Court Opinion

ID: 9706902
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:54:50.777446+00
Date Added: 2024-06-11T18:22:25.514169
License: Public Domain

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 11 U.S.C. § 548 if the purchase price is significantly less than fair market value. We hold that the consideration received at a non-collusive, regularly conducted public sale satisfies the “reasonably equivalent value” requirement of 11 U.S.C. § 548(a)(2) and reverse the trial court’s judgment avoiding the sale, 10 B.R. 795.
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 11 U.S.C. § 548(a)(2)(A). The trial court, holding that the foreclosure sale “was proper and in accordance with Nevada statutes,” found for defendants on the first theory. However, it entered judgment rescinding the foreclosure sale and cancelling the trustee’s deed to Turney on the fraudulent conveyance theory.
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 Tur-ney 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).
*426In 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(l)(e)(l) 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 11 U.S.C. § 548 of the Bankruptcy Code. In its essential respects, it tracks section 67d of the former Bankruptcy Act. Thus, the questions presented for decision are (1) whether the foreclosure sale constituted a transfer and (2) whether “reasonably equivalent value” was paid. 11 U.S.C. § 548(a)(2). We find that “reasonably equivalent value” was paid and need not address the question of whether the sale constituted a transfer.
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 *427and all creditors, is itself a safeguard against the evils of private transfers to relatives and favorites.
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 § 548 would radically alter these rules. Any foreclosure sale which failed to bring 70% of the property’s market value could be set aside by a bankruptcy trustee or a debtor-in-possession for a period of one year.
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 § 548(a)(2) to mean the same as the consideration received at a non-collusive and regularly conducted foreclosure sale. Thus, in the absence of defects, such foreclosure withstands avoidance as a fraudulent conveyance.
Reversed.