Daily Development for Thursday, March 4, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

BANKRUPTCY; PREFERENCES; PROPERTY SOLD AT FORECLOSURE PRE-FILING: Unlike in the case of bankruptcy fraudulent conveyances, a regularly conducted foreclosure sale will not be viewed as producing value sufficient to satisfy the preference test of “no more than the trustee could obtain in a Chapter 7 liquidation.”  Hence, foreclosure sales with the characteristics of preference scan be avoided in bankruptcy.

In re Villareal, 413 B.R. 633 (Bkrtcy. S.D. Texas, 2009)

This is the case that is said to have awakened the title insurance industry to the dangers of granting the “creditor’s rights” endorsement.  It states a concept that law professors knowledgeable about bankruptcy law have been driving into their students ever since In re BFP was first decided by the U.S.. Supreme Court. 

Although the Supreme Court in In re BFP emphasized deference to the state law procedures for liquidating property and establishing value, the fact is that the test of “reasonably equivalent value” - which is what the Supreme Court was evaluating, is quite different from the “liquidation value” that appears in the preference statute.  The court in the instant case emphasized that a bankruptcy court is not bound by the strictures of an auction sale - it can advertise and negotiate, separate and combine.  The price produced for that asset often will exceed the price tha tmight be produced at a foreclosure sale, especially a Texas sale in which there is little notice and  a short notice period.

Of course, it didn’t help the petitioner’s case that the appraisal evidence showed that equity in the property sold (at a second mortgage foreclosure) was in excess of $3,250,000, and it sold at the foreclosure sale to the junior creditor for $70,000. 

Comment 1: Here are some comments from Jack Murray on the decision (previously published on DIRT:)

“In Newman v. FIBSA Forwarding, Inc. (In re FIBSA Forwarding, Inc.), 230 B.R. 334 (Bankr. S.D. Tex. 1999), aff'd, 244 B.R. 94 (S.D.Tex.1999), the bankruptcy court held that the Supreme Court's ruling in BFP -- finding that a regularly conducted, non-collusive foreclosure sale was not a fraudulent transfer under § 548 of the Bankruptcy Code -- should be applied to nullify a challenge to a real estate foreclosure sale on the basis that it constituted a preferential transfer under § 547. But in In re Villarreal, the bankruptcy court concluded that it was not bound by stare decisis to follow the decision in In re FIBSA Forwarding, Inc., supra, stating that "FIBSA is a decision reached by United States Bankruptcy Judge Steen and affirmed by United States District Judge Ellison of this District. This Court concludes that -- although such an opinion deserves great deference -- it is not binding on this Court." In re Villarreal, supra, 413 B.R. at 640. [Note: Most bankruptcy judges state
that they are bound only by decisions handed down by the U.S. Supreme Court and their respective Circuit Court of Appeals. Cases from other circuit courts, district courts outside their district, the District Court for the district in which they sit, or even other bankruptcy judges within their district, may support an argument but are not binding on bankruptcy judges. See John C. Murray, The Lender's Guide to Single-Asset Real Estate Bankruptcies, 31 REAL PROP. PROB. & TR. J. 393, 411 (1996)].

It will be interesting to see if other bankruptcy courts follow the court's reasoning in In re Villarreal. As a result of the court's ruling in that case (as well as other cases holding that BFP does not apply to preferential transfers under § 547) and the current litigious climate in general, title insurers may no longer be willing to delete the creditors' rights exclusion or issue the ALTA Form 21-06 Creditors' Rights Endorsement (which insures against loss because of the occurrence, on or before the date of the policy, of a fraudulent transfer or preference under federal bankruptcy law or state insolvency or creditors' rights laws) with respect to Loan Policies (assuming the deletion or endorsement is otherwise appropriate and available) that would cover preferential transfers - at least until 91 days have elapsed since the foreclosure sale, with no intervening bankruptcy filing by or against the borrower. (Also, it may be prudent for the lender to obtain a current appraisal fr
om an independent reputable appraiser at or near the time of the foreclosure sale to support the lender's position that it did not receive more than it would have as the result of a Chapter 7 liquidation (if such is the case)).”

Comment 2: It also bears noting (the court did not) that a non-judicial private sale conducted with scant notice may not be the equivalent of a judicial foreclosure as approved in In re BFP.  Some other courts, however, have extended the Supreme Court’s reasoning to private sales. 

Items reported here and in the ABA publications
are for general information purposes only and
should not be relied upon in the course of
representation or in the forming of decisions in
legal matters.  The same is true of all
commentary provided by contributors to the DIRT
list.  Accuracy of data and opinions expressed
are the sole responsibility of the DIRT editor or
individual contributors and are in no sense the
publication of the ABA.

Parties posting messages to DIRT are posting to a
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality

DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 to 15 messages per work day.

DIRT Developments are posted periodically, as supply dictates.

To subscribe, send the message

subscribe Dirt [your name]



To cancel your subscription, send the message
signoff DIRT to the address:


for information on other commands, send the message
Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters.  Because real estate brokers generally find
this service more valuable, it is named “BrokerDIRT.”  But residential
specialist attorneys, title insurers, lenders and others interested in the
residential market will want to subscribe to this alternative list.  If you
subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as
BrokerDIRT carries all DIRT traffic in addition to the residential discussions.

To subscribe to BrokerDIRT, send the message

subscribe BrokerDIRT [your name]



To cancel your subscription to BrokerDIRT, send the message
signoff BrokerDIRT to the address:


DIRT is a service of the American Bar Association
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law.  Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, any substitute reporters, DIRT, and its sponsors.

All DIRT Developments, and scores of other cases, arranged topically, are reported in hardcopy form in the ABA Quarterly Report.  This is a limited subscription service, available to ABA Section Members, ACMA members and members of the NAR.   Qualified subscribers may Subscribe to this Report ($30 for Two Years) by Sending a Check to Ms. Bunny Lee, ABA Section on Real Property, Trust & Estate Law, 321 N. Clark Street, Chicago, Il 60610. Contact Bunny Lee  at (312) 988-5651, Leeb@staff.abanet.org   ABA members also can access prior and current editions of this report on the ABA RPTE section website.

DIRT has a WebPage at: