VELTRE v. FIFTH THIRD BANK
Filing
11
OPINION re 1 Bankruptcy Appeal, filed by MARGARET ADELINE VELTRE. The court finds that the bankruptcy court correctly concluded that a valid, non-collusive sheriffs sale of property is not an avoidable preference under 11 U.S.C. §547. The bankruptcy court did not err in granting Fifth Thirds motion to dismiss. Debtors appeal from the bankruptcy courts order will be denied. An appropriate order follows. Signed by Chief Judge Joy Flowers Conti on 8/14/17. (jp)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
In Re: MARGARET ADELINE VELTRE, )
)
Debtor,
)
)
Margaret Adeline Veltre,
)
by her attorney in fact DINA MILLER
)
)
Appellant
)
v.
)
)
FIFTH THIRD BANK,
)
)
Appellee.
)
)
Civil Action No. 17-239
Appeal from:
Bankruptcy Case No. 16-23699-CMB
Adversary Proceeding No. 16-2213 CMB
OPINION
CONTI, Chief District Judge.
I.
Introduction
The matter pending before this court is an appeal from the January 27, 2017, Order issued
by the United States Bankruptcy Court for the Western District of Pennsylvania and entered in
Adversary Proceeding No. 16-2213. (ECF No. 1-3.) The bankruptcy court dismissed, with
prejudice, the November 17, 2016, complaint filed by appellant-debtor Margaret Adeline Veltre
by her attorney in fact Dina Miller (“debtor”) against appellee Fifth Third Bank (“Fifth Third” or
“appellee”), which sought to avoid the sheriff’s sale of her house as a preference under 11 U.S.C.
§ 547. (Id.; ECF No. 6 at 1.) The bankruptcy court explained its reasons for dismissing debtor’s
complaint in a Memorandum Opinion dated January 27, 2017. (ECF No. 1-1.) This court has
jurisdiction over the present appeal in accordance with 28 U.S.C. § 158(a). Venue is proper in
this judicial district pursuant to 28 U.S.C. §§ 1408 and 1409.
1
On February 6, 2017, debtor filed an appeal in this court. (ECF No. 6.) On June 9, 2017,
Fifth Third filed a brief in opposition. (ECF No. 9.) Debtor seeks review of the bankruptcy
court’s order granting Fifth Third’s motion to dismiss debtor’s complaint and upholding the
sheriff’s sale of debtor’s property.
For the reasons set forth below, the court concludes that, as a matter of law, a sheriff’s
sale conducted in Pennsylvania cannot be an avoidable preference under 11 U.S.C. § 547,
because the price attained at a validly conducted sheriff’s sale is as much as or more than the
value that would be assigned to the property in a hypothetical Chapter 7 liquidation, and,
therefore, a creditor cannot receive more through a sheriff’s sale than it would receive under a
hypothetical Chapter 7 liquidation.
II.
Factual and Procedural Background
The facts underlying this appeal are undisputed. (ECF No. 6 at 1.) Debtor owned
residential property located at 2317 Haymaker Road, Monroeville, PA 15416 (the “property”),
which she used as her home. 1 (Id.) Debtor had two mortgages on the property: the first granted in
favor of Capital One Bank (“Capital One”) and the second granted in favor of appellee, Fifth
Third. (Id.)
After debtor failed to make the required mortgage payments to Capital One for
approximately eighteen months, Capital One initiated foreclosure proceedings by filing a
Complaint for Mortgage Foreclosure in the Allegheny County Court of Common Pleas in
December 2014. (ECF No. 9 at 6.) In May 2015, the Allegheny County Court of Common Pleas
entered a default judgment, and on June 10, 2015, Capital One obtained a writ of execution for
1
Debtor is now deceased and survived by her daughter, who currently resides at the property with her
family. (ECF No. 9 at 7.)
2
the property. (Id.) On July 5, 2016, the Allegheny County Sheriff sold the property at a regularly
conducted sheriff’s sale. (Id.) The property was sold to Fifth Third for $90,000, which was
sufficient to pay the debt due Capital One. (ECF No. 1-1, 2.) On August 15, 2016, the Sheriff’s
Office of Allegheny County issued a sheriff’s deed to Fifth Third in compliance with the
Allegheny County Recorder of Deeds’ and applicable sheriff’s sale procedures. (ECF No. 9 at 6.)
On October 2, 2016, the 90th day after the sale, debtor filed a petition for relief under Chapter 11
of the Bankruptcy Code. (ECF No. 6 at 2.) Debtor did not challenge the foreclosure proceedings
prior to initiating bankruptcy proceedings and agrees with Fifth Third that the sheriff’s sale
complied with applicable state law. (ECF No. 9 at 6.)
