Among the many protections afforded creditors under the Bankruptcy Code is the estate’s ability to avoid transfers made before the petition date that benefit certain creditors at the expense of others. These so-called avoidance actions are primarily governed by Sections 544, 547 and 548 of the Bankruptcy Code, which set forth the requirements for challenging prepetition transfers as preferential or fraudulent.

It has not always been clear how these avoidance powers apply to prepetition foreclosure sales. Beginning with fraudulent transfers under Section 548 of the Code, the Supreme Court’s decision in BFP v. Resolution Trust Corporation established that the price received for real property at a mortgage foreclosure sale conducted in compliance with state law constitutes “reasonably equivalent value. The Supreme Court noted that it “would not presume that Congress intended to displace traditional state regulation with an interpretation that would profoundly affect the important state interest in the security and stability of title to real property. Accordingly, as long as a prepetition foreclosure sale was conducted in accordance with state law, it could not be avoided as fraudulent.

In contrast, the treatment of foreclosure sales in the context of a preference action under Section 547 of the Code is not as well defined. On the one hand, some courts have extended the policy reasoning in BFP to Section 547, finding that if a foreclosure sale is non-collusive and has been regularly conducted, then, as a matter of law, because the sale price constitutes reasonably equivalent value for the transferor for purposes of Section 548, the transferee will not have “received more” than it would have in a chapter 7 liquidation for purposes of Section 547.4 On the other hand, certain courts have reasoned that BFP is inapplicable and relied upon what they considered a “plain meaning” interpretation of Section 547, holding that the only relevant question is whether the creditor received more from the foreclosure sale than it would have in a hypothetical chapter 7 liquidation; in other words, a transfer could be “avoidable notwithstanding the fact that the foreclosure sale was non-collusive and complied with state law.

The Third Circuit’s recent decision in In re Veltre seeks to resolve some of this ambiguity by considering whether a properly conducted foreclosure sale can be avoided as a preference under Section 547 of the Bankruptcy Code. The court held that it cannot when the sale is governed by Pennsylvania state law, but refused to extend BFP to hold that a foreclosure sale can never be avoided as a preference.