After applying the Patchstick on a 1.1 OTB, I was able to SSH and SCP ok, but not SFTP. I wanted to use something like transmit to "SFTP" as well and found I could not connect.
Looking in to the problem further I noticed that I had a 0 byte /etc/sshd_config file.
To enable the SFTP subsystem you need to add the following to your sshd_config file:
Subsystem sftp /usr/libexec/sftp-server
Alternatively you could also SCP your local sshd_config file to /etc on appletv.local
cp /etc/sshd_config email@example.com:/etc/sshd_config