is not uncommon for a delay to occur such that the new mortgage is recorded over thirty days after the lender transferred the funds to pay off the original loan. In such a case, if the borrower files for bankruptcy within ninety days of the date on which the new mortgage was recorded the bankruptcy trustee will often seek to avoid the new mortgage as a preference.
The Bankruptcy Code provides lenders with statutory defenses to preference actions. Most notable, section 547(e)(2) provides lenders with a grace period of thirty days to perfect their security interest. Thus, “[i]f the security interest is perfected within this grace period, for the purposes of the bankruptcy proceeding, the date of the transfer of the security interest will relate back to when the lender issued credit to the debtor.” In addition to statutory defenses, refinancing lenders can also assert various common law defenses, including the earmarking doctrine.