Avoidability of Foreclosure Sales Under Section 547 of the Bankruptcy Code

(Excerpt) Should foreclosure sales that comply with state law be subject to avoidance under federal bankruptcy law? In BFP v. Trust Resolution Corp., the Supreme Court said no, at least when dealing with alleged section 548 fraudulent conveyances, as doing so would, inter alia, undermine state interests and raise substantial federalism concerns. Some courts have taken this reasoning and applied it to section 547 preferences as well, while others feel that the plain language of section 547 prohibits such an application. One recent case in the latter category is In re Whittle Development, Inc. In general, transfers are avoidable as fraudulent conveyances when the debtor receives less than a “reasonably equivalent value” for some property interest. The Court in BFP held that a foreclosure sale that complied with state law must necessarily be considered a “reasonably equivalent value,” as to hold otherwise would lead to a federally generated cloud over almost all property bought at foreclosure sales. In contrast, transfers are avoidable as preferential when the creditor simply receives more than he would under a chapter 7 liquidation. Section one of this memorandum will describe sections 547 and 548 of the Bankruptcy Code. The second section will focus on the BFP case. Section three will discuss the current split on the applicability of the BFP logic to preference cases. Lastly, section four defends the Whittle court’s decision, as the bankruptcy code explicitly preempts state law, and the plain language of section 547 draws a bright line rule, as opposed to the fuzzier test of section 548’s “reasonably equivalent value.