On November 17, 2016, debtor commenced an adversary proceeding against Fifth Third
alleging Fifth Third’s purchase of the property was an avoidable preference under 11 U.S.C. §
547. Debtor maintains that Fifth Third received a preference of approximately $80,000. 2 (ECF
No. 6 at 2; ECF No. 1-1 at 3.) On December 16, 2016, Fifth Third filed a motion to dismiss
pursuant to Federal Rule of Civil Procedure 12(b)(6). (ECF No. 1-1 at 2.) After a hearing on
Fifth Third’s motion on January 19, 2016, the United States Bankruptcy Court for the Western
District of Pennsylvania dismissed the adversary complaint. (Id. at 5.) The bankruptcy court
determined that, as a matter of law, the execution of a properly conducted non-collusive sheriff’s
sale is not a preferential transfer under 11 U.S.C. § 547(b). The court came to this conclusion
based in large part on BFP v. Resolution Trust Corporation, 511 U.S. 531 (1994). In BFP, a
debtor challenged a sheriff’s sale under the fraudulent transfer provisions of the Bankruptcy
2
The bankruptcy court aptly noted that “[p]ursuant to the Debtor’s pleadings, the $80,000.00 claim is
derived from the difference of the sale price of the Property paid by Fifth Third in the amount of
$90,000.00 with the property’s alleged market value in the amount of $200,000.00 less the debt owed to
Fifth Third in the amount of $25,000.00. The Court recognizes the Debtor’s math is not exact and that the
Debtor’s asserted value of the Property varies among the pleadings, but is accurate to the extent the
numbers reflect that Fifth Third arguably obtained a substantial equity cushion in the Property.” (ECF
No. 1-1 at 3.)
3
Code, 11 U.S.C. § 548. Section 548 provides that a trustee may avoid a transfer if, among other
things, the transferor did not receive a reasonably equivalent value for the property; in other
words, it would be a constructively fraudulent transfer.11 U.S.C. § 548. The Supreme Court
held that a sheriff’s sale of property cannot be a fraudulent transfer because the price obtained at
a foreclosure sale constitutes a reasonably equivalent value as a matter of law under 11 U.S.C. §
548. (ECF 1-1.) In this case, the bankruptcy court applied the Supreme Court’s reasoning as it
related to § 548, and held that “property sold at a properly conducted and otherwise noncollusive foreclosure sale may not serve as the basis of a preference action under 11 U.S.C. §
547.” (Id. at 2.)
On February 2, 2017, debtor filed a notice of appeal. (Id.) Debtor argues that the
bankruptcy court’s application of BFP was incorrect, and that in accordance with the plain
language and legislative history of § 547, this court should find that the sheriff’s sale of debtor’s
property met the requirements for a preferential transfer under § 547. Debtor argues the sheriff’s
sale was a transfer that permitted Fifth Third to receive a greater amount than it would have
received under a hypothetical Chapter 7 liquidation, and, thus, is an avoidable preference under §
547(b)(5). (ECF No. 6 at 2.) Fifth Third filed a response on February 19, 2015. (ECF No. 9 at
1.) Fifth Third argues that the bankruptcy court correctly applied the Supreme Court’s reasoning
in BFP, and that in accordance with this precedent the transfer of property pursuant to a noncollusive sheriff’s sale cannot be avoided as a preference under § 547. (Id. at 7.) Having been
fully briefed, the matter is ripe for disposition.
III.
Standard of Review
Federal district courts have appellate jurisdiction over final judgments, orders, and
decrees of the bankruptcy court. 28 U.S.C. 158(a)(1). “Upon appeal of a ruling from bankruptcy
4
court, this Court reviews the Bankruptcy Court's legal conclusions de novo, its factual findings
for clear error, and its exercise of discretion for abuse thereof.” In re Gisondi, Civ. Action No.
13-6147, 2014 WL 683755, at *2 (E.D. Pa. Feb. 21, 2014) (citing In re Goody’s Family
Clothing, Inc., 610 F. 3d 812, 816 (3d Cir. 2010)); see Friedman’s Liquidating Tr. v. Roth
Staffing Cos. LP. (In re Friedman's Inc.), 738 F.3d 547, 551–52 (3d Cir. 2013); Baroda Hill
Invest., Ltd v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 136 (3d Cir. 2002). When a
case involves mixed questions of law and fact, the court “must differentiate between those two
categories and ‘apply the appropriate standard to each component.’ ” Montgomery Ward & Co.,
Inc. v. Meridian Leasing Corp. (In re Montgomery Ward Holding Corp.), 326 F.3d 383 (3d Cir.
2003) (quoting United States of America v. Fegeley (In re Fegeley), 118 F.3d 979, 982 (3d Cir.
1997)).
IV.
