Grissom v. JohnsonGrissom v. Johnson
In the Matter of Johnny GRISSOM and Jeanette Holland
Grissom, Debtors.
Jоhnny GRISSOM and Jeanette Holland Grissom, Plaintiffs-Appellees,
v.
Birnet L. JOHNSON, et al., Defendants,
C & S National Bank, Defendant-Appellant.
No. 90-8890.
United States Court of Appeals,
Eleventh Circuit.
March 17, 1992.
As Amended April 29, 1992.
Henry B. Napier, Richard H. Siegel, McCalla, Raymer, Padrick, Cobb, Nichols and Clark, Atlanta, Ga., for defendant-appellant.
Lee Ringler, Augusta, Ga., for plaintiffs-appellees.
Appeal from the United States District Court for the Southern District of Georgia.
Before COX and BIRCH, Circuit Judges, and ENGEL*, Senior Circuit Judge.
BIRCH, Circuit Judge:
This case requires us to interpret
The appellees, Johnny and Jeanette Grissom, failed to make the required payments on a loan which was secured by their residence. Exercising the legal rights granted by Georgia law, appеllant Citizens & Southern National Bank ("C & S" or "bank") foreclosed on the collateral, selling the Grissoms' property to the highest third-party bidders at an advertised foreclosure sale. Shortly thereafter, the Grissoms voluntarily sought Chapter 13 bankruptcy protection and filed a complaint in the United States Bankruptcy Court for the Southern District of Georgia. Their complaint sought to nullify the foreclosure sale because C & S allegedly sold the property too cheaply. After the case was tried, the bankruptcy court ruled in favor of the Grissoms because it was convinced that C & S did not sell the property for its reasonably equivalent value. On appeal, the United States District Court for the Southern District of Georgia affirmed the bankruptcy court.
We are convinced that both the bankruptcy court and the district court misunderstood the scope and meaning of our cases interpreting
I. BACKGROUND
A. The Relevant Facts
In 1971, Johnny Grissom borrowed $18,000 from C & S. The loan was secured by the Grissoms' residence in Augusta, Georgia. Eventually, the Grissoms defaulted in payment upon this notе. After C & S notified the Grissoms about the default and about the bank's intention to foreclose on the collateral, C & S advertised the foreclosure sale once a week for four weeks. On April 4, 1989, the bank conducted a nonjudicial foreclosure sale of the Grissoms' property at the courthouse in Richmond County, Georgia. The property was sold to the highest bidders, Birnet and Leslie Johnson. The sale price was $14,059--exactly the amount that the Grissoms owed on the note to C & S. It is undisputed that the bank's method of foreclosure--notifying the party in default, advertising the foreclosure sale, selling the property to the highest bidder--was in full compliance with Georgia law, see
The Grissoms filed for bankruptcy protection one day after the sale of their residence. One month later, they filed an adversary proceeding in the bankruptcy court against C & S and the Johnsons. In the portion of their complaint which is relevant to this appeal, the Grissoms contended that the foreclosure sale could be avoided by their bankruptcy estate because the Johnsons purchased the property for less than its "reasonably equivаlent value" within the meaning of
B. The Proceedings Below
1. The Bankruptcy Court.
The Grissoms' case was tried in bankruptcy court on July 7, 1989. At trial, the Grissoms argued that
The trustee may avoid any transfer of an interest of the debtor in property ... that was made ... on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily received less than a reasonably equivalent value in exchange for such transfer ... and ... became insolvent as a result of such transfer....
At the time of the trial, the seminal case bearing on the proper determination of reasonable equivalency was an opinion of our predecessor court, Durrett v. Washington National Insurance Co.,
Given the influence of Durrett and its progeny, the Grissoms' trial strategy was clear. The Grissoms attempted to establish a high market value of their residence, so that $14,059 would be less than 70% of that established value. To facilitate this strategy, the Grissoms offered a variety of evidence indicative of the property's true market value: a Richmond County tax document stating the residence's value to be $26,580; another appraisal indicating a similar value; and the testimony оf Jeanette Grissom, who stated that Birnet Johnson had offered to sell the property back to the Grissoms for $26,500. To counter this strategy, C & S offered the testimony of Birnet Johnson, who claimed that the property was only worth $18,000 "as is." In sum, the trial proceedings before the bankruptcy court were influenced heavily by the Durrett dictum.
