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Fifth Circuit Says Foreclosures are Transfers


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August 30, 2022, US Court of Appeals for the Fifth Circuit – The Fifth Circuit Court of Appeals allowed a creditor to avoid a senior lien on a property purchased and foreclosed by the property owner, holding that the foreclosure was “fraudulent” as to the creditor under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) constructive fraud provision.

Richard Morash (“Mr. Morash”), the sole owner of the Debtor, owned a property encumbered by liens. Mr. Morash erased the Defendant creditor’s lien on the property by purchasing a senior lien and foreclosing on the property. The Court noted section 24.006(b) of the Texas Business and Commerce Code, allows a transfer made by the debtor to an “insider” at the time of the debtor’s insolvency to be set aside in favor of a creditor’s earlier filed claim. Mr. Morash had argued that foreclosures are allegedly not transfers “made by a debtor” but are instead transfers made by third parties. In this case, the property foreclosure deed was signed by the foreclosure trustee. The Court cites the fifth circuit judgment in Abramson v. Lakewood Bank & Trust Co., 647 F.2d 547, 1981 U.S. App. LEXIS 12438, to hold that TUFTA’s broad language implies that foreclosures are “transfers made by the debtor”. 

Morash v. Valley Ridge Roofing & Constr., L.L.C. (In re Silver State Holdings), 2022 U.S. App. LEXIS 24587, 2022 WL 3755778