Pratt's Journal of Bankruptcy Law: A Routine Foreclosure May Be A Preferential Transfer

09/27/2011

A bankruptcy judge in Dallas recently issued an opinion that exposes foreclosing lenders who credit bid to possible attack. The court ruled that a lender that credit bid to purchase its collateral at a foreclosure sale prior to the bankruptcy of the borrower could be sued for a preference to recover the purchased property, even though the debtor could not bring a fraudulent transfer suit regarding the foreclosure sale. The authors of this article discuss the case and its ramifications.

As many creditors have unfortunately discovered, the Bankruptcy Code allows a debtor to sue the creditor for certain payments -- called preferences -- that the creditor received from the debtor prior to the bankruptcy. The creditor is deemed "preferred" over other creditors if the transfer resulted in a payment on the creditor's claim against the debtor that was larger that the payment the creditor would have received if the transfer had not been made and the creditor had instead participated in distributions from the debtors bankruptcy estate. Although maddening to the creditor -- who is already likely to receive less than full payment on its claims against the debtor and now faces the possibility of having to return previous payments back to the defaulting debtor -- the intent of this portion of the Bankruptcy Code is to promote the overarching bankruptcy policy of "sharing the pain" by providing for equal distributions to all creditors of the debtor.

Excerpt from Pratt's Journal of Bankruptcy Law, Sept. 27, 2011. To view the full article, click the PDF linked below.

PDF - Pratt's_Journal_of_Bankruptcy_Law

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