Although some courts reach the same result for different reasons, Bankruptcy Judge Laurel M. Isicoff of Miami explained why a mortgage foreclosure cannot be a preference in Florida.
In short, there is no payment of antecedent debt.
A homeowner defaulted on a $150,000 mortgage. The lender went through the steps required in Florida to take title through a credit bid: The lender filed a foreclosure complaint; the state court entered a final judgment of foreclosure; the lender was the successful bidder at the foreclosure sale with a $69,000 credit bid; a certificate of sale was entered; and after the homeowner unsuccessfully objected to the sale, the state court issued a certificate of title.
The same day the state court overruled the objection and said it would issue a certificate of title, the homeowner filed a chapter 13 petition and immediately filed a complaint to set aside the foreclosure sale as a preference under Section 547. The lender filed a motion to dismiss, contending that the complaint failed to state a claim.
The lender conceded that the home had been property of the debtor and that the debtor was insolvent in the 90 days before bankruptcy.
In her November 10 opinion, Judge Isicoff listed the two remaining questions: (1) Was the transfer on account of an antecedent debt; and (2) did the lender receive more than it would have in chapter 7?
The debtor argued that the transfer of the home to the lender was on account of the lender’s status as a creditor and was therefore on account of antecedent debt.
Some courts, Judge Isicoff said, believe that the first transfer in foreclosure is a transfer to the lender that can be set aside as a preference if the lender recovers more than it would in a hypothetical liquidation. Other courts, according to Judge Isicoff, believe that a foreclosure sale is not on account of antecedent debt.
In Florida, a foreclosure entails two transfers, Judge Isicoff said. The first transfer is the issuance of the certificate of title. The payment of the sale proceeds to the foreclosing lender is the second transfer.
In Florida, though, lenders are entitled to credit bid, to avoid requiring the lender to pay cash that will be repaid to the lender almost immediately. Consequently, the transfer to the lender at a foreclosure sale “is in consideration of the payment of the bid amount,” Judge Isicoff said.
Judge Isicoff explained how foreclosure works and where the transfers are found:
[T]he transfer to [the lender] on account of the antecedent debt was the transfer of the sale proceeds (had there been sale proceeds) to [the lender]. The issuance of the certificate of sale to [the lender] was not on account of the antecedent debt, but rather on account of [the lender’s] payment of the purchase price, which, in this case, was done by the credit bid.
Therefore, the lender received title in its capacity as a purchaser, not as a creditor, Judge Isicoff explained. As a result, the foreclosure sale could not be avoided as a preference because there was no transfer on account of antecedent debt.
Because one of the elements of a preference was not present, Judge Isicoff was not required to decide whether the lender received more than it would in chapter 7.
In a footnote, Judge Isicoff said she believes that BFP v. Resolution Trust, 511 U.S. 531 (1994), is not applicable to preferences. The Supreme Court held in BFP that a regularly conducted mortgage foreclosure cannot be set aside as a fraudulent transfer.
Under Florida law, the amount bid at a foreclosure sale is “conclusively presumed” to be sufficient consideration. On that basis, Judge Isicoff said she also would have granted the lender’s motion to dismiss.
Although some courts reach the same result for different reasons, Bankruptcy Judge Laurel M. Isicoff of Miami explained why a mortgage foreclosure cannot be a preference in Florida.
In short, there is no payment of antecedent debt.
A homeowner defaulted on a $150,000 mortgage. The lender went through the steps required in Florida to take title through a credit bid: The lender filed a foreclosure complaint; the state court entered a final judgment of foreclosure; the lender was the successful bidder at the foreclosure sale with a $69,000 credit bid; a certificate of sale was entered; and after the homeowner unsuccessfully objected to the sale, the state court issued a certificate of title.
The same day the state court overruled the objection and said it would issue a certificate of title, the homeowner filed a chapter 13 petition and immediately filed a complaint to set aside the foreclosure sale as a preference under Section 547. The lender filed a motion to dismiss, contending that the complaint failed to state a claim.
The lender conceded that the home had been property of the debtor and that the debtor was insolvent in the 90 days before bankruptcy.
In her November 10 opinion, Judge Isicoff listed the two remaining questions: (1) Was the transfer on account of an antecedent debt; and (2) did the lender receive more than it would have in chapter 7?