Discussion
Debtor seeks to avoid the transfer of her property to Fifth Third as a preferential transfer,
in accordance with 11 U.S.C § 547. Under § 547, in order to maintain an action to avoid a
preferential transfer, a plaintiff must establish that the transfer of an interest of the debtor in
property was:
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such
transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the
petition, if such creditor at the time of such transfer was an insider;
and
(5) that enables such creditor to receive more than such creditor would receive
if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
5
(C) such creditor received payment of such debt to the extent provided
by the provisions of this title.
11 U.S.C. § 547(b). The final element of § 547(b) “constitutes the so-called ‘greater amount
test,’ which ‘requires the court to construct a hypothetical chapter 7 case and determine what the
creditor would have received if the case had proceeded under chapter 7’ without the alleged
preferential transfer.” Tenderloin Health Inc. v. Back of the West (In re Tenderloin Health), 849
F.3d 1231, 1235 (9th Cir. 2017) (quoting Alvarado v. Walsh (In re LCO Enters.), 12 F.3d 938,
941 (9th Cir. 1993)); see Garner v. Knoll, Inc. (In re Tusa-Expo Holdings, Inc.), 811 F.3d 786,
792 (5th Cir. 2016) (“To determine whether a trustee has established this requirement . . . . the
court (1) constructs a hypothetical Chapter 7 liquidation in which the creditor retains the disputed
transfers, viz., the transfers-retained hypothetical, and (2) constructs another in which the
creditor returns those transfers, viz., the transfers-returned hypothetical. To establish the
requirement of § 547(b)(5) under this analysis, the sum of (1) the disputed transfers and (2) the
creditor's distribution in the transfers-retained hypothetical must be “more” than the creditor's
distribution in the transfers-returned hypothetical.”) (emphasis original); Rambo v. Chase
Manhattan Mortgage Corp. (In re Rambo), 297 B.R. 418 (Bankr. E.D. Pa. 2003)
(“The § 547 analysis . . . . requires a comparison of what the creditor would receive in a
liquidation under Chapter 7, a hypothetical inquiry, with what the creditor actually received.”);
see also S. REP. No. 95-989, at 87 (1978), reprinted in U.S.C.C.A.N. 5787, at 5873 (1978)
(“[T]he creditor must receive more than he would if the case were a liquidation case, if the
transfer had not been made, and if the creditor received payment of the debt to the extent
provided by the provisions of the code.”) “This process can often be complex, as it requires the
valuation of contingent interests, causes of action, disputed claims, and other assets of the
6
debtors that may not be subject to an easy calculation of worth.” Taunton v. Reding (In re
Taunton), 306 B.R. 1, 4 (M.D. Ala. 2004).
The central thrust of debtor’s argument is that the sheriff’s sale of her property conducted
on July 5, 2016, meets the requirements outlined in § 547(b) and should, therefore, be avoided as
a preferential transfer. Debtor argues that the bankruptcy court erred in determining that a duly
conducted sheriff’s sale can never be a preferential transfer under § 547, because § 547(b)(5)
requires only that a creditor receive more through the transfer than it would under a hypothetical
Chapter 7 liquidation and here the sheriff’s sale met this requirement.
In its memorandum opinion, the bankruptcy court relied heavily on the Supreme Court’s
holding in BFP, to support the conclusion that property sold at “a properly conducted and
otherwise non-collusive sheriff’s sale may not be avoided as a preference action under 11 U.S.C.
§ 547.” (ECF No. 1-1 at 6.) In BFP, the Supreme Court had to determine whether a property sold
through a valid foreclosure sale could be considered a fraudulent transfer under 11 U.S.C. § 548.
While the sale in BFP complied with state law, the property was sold for significantly less than
fair market value. Under § 548(a)(1), a transfer can be avoided if there is “constructive fraud,”
which occurs when a debtor receives “less than a reasonably equivalent value” in exchange for
the transfer. 11 U.S.C. § 548. The Court had to determine whether a validly conducted
foreclosure sale could constitute constructive fraud if the property sold for less than fair market
value. In other words, for purposes of § 548, does the fair market value control what can be
considered reasonably equivalent value?
The Court conclusively decided that reasonably equivalent value does not equal fair
market value. The Court reasoned that fair market value “is a well-established concept,” and that
Congress acted intentionally when it included the term “reasonably equivalent value,” rather than
7
“fair market value” in § 548. BFP, 511 U.S. at 537. The Court also held that “[m]arket value
cannot be the criterion of equivalence in the foreclosure-sale context” because fair market value
presumes market conditions that are not in existence in the context of a forced sale. Id. at 538–39
(“property that must be sold within those strictures [of a forced sale] is simply worth less)
(emphasis original). Based on these determinations, the Court held that fair market value has no
bearing in the context of a forced sale.
