This article addresses whether a transfer of real estate title may be avoided as a preference under section 547(b) of title 11 of the United States Code (the “Bankruptcy Code”). Section 547 permits avoidance of preferential transfers. “A preference is a ‘transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of assets of the bankrupt estate.’” Essentially, a preference allows one creditor to receive more value than other creditors. Preferential transfers violate a central policy of the Bankruptcy code— the equality of distribution among creditors. Thus, preferential transfers may be avoided if all elements of section 547(b) are satisfied.
Under section 547(b), 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.”
However, because title to real estate is governed by state law, which may be at odds with the Bankruptcy Code’s central policy of the equality of distribution among creditors, it is unclear whether a transfer of real estate title may be avoided as a preference under section 547(b) even if all of the elements of that section are satisfied. The confusion originated as a result of the Supreme Court’s decision in BFP v. Resolution Trust Corp., which interpreted section 548 of the Bankruptcy Code, and held that transfers of real estate title could not be avoided as fraudulent. Section 547(b) is similar to section 548, which also deals with avoidance of transfers. However, where section 547(b) deals with avoidance of transfers as preferential, section 548 deals with avoidance of transfers as fraudulent. Nevertheless, because transfers of real estate title could not be avoided as fraudulent in BFP, lower courts began to wonder if based on BFP, transfers of real estate title could not be avoided as preferential as well. While some jurisdictions refused to adopt the reasoning in BFP regarding fraudulent transfers to preferential transfers, others willingly extended BFP to preference actions.
This article explores the split in three parts. Part I outlines the origin of the split through a discussion of the Supreme Court’s holding in BFP. Part II discusses how various jurisdictions refuse to adopt the Supreme Court’s holding in BFP regarding section 548 to preference actions under section 547(b) through a plain language approach. Part III, on the other hand, discusses how other jurisdictions extend BFP to preference actions based on federalism and policy concerns.