Bankruptcy Update Blog

A Second Look: United States Bankruptcy Court for The District of New Jersey Clarifies Start of Look-Back Periods for Avoidance Actions Involving Real Property

Debtors and trustees seeking to avoid the hardship of a foreclosure often attempt to employ sections 547 and 548 of the Bankruptcy Code.[1] In accordance with the former section, a debtor may avoid any transfer of an interest in property “on or within 90 days before the date of the filing of the petition.” When there is an allegation of a fraudulent transfer, the latter section provides, “The trustee may avoid any transfer . . . incurred by the debtor that was made or incurred on or within two years before the date of the filing of the petition.”

Because these look-back periods extend the time when a debtor can avoid certain transfers, the threshold determination of when the applicable period starts is crucial to assess whether these provisions are available to the debtor. A recent adversary proceeding in the United States Bankruptcy Court for the District of New Jersey, Cedrick Goodman v. MTAG as Custodian for Alterna Funding I, LLC, et al. Adv. Pro. No.: 20-01162[2], provides important guidance applicable when a lender files a lis pendens[3] years before the debtor files for bankruptcy.

The debtor filed for chapter 13 on January 15, 2020. About two months later, the debtor initiated an adversary proceeding to avoid the transfer of real property located in New Brunswick, New Jersey (“Property”) resulting from a final judgment of foreclosure entered on December 27, 2019, and to re-vest title of the Property in the debtor’s name. After a previous unsuccessful attempt, the debtor’s lender filed a second motion to dismiss the adversary proceeding on February 23, 2021. The lender’s primary argument was based on the recording date of the underlying lis pendens, September 17, 2015. The lender contended that because the lis pendens was recorded more than four years before the final judgment of foreclosure was entered, the debtor was foreclosed from asserting a claim under either section 547 or section 548 of the Code.

In his opposition to the lender’s motion, the debtor argued that the transfer should be avoided because the foreclosure became effective as of the date of the judgment in 2019 and not when the lis pendens was recorded. The Court noted that the debtor failed to offer case law to support this position. But the debtor claimed that two recent and controlling cases should not be dispositive because they had been decided after the debtor filed for bankruptcy.

The Court was not persuaded by this argument:

The lis pendens was recorded on September 17, 2015, and for purposes of analysis under the Bankruptcy Code, this date is considered the date of perfection, or the transfer date. Debtor filed his bankruptcy on January 15, 2020. The transfer date is clearly outside the respective lookback periods of 90 days or two years before the petition filing date. As such, the transfer may not be avoided under § 547 or § 548 of the Bankruptcy Code.

Accordingly, this case provides an important reminder to lenders regarding the significance of timely filing a lis pendens upon the commencement of a foreclosure action. As this case demonstrates, foreclosure actions in judicial foreclosure states such as New Jersey can take several years to complete. By promptly filing a lis pendens following the start of a foreclosure, a lender protects its interest in the property by, among other things, starting the clock for when avoidance actions would be available to debtors in a future bankruptcy case.

[1] See also Section 544(a)(3) of the Bankruptcy Code, which provides another avenue for a trustee to avoid certain transfers of real property pursuant to applicable state law: “The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by...a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.”

[2] The underlying case from which the adversary proceeding is derived is styled In re Cedrick Goodman, Case No.: 20-10683.

[3] A lis pendens is an official notice to the public of a lawsuit involving a claim impacting real property. A lis pendens puts a potential purchaser of real property on notice of existing litigation that clouds the title of the subject property and informs a potential purchaser that it will purchase the property subject to the existing litigation.