Instead, the Court looked at the effect permitting validly conducted foreclosure sales to
be considered fraudulent transfers under § 548 would have on state interests. The Court reasoned
that while Congress has the power to disrupt state law pursuant to its grant of authority over
bankruptcy, U.S. Const., Art. I, § 8, cl. 4, in instances where exercising this authority would have
a profound effect on “an essential state interest,” and would “displace traditional state regulation
. . . the federal statutory purpose must be ‘clear and manifest.’ ” Id. at 544 (quoting English v
General Elec. Co., 496 U.S. 72, 79 (1990)). With respect to the term “reasonably equivalent
value,” the Court held that there was not sufficiently clear textual guidance in § 548 to find that
Congress intended to impinge on the important interest states have in ensuring the security of
titles to real estate. Id. at 544–45. The Court, therefore, held that “a ‘reasonably equivalent
value,’ for foreclosed property, is the price in fact received at [a validly conducted] foreclosure
sale,” and that mere inadequacy of the foreclosure sale price could not be considered a basis for
setting the sale aside under § 548. Id. at 542–43, 545. Here, the bankruptcy court determined that
the Supreme Court’s reasoning in BFP was equally applicable to claims brought under § 547,
and that consequently “Fifth Third could not and did not ‘receive more’ for purposes of
§ 547(b)(5) because it purchased the Property at a regularly conducted, non-collusive sheriff’s
sale.” (ECF No. 1-1 at 6.)
8
In addition to applying the rationale set forth in BFP, the bankruptcy court looked to a
series of opinions decided within the Western District of Pennsylvania, each of which addressed
the exact issue whether a sheriff’s sale could be avoided as a preference under § 547. 3 The
Bankruptcy Court for the Western District of Pennsylvania first confronted this question in The
Chase Manhattan Bank v. Pulcini (In re Pulcini), 261 B.R. 836, 844 (Bankr. W.D. Pa. 2001). In
Pulcini, the bankruptcy court relied on BFP to conclude that a validly conducted, non-collusive
sheriff’s sale cannot be avoided as a preferential transfer under § 547. Id. The court held:
Although BFP dealt with § 548(a), not § 547(b), we believe that the rationale
of BFP applies to the present matter with equal force. It compels the conclusion
that a pre-petition transfer of a debtor's interest in real property to a lien creditor
who purchases the property at a regularly-conducted, non-collusive sheriff's sale
and who then sells the property to a third party for an amount greater than the
amount of its lien is not avoidable in accordance with § 547(b) as a preference. In
particular, the lien creditor does not “receive more” for purposes of § 547(b)(5)
than
it
would
receive
in
a
chapter
7
liquidation.
Id. In support of this conclusion, the bankruptcy court cited many of the policy concerns
discussed in BFP.
What is at stake is the essential sovereign interest in the security and stability of
title to land. . . . The intent of Congress to displace traditional state regulation . . .
must be “clear and manifest”. Otherwise, the Bankruptcy Code must be construed
to adopt rather than displace preexisting state law. Applying these precepts to the
present matter, we conclude that the chapter 7 trustee's position, if adopted,
unquestionably would profoundly affect Pennsylvania's essential interest in
making title to real property stable and secure. Title to real property purchased at
a foreclosure sale “would be under a federally created cloud”. Although the
language of § 547(b) would, at first blush, seem to support the chapter 7 trustee's
position that the sale of the property to CMB falls within the scope of § 547(b)(5)
and is avoidable as a preference, we find no “clear and manifest” indication that
when it enacted § 547(b) Congress intended to override the long-standing law of
Pennsylvania concerning title to real property.
Id. at 844–45 (quoting BFP, 511 U.S. at 544).
3
Although the bankruptcy court acknowledged that “there is no such thing as ‘law of the district,’” and
that it was not bound by the decisions of other bankruptcy courts, it ultimately found persuasive the
reasoning applied in these other decisions. (ECF No. 1-1 at 5) (citing Threadgill v.Armstrong World
Indus., Inc., 928 F. 2d 1366, 1371(3d Cir. 1991)).
9
In subsequent decisions, the Bankruptcy Court for the Western District of Pennsylvania
adopted the reasoning applied in Pulcini and held that, as a matter of law, a validly conducted
sheriff’s sale cannot be avoided as a preference under § 547. See Electra Lighting & Elec. Co. v.
S & T Bank (In re Free), 449 B.R. 461, 465 (Bankr. W.D. Pa. 2011) (citing Pulcini to support the
conclusion that a sheriff’s sale cannot be avoided as a preference under § 547 because such a sale
does not “enable the [creditor] to receive more on its pre-petition claim against the Debtor than it
would have had such sheriff's sales not been conducted and the [creditor] instead had received
payment by way of a hypothetical Chapter 7 liquidation”); JP Morgan Chase Bank v. Rocco (In
re Rocco), 319 B.R. 411, 418 (Bankr. W.D. Pa. 2005), subsequently aff'd sub nom. Rocco v. J.P.
