Pre-petition foreclosures avoidable as preferential transfers?


Preferential transfers are transfers made to ordinary creditors within 90 days prior to filing or transfers made to insiders within 1 year prior to filing. Insiders can be family members or friends, etc. All of the transfers mentioned above can be determined void by the bankruptcy trustee and reverted back to the Debtor to become part of the bankruptcy estate with possible disbursement to creditors.


Where a property has equity, the Judge in In re White Development Inc. denied lenders Motion for summary judgment finding that the Debtor had shown a plausible case under section 547(b). The sales occurred within the 90 day preference period and the lender sold the property to the bank’s wholly subsidiary. 


The so called buyer paid $1,220,000 by submitting a credit bid leaving a deficiency of 1.8 million. The Debtor argued that the property had a fair market value of $3.3 million and only owed the lender 2.2 million. The Debtor complaints therefore stated that the transaction was an avoidable preference because it resulted in the lender receiving more than it would have in a straight Chapter 7 liquidation. Specifically, the lender received the fair market value less the credit bid plus the deficiency claim for a total of 3.26 million; over 1 million more than the lender was owed. But for the pre-petition foreclosure, the lender would have been paid in full and the debtor would have realized its equity in the property. 

The lender argued BFP v. Resolution Trust Corp., where the U.S. Supreme Court held that a pre-petition foreclosure that otherwise complied with state laws was not avoidable as a fraudulent transfer. The lender argued that because the foreclosure complied with applicable state laws, it cannot be set aside in a bankruptcy. However, the Debtors here are arguing not fraudulent transfer, rather they are arguing that the foreclosure is a preferential transfer which should therefore be avoidable. The court in In re White Development Inc. distinguished itself from BFPbecause the issue is this case is not what value the purchaser paid, but what value the lender received. Had the U.S. Supreme Court ruling been different, “all transfers of real estate in a foreclosure sale could be declared fraudulent since the transfer would not, as a matter of law yield… ‘reasonably equivalent value in exchange.’” If a lender makes money by selling the property at an artificially inflated deficiency claim, the difference can be recovered from the lender.