Opinion ID: 1840147
Heading Depth: 3
Heading Rank: 3

Heading: BFP v. Resolution Trust Corp and its progeny

Text: The definition of reasonably equivalent value as it appears in the U.S. Bankruptcy Code was addressed by the United States Supreme Court in BFP, 511 U.S. 531, 114 S.Ct. 1757. In a five-four decision, the Court held that reasonably equivalent value as required by section 548 of the U.S. Bankruptcy Code 11 U.S.C. § 548 [4] for foreclosed property is the price in fact received at a noncollusive real estate mortgage foreclosure sale, so long as all the requirements of the state's foreclosure law have been complied with. Id. at ___, 114 S.Ct. at 1765. In BFP, the property was sold at a foreclosure sale for $433,000, but had a fair market value of $725,000. Id. at ___, 114 S.Ct. at 1759. The Court characterized the issue in this manner: whether the amount of debt satisfied at the foreclosure sale is reasonably equivalent to the worth of the real estate conveyed. Id. at ___, 114 S.Ct. at 1760. In holding that reasonably equivalent value is equal to the price received at a noncollusive foreclosure sale, the Court rejected the Durrett 70% rule, [5] and stated that property that must be sold within the strictures of a mortgage foreclosure is simply worth less. Id. at ___, 114 S.Ct. at 1762. The Court examined the history of fraudulent transfer law, and noted the [f]raudulent transfer law and foreclosure law enjoyed over 400 years of peaceful coexistence in Anglo-American jurisprudence. Id. at ___, 114 S.Ct. at 1764. The Court also observed that the section of the bankruptcy code which requires reasonably equivalent value in exchange for a transfer seems deliberately to avoid the obvious term fair market value. Id. at ___, 114 S.Ct. at 1761. The Court reasoned that: the fact that a piece of property is legally subject to forced sale, like any other fact bearing upon the property's use or alienability, necessarily affects its worth. Unlike most other legal restrictions, however, foreclosure has the effect of completely redefining the market in which the property is offered for sale; normal free-market rules of exchange are replaced by the far more restrictive rules governing forced sales. Given this altered reality, and the concomitant inutility of the normal tool for determining what property is worth (fair market value), the only legitimate evidence of the property's value at the time it is sold is the foreclosure sale price itself. Id. at ___, 114 S.Ct. at 1767. The Court held that the reasonably equivalent value for foreclosed real property is the price received at a foreclosure sale conducted in compliance with the state's foreclosure law. Id. at ___, 114 S.Ct. at 1765. The Court specifically limited its holding to mortgage foreclosures of real property, and noted that application to tax foreclosures or other foreclosures could be different. Id. at ___ n. 3, 114 S.Ct. at 1761 n. 3. An Oregon bankruptcy court has applied the reasoning of BFP in the context of a land sale contract, or contract for deed. Vermillion v. Scarbrough (In re Vermillion), 176 B.R. 563 (Bankr.D.Or.1994). Oregon law provides that one of a vendor's remedies in default is a forfeiture. In a forfeiture procedure, the vendor declares the contract terminated and retains the vendee's prior payments as liquidated damages. Id. at 567. As in a Minnesota cancellation procedure, an Oregon vendor seeking forfeiture must comply with strict statutory notice requirements. Id. The Oregon bankruptcy court applied BFP to land sale contracts, holding that [a]bsent a debt so small as to shock the conscience, cancellation of the remaining debt on an Oregon land sale contract through a forfeiture procedure regularly conducted pursuant to state law is `reasonably equivalent value' for the debtor's interest in the property within the meaning of § 548(a)(2)(A). The Oregon court analyzed the BFP holding and opined that even though the BFP Court had limited its holding to mortgage foreclosures, the analysis upon which the Court rests its holding has equal relevance within the context of forfeitures of Oregon land sale contracts. Id. at 568. In applying BFP to land contract forfeitures, the court first observed that there is widespread use of land sale contracts in Oregon, and that the use of this method of financing is in Oregon's basic interest. Id. at 569. The court next noted that an interest in property that is the subject of a forfeiture action is also, as in a mortgage foreclosure sale, worth less than fair market value. Id. Further, the court stated that its holding has particular cogency when applied in those states, such as Oregon, whose legislatures and courts have taken steps to assure that a proper balance be struck between the rights of the vendor and vendee under land sale contracts. Id. The Oregon court further noted that a mortgagor has the three procedural protections of notice, opportunity to cure, and the requirement of strict adherence to statutory requirements under mortgage and deed of trust foreclosure proceedings. The same protections apply to contract for deed vendees. Id. at 569-70. During the cure period, the vendee in default is free to sell his or her interest in the property. Id. The court concluded that if the forfeiture procedure is regularly conducted, the reasoning of BFP is valid in the context of land sale contracts, despite the absence of a mandated sale of the property. Id. A Pennsylvania bankruptcy court applied the reasoning of BFP and In re Vermillion to tax foreclosure sales and determined that regularly conducted tax foreclosure sales conclusively meet the reasonably equivalent value standard. Lord v. Neumann (In re Lord), 179 B.R. 429 (Bankr.E.D.Pa.1995). See also In re T.F. Stone Co., 72 F.3d 466, 471 (5th Cir.1995) (holding tax foreclosure sale satisfied fair equivalent value requirement pursuant to BFP analysis, and observing that the essential state interest in ensuring `security of the titles to real estate' is equally salient in both mortgage foreclosure sales and tax sales.).