Morgan Chase Bank, 255 F. App'x 638 (3d Cir. 2007) (“The concerns expressed and addressed
by Pulcini are valid, well reasoned and persuasive. In light of the foregoing and consistent with
the Pulcini analysis as applied to the facts of this case, 11 U.S.C. § 547 is not available to the
Debtors.”).
Fifth Third argues that this court should adopt the reasoning of Pulcini and find that
because this case involved a validly conducted sheriff’s sale that complied with Pennsylvania
law, the price garnered at this sale was a “fair and proper price,” and, therefore, the creditor
could not have “received more” through the sheriff’s sale than it would have received under a
Chapter 7 liquidation. See BFP, 511 U.S. at 543. Fifth Third asserts that permitting the avoidance
of a valid sheriff’s sale would have a significant negative impact on state property law – a
consequence the Court purposely sought to avoid in BFP – because such a decision would
undermine the foreclosure and sheriff’s sale processes, as well as the stability of titles issued
pursuant to Pennsylvania law.
10
Debtor argues that the Supreme Court’s decision in BFP is inapplicable to § 547, because
the term “reasonably equivalent value” is not included in § 547. Unlike under § 548(a)(1), where
a transfer can be avoided when a debtor receives “less than a reasonably equivalent value” in
exchange for a transfer, under § 547(b)(5) a transfer can be avoided when a creditor receives
more than it would under a hypothetical Chapter 7 liquidation. 11 U.S.C. §§ 547, 548. Debtor
claims that based on the plain language of § 547, sheriff’s sales are subject to avoidances as
preferences as long as the creditor received more through the sheriff’s sale than it would have
received through a hypothetical Chapter 7 liquidation. See Whittle Dev. Inc. v. Branch Banking
& Trust Co., (In re Whittle Dev., Inc.), 463 B.R. 796, 802–03 (Bankr. N.D. Tex. 2011) (“[I]f a
creditor executes on secured property and obtains the property for what is found to be less than
what it would have garnered in a hypothetical liquidation, then the transfer may be avoided under
the plain meaning of section 547(b).”).
Debtor argues that Pulcini, Free, and Rocco, each of which was decided in this district
and each of which determined that a validly conducted sheriff’s sale cannot be avoided under §
547, unduly rely on the policy rationales cited by the Supreme Court in BFP. Debtor argues that
when a text is unambiguous, policy rationales – such as the federalism concerns cited by the
bankruptcy court in Pulcini – cannot supplant the plain language of the text, and that in BFP the
Court reached the stated policy concerns only after first finding that the operative language of §
548 was ambiguous. See Rambo, 297 B.R. at 427 (“Whether the value determination under a
different provision of the Bankruptcy Code should follow the BFP value determination requires
an analysis first of the statute, not the policies that would support it.”).
Debtor asserts that because the plain language of § 547 is not ambiguous, Pulcini and its
progeny impermissibly rely on the policy rationales cited in BFP, instead of first interpreting the
11
plain language of § 547. Debtor asks that this court reject the reasoning of these decisions in
favor of a plain language interpretation of § 547. See Id. at 428 (“While there is no doubt that
preserving the integrity of regularly conducted foreclosure sales animated the majority decision
[in BFP], its holding is based on its articulated conclusion that the statute was ambiguous in
failing to provide a measure of valuation. The policy rationale therefore does not stand alone nor
could it as it is not the prerogative of a court to make the law but rather to interpret it.”).
Though not specifically cited by debtor, it is worth noting that other courts have found
that the policy concerns raised by the Court in BFP, especially the concern about the stability and
security of real property, are not as significant in the § 547 context. One of these courts
concluded:
If an otherwise valid foreclosure sale is found to enable a creditor to obtain more
than he would in a chapter 7 liquidation, then the additional amount of benefit
conferred to the creditor is simply brought back into the estate. The purchaser of
the real estate at the foreclosure does not necessarily lose its property unless the
purchaser is the creditor himself. This approach furthers the state's interest in
maintaining the security of titles without subverting the policy of the Code of
maintaining equality among the creditors . . . the risks to third parties who buy the
property at the foreclosure are non-existent.
Whittle, 463 B.R. at 801–02.
The court agrees with debtor that it should begin its analysis with the language of the
statute. See Burns v. Alcala, 420 U.S. 575, 580–81 (1975); Singh v. Attorney Gen. of U.S., 677
F.3d 503, 510 (3d Cir. 2012). As stated earlier, in order to maintain an action to avoid a
preferential transfer under § 547, a plaintiff must establish that the transfer “enables such creditor
to receive more than such creditor would receive if the case were a case under chapter 7 of this
title.” 11 U.S.C. § 547. This language clearly differs from the “reasonably equivalent value”
language of § 548. The court cannot simply assume that because the value obtained at a sheriff’s
sale equals “reasonably equivalent value,” that the value obtained at a sheriff’s sale also equals
12
what a creditor would receive under Chapter 7 liquidation. 4 The court needs to examine the
language utilized in § 547.
