Preferences: Surprise – Being Fully Secured May Not Be A Complete Defense

Gladstone v. Bank of America, N.A. (In re Vassau), 499 B.R. 864 (Bankr. S.D. Cal. 2013) –

A chapter 7 trustee sought to avoid payments made to a fully secured senior mortgagee within 90 days prior to bankruptcy as preferential to an undersecured junior mortgagee.

Property valued at ~$1.1 million was subject to a lien securing senior debt of ~$988,000 and a junior lien of ~$265,000.  The debtors made 10 payments totaling ~$42,000 to the senior mortgagee within 90 days before filing bankruptcy.

Everyone agreed that the senior lender was fully secured, so that the payments were not preferential as to the senior lender (since it did not receive more than it would have in a chapter 7 bankruptcy).  Everyone also agreed that the junior mortgagee was undersecured.  So, the trustee argued that the payments made to the senior lender were preferential as to the junior mortgagee since reducing the fully secured senior claim by $42,000 meant that an additional $42,000 worth