Non-Collusive Mortgage Foreclosure Held Preferential

 By: Adam S. Cohen

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Whittle Development, Inc.,[1] the Bankruptcy Court for the Northern District of Texas held that a pre-petition foreclosure action against real property may be avoidable as a preferential transfer where the foreclosing creditor receives more than it would have in a liquidation under chapter 7 of the Bankruptcy Code, even though the action was non-collusive and complied with state law.[2] Whittle Development, Inc. (the “Debtor”) and Colonial Bank, N.A. (the “Creditor”) entered into a Development Loan Agreement on December 31, 2007 pursuant to which the Creditor loaned the Debtor $2,700,000 (the “Loan”).[3] The Creditor declared a default on the Loan, accelerated the balance due, and on September 7, 2010, foreclosed on the property that secured the loan.[4] At the pre-petition foreclosure sale, a subsidiary of the Creditor bought the property for $1,220,000.[5]  The Debtor filed for bankruptcy on October 4, 2010 under chapter 11 of the Bankruptcy Code.[6]  The Creditor filed a proof of claim for $2,855,243.29, alleging that $1,181,513.27 of the claim represents the deficiency from the foreclosure sale.[7]  The Debtor disputed the Creditor’s deficiency claim and argued that the Creditor was over secured by $1,100,000 because the property was worth $3,300,000.[8]

read more