Under § 547, a court must construct a hypothetical Chapter 7 liquidation. Rambo, 297
B.R. at 431. By its nature, the accuracy of this hypothetical analysis can never be completely
certain and presents complicated issues. See Tenderloin Health, 849 F.3d at 1237 (quoting In re
Affiliated Foods, Inc., 249 B.R. 770, 788 (Bankr. W.D. Mo. 2000) (finding that a hypothetical
Chapter 7 liquidation “ ‘requires an estimation of the value of all of the bankruptcy estate's
assets, including such hard to determine values as disputed and contingent claims, the potential
disallowance of claims (under § 502(d)), the probability of success and value of causes of action
held by the estate, and, in this case, potential preference actions.’ ”); In re W.R. Grace & Co.,
475 B.R. 34, 142 (D. Del. 2012), aff'd sub nom. In re WR Grace & Co., 729 F.3d 332 (3d Cir.
2013), and aff'd, 532 F. App'x 264 (3d Cir. 2013), and aff'd, 729 F.3d 311 (3d Cir. 2013),
and aff'd sub nom. In re WR Grace & Co., 729 F.3d 332 (3d Cir. 2013) (quoting In re Affiliated
Foods, Inc., 249 B.R. 770, 788 (Bankr. W.D. Mo. 2000)) (“[T]he valuation of claims in a
hypothetical Chapter 7 liquidation is ‘not an exact science’ because the process entails a
considerable degree of speculation.”); Candle Company II, Inc. v. PC Liquidation Corp. (In re
PC Liquidation Corp.), 383 B.R. 856, 868 (E.D.N.Y. 2008) (quoting ACC Bondholder Groups
v. Adelphia Comm. Corp. (In re Adelphia Comm. Corp.), 361 B.R. 337, 366-67 (S.D.N.Y.2007))
4
On this matter, the court agrees with the Bankruptcy Court for the Eastern District of Pennsylvania that
the majority of decisions that have applied the reasoning of BFP to § 547 have done do so without
considering the textual differences between § 547 and § 548, and that the court should not sidestep the
text of the statute, even when significant policy concerns are at issue. See Rambo, 297 B.R. at 427–28
(“[T]he Supreme Court's recognition of the states' important interest in controlling the laws governing the
foreclosure of real property have been imported from the fraudulent conveyance context to preference
cases, but without discussion of the statutory predicate, i.e., § 547(b)(5). Whether the value determination
under a different provision of the Bankruptcy Code should follow the BFP value determination requires
an analysis first of the statute, not the policies that would support it. Because it is axiomatic that a court's
duty is to interpret the law not to make it, policy cannot be the basis for construing a statute.”).
13
(“[T]he valuation of a hypothetical chapter 7 liquidation is, by nature, inherently speculative and
is often replete with assumptions and judgments.”). Under these circumstances there is inherent
uncertainty and ambiguity in how the court should determine a hypothetical liquidation value. 5
Under Pennsylvania law, however, “it is presumed that the price received at a duly
advertised public sale is the highest and best obtainable.” Blue Ball Nat. Bank v. Balmer, 810 A
2.d 164, 167 (Pa. Super. Ct. 2002); see First Fed. Sav. & Loan Ass'n of Lancaster v. Swift, 321
A.2d 895, 896–97 (Pa. 1974); Bank of Am., N.A. v. Estate of Hood, 47 A.3d 1208, 1213 (Pa.
Super. Ct. 2012); Hart v. Bulldawg LLC, No. 107 C.D. 2016, 2017 WL 582735, at *3 (Pa.
Commw. Ct. Feb. 14, 2017) (citing Blue Ball Nat. Bank, 810 A 2.d at 167). If the value obtained
at a sheriff’s sale is “the highest and best obtainable,” then a trustee would not be able to secure a
higher price through a Chapter 7 liquidation, and only if the trustee were able to secure a higher
price at a liquidation sale could there be a situation where a secured creditor received more
through purchasing the property at the sheriff’s sale than that same creditor would have received
through Chapter 7 liquidation. In other words, because the sheriff’s sale price is presumptively
the highest price obtainable, a creditor cannot purchase property at a sheriff’s sale at an
artificially low price, thereby “receiving more” than it would have under the hypothetical
liquidation. For the purposes of § 547, then, the price obtained at a non-collusive sheriff’s sale
conducted in full compliance with Pennsylvania law effectively serves as an upper limit for the
hypothetical amount that can be obtained through a Chapter 7 liquidation. 6
5
Black’s Law Dictionary defines “liquidation value” as “[t]he value of a business or of an asset when it is
sold in liquidation, as opposed to being sold in the ordinary course of business.” Black’s Law Dictionary
1785 (10th ed. 2014). This definition does not describe how a hypothetical liquidation value is
determined.
