In re Judith Lynne MADRID, Debtor. LAWYERS TITLE INSURANCE CORP., and Donald Turney, Appellants, v. Judith Lynn MADRID, Appellee.
BAP No. NV-81-1106-HVE
Bankruptcy No. 81-00038
United States Bankruptcy Appellate Panels of the Ninth Circuit.
Decided June 22, 1982.
21 B.R. 424
Alan R. Smith, Miller & Daar, Reno, Nev., for appellee.
Before HUGHES, VOLINN and ELLIOTT, Bankruptcy Judges.
OPINION
HUGHES, Bankruptcy Judge:
The question presented by this appeal is whether a non-judicial foreclosure of a deed of trust can be set aside as a fraudulent conveyance under
I
Judith Madrid acquired a home near Lake Tahoe in September 1979 for $290,000, giving the seller $125,000 cash and a one-year note secured by a deed of trust for $165,000. The cash was raised with a note to Del Mar Commerce Co. for $142,500, secured by a second deed of trust. The second deed of trust was paid down by $75,300 in June 1980 but no further payments were made and Del Mar requested the trustee under its deed of trust to commence nonjudicial foreclosure proceedings.
The trustee‘s sale took place on January 9, 1981, at which time $175,000 was due on the first deed of trust and $80,224 on the second. Donald Turney purchased at the sale for the amount of the second deed of trust. He took subject to the first deed of trust, which was in the process of foreclosure.
Madrid filed a Chapter 11 bankruptcy case on January 16, 1981 and, as debtor-in-possession, brought an action against Del Mar, Turney and the trustee under the deed of trust to set aside the trustee‘s sale of January 9. Two theories were advanced: 1. The sale did not comply with Nevada law; 2. The sale constituted a fraudulent conveyance pursuant to
Relying on a recent Fifth Circuit decision, the court found that Turney‘s bid was 64% to 67% of the property‘s market value at the time of sale and concluded that it was not reasonably equivalent value. The sale was held to be a voidable fraudulent conveyance. Thereafter, the court gave Turney a lien for the amount of his payment and for his attorneys fees in defending the fraudulent conveyance action. The title insurance company that had insured Turney‘s title was also given a lien for attorneys fees in defending the fraudulent conveyance action.
Turney and the title company appealed the fraudulent conveyance judgment; Madrid appealed the award of a lien for attorneys fees. We reverse the judgment setting aside the sale; the judgment awarding a lien for fees is thereby rendered moot.
II
The parties and this panel are aware of only two cases holding that a purchase at a nonjudicial sale under a deed of trust may be set aside as being a fraudulent conveyance. Both cases were decided by the Fifth Circuit Court of Appeals under provisions of the Bankruptcy Act of 1898. They are Durrett v. Washington Nat. Ins. Co., 621 F.2d 201 (5th Cir. 1980) and Abramson v. Lakewood Bank and Trust Co., 647 F.2d 547 (5th Cir. 1981).
In the earlier case, Durrett sought to avoid a foreclosure that took place nine days before he filed Chapter XI. The trial court held the nonjudicial sale was a transfer as that term was used in section 67d of the Act but that the consideration paid at the sale was a “fair equivalent” under section 67d(1)(e)(1) and denied relief. The circuit court reversed.
Section 67(d) of the former Act provided that every “transfer made and every obligation incurred by a debtor within a year” of bankruptcy is fraudulent as to existing creditors “if made or incurred without fair consideration by a debtor who is or will be rendered insolvent, without regard to actual intent. . . .” Fair consideration was defined as a “fair equivalent” in a good faith exchange.
The controlling questions as seen by the Durrett court were (1) whether the trustee‘s sale constituted a transfer and (2) whether fair equivalent value was paid.
As to the transfer issue, the court acknowledged that the “actual transfer of title was made by Durrett to Fields, as trustee, via the deed of trust, executed April 7, 1969, to secure an indebtedness . . .” P. 204. The transfer was more than one year before bankruptcy and therefore not vulnerable to attack under section 67d. The court held there was a second and final transfer on the day of the foreclosure sale, and this was within the one-year period.
As to the fair equivalent value issue, the Durrett Court noted that the trial court found the fair market value of the property on the date of the foreclosure sale to be $200,000 and that the successful bid was $115,400 or 57.7 per cent of the fair market value. In reversing the trial court‘s determination that the amount paid was a fair equivalent, the court of appeals held as a matter of law that the amount paid was not a fair equivalent, suggesting that any amount less than 70% of fair market value would not be equivalent value.
