III. PRE-BANKRUPTCY CONSIDERATIONS
During the months leading up to the commencement of a bankruptcy case, whether initiated by the filing of a voluntary or involuntary petition, debtors may attempt to complete certain transfers of their assets to or for the benefit of creditors they wish to treat preferentially or to obtain some short-term relief from pressure asserted by creditors. In general, any "transfer" that improves the position of one creditor over other creditors and is inconsistent with the general distribution scheme of the Bankruptcy Code is a preferential transfer. 11 U.S.C. § 547. The term "transfer" is defined as the creation of a lien, retention of title as a security interest, foreclosure of the debtor's equity of redemption, or every mode of disposition of property or an interest in property. See 11 U.S.C. § 101(54). If the other elements of a preferential transfer are found, the transfer will be avoided or set aside by a trustee or debtor in bankruptcy. See 11 U.S.C. § 547(b).
As relevant to real property issues, transfers made by debtors that are insolvent, undercapitalized, or overextended and that are in exchange for less than "reasonably equivalent value" are fraudulent conveyances that can be avoided or set aside. 11 U.S.C. § 548. The effect of avoiding or setting aside a preferential or a fraudulent transfer of property that would otherwise be property of the estate is to rescind the transaction and bring the property back into the bankruptcy estate. 11 U.S.C. § 551.
If the trustee moves to set aside any liens on the real property pursuant to Sections 547 or 548, those liens are preserved for the benefit of the estate. See 11 U.S.C. § 551; Barclays Am./Mortg. Corp. v. Wilkinson (In re Wilkinson), 186 B.R. 186 (Bankr. D. Md. 1995). The trustee steps into the shoes of the lienholder, maintaining the rights of the lienholder as they may have been against the debtor. The debtor's claim for exemption is reduced to a monetary claim for the amount allowable under state law. 11 U.S.C. § 522(g). In this instance, however, the debtor may only claim an exemption as to the recovered property or avoided lien to the extent that:
(a) The transfer avoided was involuntary and the debtor did not conceal the property; or
(b) The debtor could have avoided the transfer pursuant to Section 522(f).
11 U.S.C. § 522(g); Tavenner v. Smoot, 257 F.3d 401 (4th Cir. 2001), cert. den., 534 U.S. 1116 (2002).
A. Preferential Transfers
A "transfer" is defined under Section 101(54) as:
(a) The creation of a lien;
(b) The retention of title as a security interest;
(c) The foreclosure of a debtor's equity of redemption; or
(d) Each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with
(1) property; or
(2) an interest in property.
See Ivey v. First Citizens Bank & Trust Co., 539 B.R. 77 (M.D.N.C. 2015). A "transfer," therefore, includes not only payments on account, but also:
(1) The creation of a lien;
(2) The granting of a security interest in property or a deed of trust against real estate;
(3) The non-consensual attachment of a judgment, execution, or other lien obtained through judicial proceedings or by statutory means;
(4) The granting of a deed or other instrument of conveyance; and
(5) The foreclosure of the debtor's equity of redemption.
See 11 U.S.C. § 101(54).
In addition to the element of a transfer, five other essential elements must be present to establish a preference. The transfer must be made:
(1) To or for the benefit of the creditor;
(2) For or on account of an antecedent debt;
(3) While the debtor was insolvent;
(4) Within 90 days before the filing of the petition (or between 90 days and one year before the date of filing if the creditor is an "insider"); and
(5) Such that the creditor receives more than it would have received had the transfer not been made and the debtor's assets liquidated pursuant to Chapter 7.
11 U.S.C. § 547(b). See Morrison v. Champion Credit Corp. (In re Barefoot), 952 F.2d 795 (4th Cir. 1991); see also Chapter XII, "Avoiding Powers of the Debtor and Trustee."
1. Time of Transfer
Pursuant to Section 547(e)(1)(A), the transfer of real property, including the interest of a seller or purchaser under a contract for sale, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee. See, e.g., Werth v. Tashof (In re Tashof), No. H-85-2664, 1986 U.S. Dist. LEXIS 16745 (D. Md. 1986).
Since North Carolina is a pure "race" jurisdiction, the date and time of recordation of the instrument of conveyance will determine the effective date of most transfers of real property. See N.C. Gen. Stat. §§ 47-18 and -20. The "foreclosure of the debtor's equity of redemption" referred to in Section 101(54) suggests that this particular interest is transferred when the redemption period expires under the foreclosure statutes, which in North Carolina is at the expiration of the 10-day period for the filing of upset bids. See N.C. Gen. Stat. § 45-21.27; see In re Barham, 193 B.R. 229 (Bankr. E.D.N.C. 1996) (referencing In re DiCello, 80 B.R. 769 (Bankr. E.D.N.C. 1987), which found that the filing of a petition during the upset bid period indirectly extends the time in which the debtor's right of redemption may be exercised, and limiting DiCello's application to Chapter 13 cases commenced after the October 22, 1994 enactment of the Bankruptcy Reform Act of 1994 due to Section 1322(c)).
Under Section 547(e)(1)(B), fixtures, although attached to and arguably part of the real property, are treated differently. A transfer of a fixture is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. "Fixtures" are described as goods that have become so attached or related to real property that an interest in them arises under real property law. See N.C. Gen. Stat. § 25-9-102(41); see also Little v. Nat'l Serv. Indus., Inc., 79 N.C. App. 688, 340 S.E.2d 510 (1986).
2. Other Elements of a Preference
The question of a preference commonly arises in the real estate context where a creditor receives a security interest in or a deed of trust against property to secure an otherwise unsecured antecedent debt or where a secured creditor that had been undersecured receives additional collateral that results in the creditor becoming adequately secured or oversecured. In either case, the trustee or debtor in possession may recover the payment or cancel the security interest if the trustee or debtor in possession can also show that the debtor was insolvent (which is presumed during the 90 days immediately preceding the date of filing) and that the creditor received a net improvement in its position by reason of the transfer. 11 U.S.C. § 547(b) and (f). Creditors who assume a great deal of control over or participation in the debtor's affairs may also have some exposure as an "insider" in the 90-day to one-year period prior to the filing of the petition where the court finds that the creditor has become a virtual director or officer of the business through the control it has exerted. See generally Butler v. David Shaw, Inc., 72 F.3d 437 (4th Cir. 1996) (insider status not found when there was not exercise of sufficient authority over debtor to "unqualifiably dictate corporate policy and the disposition of corporate assets").
3. Judicial Liens
A judgment lien entered by the state courts in North Carolina acts as a lien against the real property of the judgment debtor in each county where the judgment is docketed. N.C. Gen. Stat. § 1-234. The entry of a judgment, effecting a judicial lien, is a transfer that is subject to avoidance as a preference under Section 547(b). See Wilmington Nursery Co. v. Burkert (In re Wilmington Nursery Co.), 36 B.R. 813 (Bankr. E.D.N.C. 1984). However, in North Carolina the recording of a lis pendens prior to the entry of the judgment can prevent the avoidance of the judgment entered within the preference period as the judicial lien then relates back to the date that the lis pendens was recorded. N.C. Gen. Stat. § 1-440.33(b)(1); Doub v. Hartford Fire Ins. Co. (In re Medlin), 229 B.R. 353 (Bankr. E.D.N.C. 1998). In certain instances, the recording of a lis pendens itself may constitute a transfer within the purview of Section 547(b). See Carter v. HCL Leasing Corp. (In re Martin), 87 B.R. 394 (Bankr. E.D.N.C. 1988).
Pursuant to Section 547(d), the trustee or debtor in possession can avoid a transfer of an interest in property of the debtor to or for the benefit of a surety to secure...