6 While debtor may argue that the value attributed to a piece of property under a hypothetical Chapter 7
liquidation is the property’s fair market value and not the amount obtained at a sheriff’s sale, fair market
value does not pertain to price or purchaser, but to process. Because “ ‘fair market value’ presumes
market conditions that, by definition, [do not exist] in the context of a forced sale,” it is improper to use
14
Based upon the long-standing presumption in Pennsylvania that the sheriff’s sale price is
“the highest and best obtainable,” a buyer-creditor cannot receive more by purchasing a piece of
property at a sheriff’s sale than that same buyer-creditor would have received under a
hypothetical Chapter 7 liquidation. Here, the court is not persuaded that an action under § 547
provides a means by which to challenge this presumption. 7 The court can presume that the
$90,000 obtained for debtor’s property at the sheriff’s sale on July 5, 2016, was as much as, if
not more than, the price a trustee would have been able to obtain under a Chapter 7 liquidation.
Consequently, Fifth Third did not “receive more” through this transfer than it would have
received under a hypothetical Chapter 7 liquidation, and debtor cannot maintain an action to
avoid a preferential transfer under § 547.
Like in BFP, the court also recognizes that there are serious policy concerns at issue in
this case. First and foremost, in light of the policies discussed in BFP, this court agrees with the
fair market value as a substitute for Chapter 7 valuation in the context of a forced liquidation. BFP, 511
U.S. at 538. Black’s Law Dictionary defines “liquidation price” as “[a] price that is paid for property sold
to liquidate a debt · Liquidation price is usu. below market price.” Black’s Law Dictionary (10th ed.
2014) (emphasis added).
7
Although the Supreme Court in BFP held that the “mere inadequacy of [a] foreclosure sale price is no
basis for setting [a sheriff’s] sale aside” under § 548, it acknowledged that sales “may be set aside (under
state foreclosure law, rather than fraudulent transfer law) if the price is so low as to ‘shock the conscience
or raise a presumption of fraud or unfairness.’” BFP, 511 U.S. at 542 (quoting G. Osborne, G. Nelson, &
D. Whitman, Real Estate Finance Law 9, 469, (1979)) (emphasis original). Although there is a
presumption under Pennsylvania state law that a sheriff’s sale that complies with state procedure is valid,
the court recognizes that there are exceptions to this presumption. See Blue Ball Nat. Bank, 810 A.2d at
167 (quoting Capozzi v. Antonoplos, 201 A.2d 420, 422 (Pa. 1964)) (“Where a ‘gross inadequacy’ in the
price is established courts have found proper grounds exist to set aside a sheriff's sale.”). In order to
challenge a sheriff’s sale as being so grossly inadequate that it “shocks the conscious” or is indicative of
fraud, a trustee may assert this state law claim under § 544 of the Bankruptcy Code. See Sikirica v.
Wettach (In re Wettach), 811 F.3d 99, 104 (3d Cir. 2016) (quoting 11 U.S.C. § 544(b)(1)) (“The
Bankruptcy Code grants the Trustee the power to ‘avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that is voidable under applicable law [here,
Pennsylvania law] by a creditor holding an unsecured claim.’ ”); Official Comm. of Unsecured Creditors
of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 573 (3d Cir. 2003) (“In
Chapter 11 cases where no trustee is appointed, § 1107(a) provides that the debtor-in-possession, i.e., the
debtor's management, enjoys the powers that would otherwise vest in the bankruptcy trustee.”). Debtor,
however, did not raise a claim of gross inadequacy under Pennsylvania foreclosure law pursuant to § 544
before the bankruptcy court or on appeal.
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bankruptcy court that were federal courts to void state sheriff’s sales as preferential transfers
under §547, this would disrupt well-settled foreclosure law and act as an encroachment on state
property law. Although Congress unquestionably has the power under the bankruptcy clause of
the United States Constitution, Art. I, § 8, clause 4, to depart from or to displace state law in the
bankruptcy context, the intent of Congress to displace traditional state regulation must be “clear
and manifest.” BFP, 511 U.S. at 543–45. The court agrees with the line of decisions issued by
this district’s bankruptcy court, that in enacting § 547 Congress did not present a clear and
manifest intent to displace Pennsylvania foreclosure law. Pulcini, 261 B.R. at 844–45 (“We find
no ‘clear and manifest’ indication that . . . congress intended to override” longstanding
Pennsylvania property law.); Free, 449 B.R. at 465–66 (As a matter of law, sheriff’s sales are
unavoidable as preferential transfers under § 547 for precisely the reasoning detailed in Pulcini);
Rocco, 319 B.R at 417–18 (“The concerns expressed and addressed by Pulcini are valid, well
reasoned and persuasive” and, thus, sheriff’s sales are not voidable preferences under §547).
