It’s Worth Whatever Someone Paid for It: How Courts Have Misinterpreted BFP’s Reasoning

Historically, bankruptcy courts have used the Bankruptcy Code’s avoidance powers—fraudulent conveyances in § 548 and preferential transfers in § 547—to avoid pre-bankruptcy-petition transfers. These avoidance powers were used even when the transfer in question was a mortgage or tax foreclosure sale. This has changed in response to the U.S. Supreme Court’s opinion in BFP v. Resolution Trust Corp. The BFP Court concluded that § 548 could not be used to avoid a mortgage foreclosure sale that complied with state foreclosure law. To do so, the Court had to interpret the operative language in § 548: “reasonably equivalent value.” The Court reasoned that an asset’s fair market value had no application in the context of a forced sale and ultimately concluded that the price received in the forced sale was a reasonably equivalent value of the asset. Following BFP, courts have uniformly applied BFP’s reasoning to other forced sales, such as tax foreclosure sales in the context of § 548. However, courts are split as to whether BFP should prevent the avoidance of forced sales in the context of § 547. Some courts have not extended BFP to § 547, while other courts have done so. This Comment will provide background information about and examine both sides of the circuit split and the arguments in favor of each approach. This Comment will then endorse the view that BFP’s reasoning applies to prevent the avoidance of forced sales that comply with state law under § 547 preferential transfers