Over two months after the trial but before the bankruptcy court ruled on the Grissom matter, this court decided Walker v. Littleton (In re Littleton ),
The bankruptcy court appeared unaffected by Littleton. In its order dated December 20, 1989, the court recognized Littleton 's command to consider all relevant factors. Nevertheless, the bankruptcy court relied almost exclusively upon Durrett 's 70% test, stating that it was "[t]he long standing rule in this circuit." Ordеr and Judgment of the Bankruptcy Court at 8, Exhibits Vol. 1. The court found the actual market value of the Grissoms' residence to be $26,000.3 Because the sale price of $14,059 was less than 70% of the property's market value of $26,000, the bankruptcy court ruled that the bank's foreclosure sale did not bring a reasonably equivalent value and therefore the sale was avoidable pursuant to
2. The District Court.
C & S appealed the bankruptcy court's decision to the United States District Court for the Southern District of Georgia. The district court's reliance upon the Durrett dictum is also very obvious. In its order, the district court stated that "the bankruptcy court correctly followed the general rule that a sale for less than seventy percent (70%) of the fair market value is less than a 'reasonably equivalent value.' " R1-5-4. Taking the Durrett rule as a given, the district court's analysis became mechanical. If the property was worth $18,000 (as stated by Birnet Johnson), the foreclosure sale price of $14,059 was an acceptable value because "$18,000.00 x .70 = $12,600.00." R1-5-4 n. 6. However, if the property was worth $26,000 (as found by the bankruptcy court), $14,059 was not a reasonably equivalent value because "$26,000.00 x .70 = $18,200.00." R1-5-4 n. 5. Therefore, the district court concluded that its decision would rest upon the bankruptcy court's finding of fair market value. After holding that the bankruptcy court's determination of a $26,000 fair market value was supported by the evidence, the district court affirmed the order of the bankruptcy court.5
II. DISCUSSION
A. The Determination Of Reasonable Equivalency
1. The "All Facts And Circumstances" Rule.
In Littleton, we indicated that the determination of reasonable equivalency under
Therefore, Littleton makes it clear that a foreclosure sale price of less than 70% of the actual market value of the property can still satisfy the reasonably equivalеnt standard of
2. Other Relevant Factors.
While Littleton provided one example of how a proper factual analysis could justify a foreclosure sale price of less than 70% of market value, we did not suggest in Littleton that the satisfaction of junior liens was the only other important factor bearing upon reasonable equivalency. In fact, Littleton spoke broadly of the role of the trial court, holding that a determination of reasonable equivalency could only be made after an examination of "all the facts and circumstances of each case."
In addition, the Littleton court noted that the fact that the property was sold in the context of a lawful foreclosure proceeding was an important factor because " 'the presumption of reasonableness is with the foreclosing party in the first instance.' "
One factor rebutting the presumption of reasonableness is, of course, that the foreclosure sale achieved less than 70% of the property's market value. In addition, courts should consider whether or not the foreclosing party obtained a fair appraisal of the property before selling it, the extent to which the foreclosure sale was advertised, and the competitive conditions surrounding the sale (such as the number of serious bidders). See Bundles,
3. The Competing Policy Concerns.
The totality of the circumstances test, introduced in Littleton and clarified today, best balances the competing policies underlying this area of the law. On the one hand, this court recognizes that mortgage holders must be able to exercise their lawful rights of foreclosure without having to insure losses which result simply because foreclosure property may sell too cheaply. On the other hand, we also realize that allowing commercial entities to ignore equity in foreclosure proceedings undermines one crucial policy of
Nullifying a legitimate foreclosure sale solely because the market for the property sold could not bring 70% of the property's value may advance bankruptcy policy, but it also violates the policy protecting the rights of secured creditors and diminishes the integrity of foreclosure sales. See, e.g., War Eagle Floats, Inc. v. Travis (In re War Eagle Floats, Inc.),
Therefore, it is inappropriate to make either the achievement of a fixed percentage of value or compliance with state foreclosure law the decisive factor. Both of these issues are relevant to the determination of reasonable equivalency, but neither issue is dispositive. Only a thorough analysis of all relevant facts and circumstances can achieve the appropriate balance between the competing interests. See Adwar,
B. The Inadequacy Of The Reasonable Equivalency Determination In This Case
On appeal, C & S argues that both the bankruptcy court and the district court relied too heavily on the Durrett 70% test, ignoring other potentially relevant factors which might have justified the foreclosure sale price even though that price was less than 70% of the property's market value. We agree. At the beginning of the Grissoms' trial, the bankruрtcy court told the parties in clear language that their case would be decided on the authority of Durrett and its 70% dictum:
I think Durrett's controlling, isn't it, on me? The 5th Circuit unit, you know, it's a 1980, 5th Circuit case.... [T]hat whole issue was, I think, litigated in this [bankruptcy] court in front of Judge Davis in the Littleton case, [
Transсript of Trial at 5-6. Significantly, the Littleton opinion referred to by the bankruptcy court contained the following language:
The Debtor's property was sold at the foreclosure sale for $34,917.09 or 63.49% of the fair market value of the property.... I conclude that [the buyer of the property] did not pay the "reasonably equivalent value" as required by
Walker v. Littleton (In re Littleton ),
The parties were obviously influenced by the bankruptcy court's erroneous reading of Durrett. Moreover, the parties could not benefit from this court's clarification of the law in Littleton because we did not decide Littleton until two months after their trial. Quite understandably, then, the evidence at trial focused on the market value of the Grissoms' residence, as both parties attempted to fit within the framework of Durrett. Other than this evidence relating to the 70% guideline, there was little or no evidence presented regarding the trustee's ultimate burden under
After the conclusion of the trial and nearly three months after this court decided Littleton, the bankruptcy court issued its decision in the Grissom matter. The bankruptcy court had little trouble calсulating the bank's shortcomings under the Durrett 70% guideline. However, when it attempted to analyze the other relevant factors as mandated by Littleton, the court only offered that it could find "no basis for a determination that the foreclosure sale now before the court brought the debtor the reasonably equivalent value of the property." Order and Judgment of the Bankruptcy Court at 9, Exhibits Vol. 1. That conclusion is hardly surprising in light of the fact that the parties presented scant evidence on the question.