The fair equivalent value issue was not reached in Abramson, which reversed a summary judgment on the transfer issue.
III
The case before us is governed by
As stated earlier, the type of value that satisfied the Bankruptcy Act fraudulent conveyance provision was “fair equivalent value.” In holding that a foreclosure sale for 57.7 percent of fair market value was not fair equivalent value, the Durrett court stated at page 203:
We have been unable to locate a decision of any district or appellate court dealing only with a transfer of real property as the subject of attack under section 67(d) of the Act, which has approved the transfer for less than 70 percent of the market value of the property.
The only case cited in Durrett in support of that statement, Schafer v. Hammond, 456 F.2d 15 (10th Cir. 1972), was a voluntary transfer of real property by the debtor corporation to the mother of the principal stockholder of the debtor corporation. In view of our inability to find any cases other than Durrett and Abramson where a nonjudicial foreclosure sale was set aside on fraudulent conveyance grounds, we assume that the cases upon which Durrett fashioned the 70% fair market value rule were all voluntary, private transfers such as in Schafer.
However valid it may be to hold that less than 70 percent of fair market value is not a fair equivalent for a private transfer to an insider, application of that standard to regularly conducted public sales is questionable.
We decline to follow Durrett‘s 70% fair market value rule for the reason that a regularly conducted sale, open to all bidders
The question remains whether the price obtained at a nonjudicial foreclosure sale is itself “reasonably equivalent value” of the property transferred.
IV
If we consider the question of price adequacy in the context of foreclosure law we find, not surprisingly, that mere inadequacy will not upset a foreclosure sale. Golden v. Tomiyasu, 79 Nev. 503, 387 P.2d 989 (1963). “[T]here must be in addition proof of some element of fraud, unfairness, or oppression as accounts for and brings about the inadequacy of price.” Oller v. Sonoma County Land Title Company, 137 Cal.App.2d 633, 290 P.2d 880, which is identified as the Nevada rule. Golden v. Tomiyasu, supra, 387 P.2d at 994-5. The trial court‘s construction of
The law of foreclosure should be harmonized with the law of fraudulent conveyances. Compatible results can be obtained by construing the reasonably equivalent value requirement of Code
Reversed.
VOLINN, Bankruptcy Judge, dissenting.
As stated by the majority, the issue is whether or not a transfer of the debtor‘s property, in the course of a deed of trust foreclosure sale, is the kind of transfer contemplated by
Two decisions of the Fifth Circuit Court of Appeals which involved similar facts and which held that the provisions of § 67 of the Bankruptcy Act, the predecessor of
The majority evidences great concern with an arbitrary figure as to what may be reasonably equivalent value. It states that Durrett has in effect imposed an upset price of 70% in deed of trust or mortgage foreclosure sales. Durrett need not be read as categorically setting such a figure. The case held that a sale for 57% of the value was not for a reasonable equivalent value. In any event, I believe that the concept of “reasonably equivalent value” as a test set for
One cannot disregard the fact that a foreclosure sale is a forced sale and that the debtor contracted that such sale could occur in the event of default. Thus, there is a reasonable prospect that a sale under the circumstances of foreclosure could result in a price which would be less than one made under ideal circumstances involving a seller who does not have to sell and a buyer who does not have to buy. The reasonable value test of
The majority, however, endows the consideration received at a non-collusive regularly conducted non-judicial foreclosure sale, with a conclusive or irrebuttable presumption of reasonableness. Functionally, the only way to question a fraudulent transfer under
The Bankruptcy Code is a Federal Statute. Section 548 states a standard with respect to reviewing consideration in the event of a transfer of the debtor‘s property. Section 548 transcends the dispute between this debtor and the secured creditor. It brings into focus the claims of the debtor‘s other creditors that they have been deprived of recourse to an asset by an improvident sale. The majority would hold that despite widespread differences in law and practices relating to foreclosure, no bankruptcy court may entertain the factual issue of whether, under
In conclusion, I would hold that the price paid at a regularly conducted foreclosure sale should be given, at best, a strong presumption of adequacy. It should be remembered that the burden of proof in any event, is on the plaintiff to show that the consideration paid was inadequate. In this case the record shows that the Bankruptcy Judge heard the facts and gave the matter a good deal of thought.3 He concluded that a price of about 67% of the fair market value was not a reasonably equivalent value. This is a finding of fact which may be overturned only if it is clearly erroneous. Bankr.Rule 810. I am satisfied that his conclusion was reasonable and supported by the record. I would affirm.