By Bethany D. Simmons, Esq., and Noah Weingarten, Esq., Loeb & Loeb LLP
In Reinhardt v. Prince (In re Reinhardt), 177 F.4th 684 (6th Cir. 2026), the 6th U.S. Circuit Court of Appeals held that a property tax foreclosure constituted an avoidable preferential transfer under Section 547(b) of the Bankruptcy Code.
Although the decision arose from Michigan’s property tax foreclosure scheme, its reasoning has broader significance for preference litigation, particularly on transfer timing and Section 547(b)’s “more than” test, which asks whether the challenged transfer allowed the creditor to receive more than it would have received in a hypothetical Chapter 7 liquidation.
Background
The debtor owned a home in Michigan and failed to pay her property taxes, which prompted the county treasurer, who was responsible for tax collection, to initiate foreclosure proceedings against the property. The dates of the various background events are critical to understanding the 6th Circuit’s ultimate ruling.
On February 18, 2022, the treasurer obtained a foreclosure judgment ordering that title to the property would vest in the county treasurer if the debtor did not pay the delinquent taxes by March 31, 2022.
On March 31, 2022, title in the property vested in the county treasurer because the debtor failed to pay her taxes.
On June 10, 2022, within 90 days of title vesting in the treasurer, the debtor filed for bankruptcy and brought an adversary proceeding seeking to avoid the transfer of title as a preferential transfer under Section 547(b) of the Bankruptcy Code.
Because the property was the debtor’s only potential asset with unexempt value, the debtor premised her proposed plan on avoiding the transfer of title to the treasurer, paying the treasurer in full, and then paying her other creditors.
Preference basics
Section 547 of the Bankruptcy Code generally permits a trustee or debtor-in-possession to avoid a prepetition transfer of a debtor’s property if it was made to or for the benefit of a creditor, on account of a preexisting debt, while the debtor was insolvent, and within the applicable look-back period, which is typically 90 days before the bankruptcy filing.
The transfer must also have enabled the creditor to receive more than it would have received in a hypothetical Chapter 7 liquidation of the debtor’s assets had the transfer not been made.
The purpose of a preference is to promote equal treatment among similarly situated creditors and ensure they receive the same treatment on their claims whether paid before or after the bankruptcy filing.
At issue in Reinhardt were two elements necessary to establish the debtor’s prima facie preference claim:
- whether the transfer of her property occurred within 90 days before she filed her bankruptcy petition; and
- whether the treasurer received more than he would have received in a hypothetical Chapter 7 liquidation and the transfer had not been made.
The 90-day lookback period
The initial issue was whether the transfer occurred within the 90-day lookback period preceding the debtor’s bankruptcy filing — i.e., between March 12, 2022, and June 10, 2022 (the bankruptcy filing date).
The treasurer argued the transfer occurred on February 18, 2022 (outside the preference window), when the foreclosure judgment was entered. The debtor argued that the transfer occurred on March 31, 2022 (inside the preference window) when title actually vested in the treasurer.
The 6th Circuit agreed with the debtor, holding that the “transfer” occurred on the date that title vested — not the date that the foreclosure judgment was entered.
The court observed that Section 101(54)(D) of the Bankruptcy Code defines a “transfer” to encompass any “involuntary modes of transfer” that occur when a property is transferred by operation of law, including by means of an execution of judgment.
Here, the debtor “didn’t lose her rights” when the foreclosure judgment was entered because the judgment used the future-tense phrase “will vest” and the debtor retained the right to pay the delinquent property taxes through March 31, 2022.
Rather, the transfer occurred when the debtor failed to pay the delinquent property taxes and “involuntarily parted” with her ownership interest when title vested in the treasurer on March 31, 2022 (inside of the 90-day lookback window).
Thus, the initial disputed element for establishing a prima facie preference case was satisfied.
The ‘more than’ test
The next issue was whether the transfer enabled the treasurer to receive more than he would have received if:
the case were a case under chapter 7 of the Bankruptcy Code;
the transfer had not been made; and
he received payment on account of his claim consistent with the requirements of the Bankruptcy Code.
The 6th Circuit observed that:
“The ‘more than’ test boils down to a comparison of two values. … On one hand, we assess what the [transfer] enabled the Treasurer to receive. On the other, we construct a hypothetical Chapter 7 liquidation — pretending the [transfer] never happened — and calculate what the Treasurer would’ve received. Then we compare. If [the debtor] can show that the [transfer] enabled the Treasurer to receive more than he would’ve in the hypothetical liquidation, then she meets the § 547(b)(5) requirement and can avoid the transfer.”
The court determined that in a Chapter 7 case, the treasurer’s secured claim of $5,845 would have been paid in full (with postpetition interest), because the treasurer was significantly oversecured, holding a lien on property worth over $70,000.
However, the treasurer would not have received the 5% sales commission mandated under Michigan (or any other state-law specific fees) in a Chapter 7 liquidation, because those costs arise only from the county’s foreclosure sale process, which would not occur in a hypothetical Chapter 7 case. The court found that the treasurer’s ability to collect a sale commission “makes the difference.”
Next, the court found that the treasurer received more than if the transfer had not been made. The court rejected a pure “snapshot” approach that would simply assign the property’s full fair market value to the treasurer as of the bankruptcy filing date because that would have created an incomplete picture about what the treasurer actually received as a result of the transfer.
Rather, the court instead predicted how the foreclosure process would have played out. The parties agreed the property would have been sold at auction for well above the minimum bid. From the sale proceeds, the Treasurer would have received the minimum bid (covering delinquent taxes, interest, and fees) plus a 5% sales commission on the excess proceeds.
Because creditors in bankruptcy do not receive sales commissions, the 5% commission represented an amount the Treasurer would receive through the tax foreclosure that he would not receive in a Chapter 7 liquidation.
The court concluded that this difference — however modest — satisfied the statutory “more than” test.
Key takeaways
Although rooted in Michigan’s tax foreclosure scheme, Reinhardt has broader relevance for preference litigation. The decision emphasizes that transfer timing turns on when the debtor actually parts with a state-law property interest and when that transfer is perfected.
It also confirms that Section 547(b)(5)’s “more than” test asks whether the challenged transfer gave the creditor any value it would not have received in a hypothetical Chapter 7 liquidation — not merely whether the creditor improved its percentage recovery relative to other creditors.
Finally, the decision cautions against a mechanical petition-date “snapshot” where state law imposed conditions that affect the practical value of the creditor’s interest are present.
Bethany D. Simmons, a partner with Loeb & Loeb LLP’s restructuring and bankruptcy practice, represents clients in all aspects of Chapter 11 bankruptcies, out-of-court restructurings, and commercial litigation across diverse industries, with a focus on providing pragmatic strategies for complex financial challenges. She can be reached at bsimmons@loeb.com. Noah Weingarten, a partner in the firm’s restructuring and bankruptcy practice, maintains a commercial and bankruptcy litigation practice with an emphasis on bankruptcy avoidance. He can be reached at nweingarten@loeb.com. The authors are based in New York.
This article was previously published by Westlaw Today.
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