Obvious conclusions are not always legally sound. In this case, the bankruptсy court's conclusion misstates the relevant burden of proof. Foreclosure sales are not presumed to bring unreasonable prices when the foreclosing party fails to prove otherwise. In fact, the opposite is true. Lawful foreclosure sales are presumed to bring the reasonably equivalent value of the debtor's property unless the trustee proves other circumstances to rebut that presumption. See Littleton,
C. The Appropriate Resolution Of This Case
To determine whether or not the Grissoms can avoid the foreclosure sale of their residenсe because the sale price was not the reasonable equivalent of the property's market value, we must necessarily examine all relevant facts and circumstances surrounding the foreclosure. However, the record developed before the bankruptcy court is very sparse. We know that C & S complied with Georgia foreclosure law. We know that the foreclosure sale was advertised four times. In addition, there was a gratuitous comment by the buyer of the property, Birnet Johnson, that "there were many bidders [at the foreclosure sale]." Transcript of Trial at 54. Beyond these observations, however, the record contains no findings regarding the circumstances surrounding the foreclosure sale. We cannot even conclusively determine whether or not C & S had a fair appraisal of the Grissoms' property before the sale.
Upon this record, we are incapable of determining whether or not the foreclosure sale price was the reasonable equivalent of the property's value. Upon the evidence presented at trial, a court could not acсurately decide whether or not the bank took the reasonable commercial steps necessary to ensure that the foreclosure proceedings attempted to protect the debtor's equity in the property. The record is largely silent regarding the bank's efforts to ascertain the value of the property it planned to sell, the nature and type of the advertising of the sale, the number of serious bidders at the foreclosure sale, and any other competitive conditions surrounding the sale.7 Therefore, it is impossible to decide whether or not the Grissoms could persuade the bankruptcy court " 'by the totality of the evidence that the sale price was not the reasonably equivalent value of the property.' " Littleton,
Ordinarily, under these circumstances the Grissoms would lose. After all, sale prices obtained at regularly conducted, non-collusive, lawful foreclosure sales are presumed to be reasonably equivalent values, unless the bankruptcy trustee establishes otherwise. See id. Under usual circumstances, establishing a violation of the Durrett 70% test is, standing alone, insufficient to make the foreclosure sale avoidable under
III. CONCLUSION
Durrett 's 70% dictum provided an easy way for trial courts to determine reasonable equivalency. However, no longer should it be mistaken as the law of this circuit. The only prоper way to determine reasonable equivalency under
VACATED and REMANDED.
Notes
Honorable Albert J. Engel, Senior U.S. Circuit Judge for the Sixth Circuit, sitting by designatiоn
The Grissoms also argued that the foreclosure sale violated the automatic stay mandated by
Although the Johnsons were also named as defendants in the Grissoms' complaint, they did not file an answer. The bankruptcy court awarded the Grissoms a default judgment as to the Johnsons. The Johnsons are not a party to this appeal
C & S challenges this figure. We must accept the bankruptcy court's findings of fact unless clearly erroneous. Dooley v. Weil (In re Garfinkle ),
C & S also argues that the tax card was inadmissible as hearsay. C & S did not object to the admission of the tax card at trial. See Transcript of Trial at 51-52. Therefore, because admission of the tax card was not plain error, we will not adjudicate the issue on this appeal. See Wilson v. Attaway,
[T]o the extent that a transfer is avoided under section ... 548 ... of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from the initial transferee of such transfer or the entity for whose benefit such transfer was made.
C & S the value of the property sold.
The district court also agreed that C & S was a beneficial entity within the meaning of
Some courts conclusively presume reasonable equivalency under these circumstances. See, e.g., Lawyers Title Ins. Corp. v. Madrid (In re Madrid ),
C & S also contends that the foreclosure sale extinguished junior liens, making this case similar to Littleton. We have examined the record on this point. Our review could not determine the extent to which the Grissoms actually benefitted from the elimination of junior liens. Therefore, this argument by the bank has not influenced our disposition of this case
C & S also contests the dеtermination that it is a beneficial entity within the meaning of
Nor are we persuaded by the bank's equity attacks upon