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Broadening Cash Payment Transfers Through the Voidance of Real Estate Titles as “Preferential”

By: Aleksandra Adamska

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff Member

            Under § 547(b) of title 11 of the United States Code (the “Bankruptcy Code”), a trustee may avoid a transfer, typically a cash payment, made by or on behalf of a debtor on account of antecedent debt in the 90-day period before the bankruptcy filing.[1] In In re Hackler & Stelzle-Hackler, the United States Court of Appeals for the Third Circuit held that a transfer of real estate title may be avoided as a “preference” under § 547(b) of the Bankruptcy Code.[2] There, the Hacklers owned real estate in New Jersey and failed to pay the applicable property taxes.[3] Consequently, the township had a lien on the property for the unpaid taxes.[4] Thereafter, the township held a public auction for the unpaid municipal lien on the property and Phoenix Funding, Inc. was the successful bidder.[5] Because the Hacklers did not pay Phoenix the redemption amount, Phoenix filed a tax foreclosure complaint and assigned the lien to Arianna Holding Company, LLC.[6] The final judgment in the foreclosure vested title to the property in Arianna.[7] Two months after the title of property vested in Arianna, the Hacklers filed voluntary petitions for relief under Chapter 13 of the Bankruptcy Code with the United States Bankruptcy Court for the District of New Jersey.[8]  That same day, the Hacklers filed a complaint seeking to avoid the transfer to Arianna as a preferential transfer under § 547(b) of the Bankruptcy Code.[9] The bankruptcy court ruled in favor of the Hacklers and voided the title transfer.[10] On appeal, the United States District Court for the District of New Jersey affirmed the bankruptcy court’s decision. Both the bankruptcy court and the district court held that “the Transfer met all the requirements of § 547(b).”[11] The United States Court of Appeals for the Third Circuit affirmed their decisions.[12]

            Under § 547(b) of the Bankruptcy Code, a “transfer may be voided as preferential if it (1) was made to or for the benefit of a creditor, (2) was made for an antecedent debt, (3) was made while the debtor was insolvent, (4) was made on or within 90 days before filing for bankruptcy, and (5) enabled the creditor to receive more than it would have received in a Chapter 7 liquidation proceeding.”[13] Here, the transfer was made for the benefit of a creditor, Arianna.[14] Further, it was made for an antecedent debt, a debt “that arose before the Hacklers petitioned for bankruptcy.”[15] The transfer was also made while the Hacklers were insolvent and within 90 days before filing their bankruptcy petition.[16] Lastly, the value of the Hacklers’ property was listed as $335,000, while the value of Arianna’s lien against the property was only $42,561.21.[17] By obtaining title to the property, the Hackler’s argued that Arianna received more than it should have.[18] In fact, the Hackler’s Chapter 13 plan, “proposed to pay Arianna’s claim in full.”[19] Accordingly, the title transfer enabled Arianna to receive significantly more than the value of their lien against the property.[20] As such, all elements of § 547(b) were satisfied, and thus, the transfer of title to Arianna was void.[21]

The Third Circuit relied on BFP v. Resolution Trust Corp. in which the Supreme Court held that a real estate mortgage foreclosure sale constituted “reasonably equivalent value” and “could not be voided under § 548.”[22] Accordingly, BFP does not compel a contrary conclusion but rather is distinguishable from In re Hackler. Although the Supreme Court in that case held that the sale could not be voided, it interpreted a different section of the Bankruptcy Code—§ 548—which voids transfers as fraudulent and contains different requirements.[23] Moreover, that case dealt with “a mortgage foreclosure, not a tax foreclosure.”[24] Thus, that case is “closely tied to both the language in § 548 and the mechanics of mortgage foreclosures,” both of which were inapplicable here.[25] Lastly, § 547(b) is not in conflict with New Jersey state law as the “New Jersey fraudulent conveyance statute . . . does not address preferential transfers.”[26]

            In holding that the transfer of property to Arianna is void, the court analyzed the plain language of the statute and found that all elements were satisfied.[27] The case highlights that transfer is broader than just a cash payment and may include that of real estate title.[28] Because the real estate in In re Heckler was worth significantly more than the value of Arianna’s lien against the property, the transfer would allow Arianna to receive more money than it would have in a Chapter 7 liquidation proceeding. This was problematic as it violated the “central policy” of the Bankruptcy Code—the “[e]quality of distribution among creditors.”[29] Thus, in order to avoid unreasonable appropriations, the Bankruptcy Code “prevent[s] some creditors from receiving windfalls at the expense of others,”[30] enabling even transfers of real estate title to be voided.

 


[1] See 11 U.S.C. § 547(b).

[2] See In re Hackler & Stelzle-Hackler, No. 18-1650, 2019 WL 4309510, at *1 (3d Cir. Sept. 12, 2019).

[3] See id.

[4] See id.

[5] See id.

[6] See id.

[7] See id.

[8] See id.

[9] See id at *2.

[10] See id.

[11] See id.

[12] See id at *1.

[13] See id at *3; see also 11 U.S.C. § 547(b).

[14] See id at *3.

[15] See id.

[16] See id.

[17] See id at *2.

[18] See id.

[19] See id.

[20] See id at *3.

[21] See In re Hackler, 2019 WL 4309510, at *3.

[22] See id at *4.

[23] See id.

[24] See id.

[25] See id.

[26] See id at *5.

[27] See id.

[28] See id at *1.

[29] See In re Net Pay Solutions, Inc., 822 F.3d 144, 150 (3d Cir. 2016) (quoting Begier v. Comm’r, 496 U.S. 53, 58 (1990)).

[30] See id at *2.