The Court in BFP recognized that the security and stability of real estate titles are an
“essential” and “important state interest,” and that to allow federal courts to set validly
conducted sheriff’s sales aside would not only interfere with a state’s sovereignty to
independently legislate and regulate property rights, but would also threaten the stability of
validly acquired titles. See BFP, 511 U.S. at 542, 544, 565 (quoting American Land Co. v.
Zeiss, 219 U.S. 47, 60 (1911)) (The “ ‘general welfare of society is involved in the security and
stability of titles to real estate.’ ”). Under Pennsylvania law, sheriff’s sales are valid at the “fall of
the hammer,” unless evidence shows fraud or the sale price “shocks the conscience.” Pulcini,
261 B.R. at 840; see Butler v. Lomas & Nettleton Co., 862 F.2d 1015, 1019 (3d Cir. 1988);
Pennsylvania Co. for Insurances on Lives & Granting Annuities, to Use of Jefferson Med. Coll.
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of Philadelphia v. Broad St. Hosp., 47 A.2d 281, 283 (Pa. 1946) (“It has been the general
understanding in this Commonwealth that the sheriff's sale [is final] when the hammer falls.”).
The hammer rule is well engrained in Pennsylvania state law and promotes a clear and stable title
system. This court agrees that “the principle [of the hammer rule] remains its vitality,” and that
to allow completed sheriff’s sales to be avoided as preferences under § 547 would unduly
threaten the security and stability this law provides. Pulcini, 261 B.R. 844–45; see BFP, 511 U.S.
at 542; Rocco, 319 B.R. at 417–18.
The court recognizes that the purpose of § 547 is to promote bankruptcy law’s central
tenet of ensuring equitable distribution of the estate to creditors and to prevent individual
creditors from receiving more than their fair share by racing to the courthouse prior to a debtor
declaring bankruptcy. See H.R.Rep. No. 95–595; 5-547 Collier on Bankruptcy ¶ 547.10 (16th ed.
2017). While debtor argues that sheriff’s sales can lead to windfalls for creditors, Pennsylvania
courts have found that because the purchaser at a sheriff’s sale assumes all the risk, the purchaser
should not be denied its reward. Bank of Am., N.A.,47 A.3d at 1213 (enforcing a sheriff’s sale,
where the property was sold for less than half of its suggested fair market value because the court
“declin[ed] to deprive the purchaser of the reward he received for assuming the risk” of bidding
at a sheriff’s sale); Blue Ball Nat. Bank, 810 A.2d at 168 (finding “that it is the purchaser who
takes all of the risk at a sheriff’s sale . . . although [a purchaser] may turn a profit from their
purchase, their action is not without risk and the price they obtain upon resale does not alone
control.”). A creditor-purchaser’s profit received from the later resale of the foreclosed property
does not automatically constitute a windfall or mean the creditor received “more than” a
hypothetical Chapter 7 valuation under §547; any profit received from the later sale is received
qua purchaser, not qua creditor. See Ehring v. Western Community Money Ctr. (In re Ehring),
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900 F.2d 184, 188–89 (9th Cir. 1990) (finding that the existence of a preference should not turn
on the status of the purchaser as creditor—if the creditor as purchaser took advantage of the
debtor during the sale process, the transfer should be voided under §548); Newman v. FIBSA
Forwarding, Inc. (In re FIBSA Forwarding, Inc.), 230 B.R. 334, 341 (Bankr. S.D. Tex.) (holding
that the profit a creditor purchaser makes from flipping a debtor’s home purchased at a sheriff’s
sale is “not received in [the purchaser’s] capacity qua creditor . . . but was received in its
capacity qua purchaser”).
Thus, the multiple policy interests raised in this case all support the court’s conclusion
that in Pennsylvania a validly conducted sheriff’s sale is not an avoidable preference under
§ 547.
V.
Conclusion
For the reasons set forth above, the court finds that the bankruptcy court correctly
concluded that a valid, non-collusive sheriff’s sale of property is not an avoidable preference
under 11 U.S.C. §547. Therefore, the bankruptcy court did not err in granting Fifth Third’s
motion to dismiss.
Debtor’s appeal from the bankruptcy court’s order will be denied. An appropriate order
will follow.
Date: August 14, 2017
/s/ Joy Flowers Conti
Joy Flowers Conti
Chief United States District Judge
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