by Denying the debtor’s claim of preferential transfer, the Third Circuit applied a presumption that the foreclosure sale of the debtor’s property resulted in a purchase price equivalent to what the property could have garnered in a chapter 7 liquidation sale. Veltre v. Fifth Third Bank, No. 17-2889 (3rd. Cir. July 19, 2018) (unpublished).
The junior mortgagee, Fifth Third Bank, bought Margaret Veltre’s home in a pre-bankruptcy foreclosure sale for an amount sufficient to satisfy the first mortgage. Ms. Veltre subsequently filed for bankruptcy and initiated an adversary proceeding seeking to have the foreclosure sale avoided as a preferential transfer.
To prevent a creditor from reaping a windfall at the expense of other creditors, section 547 provides that a transfer made within 90 days of bankruptcy may be avoided if the sale resulted in the creditor receiving more than it would have received had the property been liquidated in chapter 7. In its unpublished opinion, the Third Circuit, relying on BFP Resolution Trust Corp., 511 U.S. 531 (1994) and Pennsylvania case law, held that the pre-bankruptcy, foreclosure sale of the debtors’ residence was not an avoidable preferential transfer.
The Court in BFP interpreted section 548 which permits a trustee to avoid a fraudulent transfer made within two years of bankruptcy where the debtor received less that the “reasonably equivalent value” of the property. The BFP Court concluded that the determination of “reasonably equivalent value” in the case of a foreclosure sale must take into account the distressed nature of the sale. In that context, the Court found that where proper foreclosure procedures were followed, the lower price could be presumed to be the “reasonably equivalent value,” and would not support a finding of fraud. In this case, the circuit court cited a state court opinion to the effect that the price obtained at a public sale is the “highest and best obtainable.”
But that reasoning loses force when the value of the property must be determined under section 547 rather than section 548. In the text of section 547 the phrase “reasonably equivalent value” does not appear. Many of the considerations discussed in BFP are not as relevant when addressing section 547. In an amicus brief filed by NCBRC and NACBA in this case, amici pointed out that while section 548 reaches all potential purchasers of the debtor’s property within a two year period, section 547 applies only to creditors to whom property is transferred within 90 days. Therefore, the BFP Court’s concerns about extensive invalidation of foreclosure sales, including those made to bona fide purchasers, were not as pertinent. In fact, unlike distressed foreclosure sales, sales by chapter 7 trustees more closely resemble typical real estate sales, and therefore often result in sales prices better reflecting the actual market value of the property.