Court Holds Non-Collusive Sheriff’s Sale Not a Preferential Transfer

Douglas J. Smillie      Aug. 2, 2018

In an Opinion dated July 19, 2018, the Third Circuit Court of Appeals held that a transfer of property pursuant to a non-collusive sheriff’s sale is not a preferential transfer under Section 547 of the Bankruptcy Code.

Under the Bankruptcy Code, certain transfers of property, or of a Debtor’s interest in property, can be avoided as preferential transfers if the transfer meets certain statutory requirements, and none of certain specified defenses applies. The essential elements for a transfer to be avoided under 11 U.S.C. §547(b) are that the transfer was to or for the benefit of a creditor, on account of an antecedent debt, made on or within 90 days prior to a bankruptcy filing and that the transfer of the debtor’s property enabled a creditor “to receive more” than that creditor would have received in a hypothetical Chapter 7 liquidation without the alleged preferential transfer.

In In re Veltre, a non-precedential opinion, the Court focused upon the final element; i.e., whether the transfer allowed the creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankrupt estate.

The Court acknowledged that the Supreme Court in BFP v. Resolution Trust Corp., 511 U.S. 531, 547 (1994), had observed that the Bankruptcy Code is ambiguous as to a foreclosed property’s value. However, the Court then recognized that under Pennsylvania law, “it is presumed that the price received at a duly advertised public sale is the highest and best obtainable.” Blue Ball Nat’l Bank v. Balmer, 810 A.2d 164, 167 (Pa. Super. Ct. 2002).

Based upon the state law presumption, the Court concluded that the price the creditor had obtained for the property at the sheriff’s sale was as much as—if not more than—a trustee would have obtained under a hypothetical Chapter 7 liquidation. Accordingly, the creditor could not “receive more” by purchasing the property at the sheriff’s sale than it would have received in a hypothetical Chapter 7 liquidation. As such, the Court held, the Debtor could not satisfy the requirement of establishing that the transfer allowed the creditor to receive more than it would have in a liquidation and thus the preference claim failed.

The decision, although not precedential, is good news for lenders and others obtaining property through the sheriff’s sale process. The argument that such sales can be challenged as avoidable preferences would seem to be put to rest.

A similar tactic of challenging sheriff’s sales as fraudulent transfers under Section 548 of the Bankruptcy Code had existed until the Supreme Court’s decision in BFP v. Resolution Trust, referenced above, held that the proceeds of a mortgage foreclosure sale conducted in accordance with state court constitute reasonably equivalent value as a matter of law, thereby ending that avenue of attack as well.

The bankruptcy attorneys at Fitzpatrick Lentz & Bubba, PC are ready and available to guide creditors and lenders through the Bankruptcy code.

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