Puerto Rico BK Court Holds Foreclosure Judicial Sale Not a Preference
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December 29, 2022, US Bankruptcy Court for Puerto Rico – Puerto Rico Bankruptcy Court dismissed the preference and fraudulent transfer allegations made by BLD Realty, Inc. (“Debtor”) against Latin Investment Corp., et al., (“Defendants”).
BLD Realty had also sought a declaratory judgment that the two real properties that it lost through the execution of a transfer deed subsequent to foreclosure were the property of the estate. However, the Court found that Puerto Rican law makes the transfer of title “definitive” once the transfer deed is signed between the marshal and the purchaser subsequent to the judicial sale and that the statutory requirement of a judicial order confirming the sale does not intend to halt the transfer of property. The Court held that the fact that the state court had not confirmed the judicial sale until after the filing of the bankruptcy petition was insignificant since the transfer deed was already executed a day before the bankruptcy filing. The Court concluded that the properties were not the property of the estate under section 541(a)(1) of the Bankruptcy Code.
The Court also dismissed BLD Realty’s preference claim based on the foreclosure of its properties within ninety days before the bankruptcy filing. The Court observed that secured creditors do not receive more under the hypothetical chapter 7 liquidation scenario because the collateral is unavailable to the unsecured creditors. The Court held that the Fifth Circuit judgment in Krafsur v. Scurlock Permian Corp. (In re El Paso Refinery L.P.), 171 F.3d 249, 1999 U.S. App. LEXIS 5320 allows the courts to circumvent the fifth prong of section 547 if a creditor receives a transfer which, by its very nature, would not have been available to any of the other secured or unsecured creditors. The Court ruled that a lien creditor does not receive more than it would in a chapter 7 liquidation. The Court concluded that BLD Realty’s claim failed to satisfy the fifth prong of section 547 of the Bankruptcy Code.
BLD had alleged that its tenants (“Defendants”) colluded to stop paying rent to BLD, so they would use that money to purchase the foreclosure judgment against BLD and acquire the properties through the foreclosure procedure’s judicial sale. According to the complaint, Latin Investment Corp. was allegedly a “sham” company built by tenant Defendants to undertake the said purchase. However, the Court held that collusion usually manifests itself in “bid rigging or some other form of price fixing”. The Court found that BLD did not allege that the foreclosure bid was rigged or that the price was fixed. The Court again cited the Supreme Court’s decision in Bfp v. Resolution Trust Corp. to hold that section 548 cannot avoid a “non-collusive” foreclosure. The Court held that the alleged facts failed to show that the foreclosure was “collusive” and, therefore, dismissed the fraudulent transfer claim.
BLD Realty Inc. v. Perfect Price Inc. (In re BLD Realty Inc.), 2022 Bankr. LEXIS 3662, 2022 WL 17996551 (Bankr. D.P.R. December 29, 2022)