Madrid, In re

• Citation: 725 F.2d 1197
• Decision Date: 13 February 1984
• Docket Number: No. 82-4433,82-4433
• Parties: 10 Collier Bankr.Cas.2d 347, 11 Bankr.Ct.Dec. 945, Bankr. L. Rep. P 69,758 In re Judith Lynne MADRID, Debtor. Judith Lynne MADRID, Appellant, v. LAWYERS TITLE INSURANCE CORP., and Donald Turney, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1197

725 F.2d 1197

10 Collier Bankr.Cas.2d 347, 11 Bankr.Ct.Dec. 945,

Bankr. L. Rep. P 69,758

In re Judith Lynne MADRID, Debtor.

Judith Lynne MADRID, Appellant, v. LAWYERS TITLE INSURANCE CORP., and Donald Turney, Appellees.

No. 82-4433.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 18, 1983.

Decided Feb. 13, 1984.

Victor Perri, Vernon E. Leverty, Alan R. Smith, Miller & Daar, Reno, Nev., for appellant.

Timothy J. Henderson, Henderson, Nelson & Moschetti, Reno, Nev., for appellees.

Leon L. Vickman, Encino, Cal., for Mortgage Brokers Institute.

Peter G. Clark, Oakland, Cal., for Richard O. Burke.

Noel W. Nellis, Morrison & Foerster, San Francisco, Cal., for American College of Real Estate Lawyers.

Appeal from the United States Bankruptcy Appellate Panel of the Ninth Circuit.

Before GOODWIN, TANG and FARRIS, Circuit Judges.

TANG, Circuit Judge:

The sole question before us is whether the nonjudicial foreclosure sale of appellant's home may be set aside under 11 U.S.C. Sec. 548(a) of the Bankruptcy Code. The bankruptcy court, 10 B.R. 796, set aside the sale, finding that a "transfer" occurred at the foreclosure and that less than reasonably equivalent value was paid to the debtor. The Bankruptcy Appellate Panel, 21 B.R. 424, reversed, holding that reasonably equivalent value is paid as a matter of law when there is a regularly conducted foreclosure sale.

We agree that the foreclosure sale cannot be set aside, but do not base our holding on the question of reasonably equivalent value. We hold that the sale must be upheld because the transfer of the home occurred at the time of perfection of the trust deed, not upon foreclosure.

BACKGROUND

In September, 1979, Judith Madrid purchased a home near Lake Tahoe, Nevada for $290,000. Madrid made a $125,000 down payment and executed a one-year note, secured by a first deed of trust on the residence, for the balance of $165,000. The $125,000 down payment was financed through Del Mar Commerce Company and secured by a second deed of trust on the same property. Appellee, Lawyers Title Insurance Corporation, is the substituted trustee under the second deed.

Madrid subsequently defaulted on payments due under both deeds. Pursuant to Nevada state law, Nev.Rev.Stat. Secs. 107.080 and 21.130 (1979) and provisions in the second deed of trust, the trustee commenced foreclosure proceedings on the second deed. After proper notice and publication, the property was sold on January 9, 1981, at a nonjudicial foreclosure sale to appellee, Donald Turney. Turney is in the business of buying and selling foreclosure properties. At the time of sale, approximately $176,000 was due on the first deed, and approximately $80,200 was due on the second deed. Turney, the sole bidder, paid the amount due on the second deed plus one dollar. He took the property subject to the first deed, which was also in the process of foreclosure.

On January 16, 1981, seven days after the foreclosure sale, Madrid filed a petition for reorganization under Chapter XI of the Bankruptcy Code. Madrid, as a debtor-in-possession, then brought an action in bankruptcy court to set aside the sale as a fraudulent conveyance under 11 U.S.C. Sec. 548(a)(2)(A) & (B)(i), which states:

(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor--

* * *

(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(B)(i) was insolvent on the date that such transfer was made or such obligation * * *

was incurred, or became insolvent as a result of such transfer or obligation;

The parties agreed that Madrid met the insolvency requirement of Sec. 548(a)(2)(B)(i). Thus, the question addressed by the courts below was whether there had been a transfer of Madrid's property interest within one year prior to filing of the Chapter XI petition, for which Madrid received less than a reasonably equivalent value.

The bankruptcy court agreed with Madrid that the sale should be set aside as a fraudulent conveyance. The court found, without discussion, that a nonjudicial foreclosure sale constituted a transfer under 11 U.S.C. Sec. 101(41), albeit an involuntary transfer. The bankruptcy court then set aside the sale, concluding that the reasonably equivalent value requirement of Sec. 548(a)(2)(A) had not been met.

The Bankruptcy Appellate Panel reversed the bankruptcy court. The Panel held that the consideration received at a noncollusive and regularly conducted nonjudicial foreclosure sale satisfied the reasonably equivalent value requirement of Sec. 548(a)(2)(A) as a matter of law, and thus the sale could not be set aside. Although the Panel failed to address the transfer issue, it apparently assumed that the sale constituted a transfer under Sec. 548(a).

ANALYSIS

Since the Bankruptcy Appellate Panel's conclusion rests on a question of law, it is subject to independent review by this court. Lama Co. v. Union Bank, 315 F.2d 750, 752 (9th Cir.1963). While we agree with the Panel that the sale should not be set aside under Sec. 548(a)(2)(A), we base our reasoning on different legal principles.

We conclude that the foreclosure sale was not a transfer under Sec. 548(a), and do not decide whether the amount paid at foreclosure was a reasonably equivalent value. For reasons that follow, we hold that the transfer of Madrid's property interest under Sec. 548(a)(2)(A) occurred at the time the second deed of trust was perfected under Nevada law. That transfer was carried out more than one year prior to filing of the bankruptcy petition. Thus, the transfer was not voidable as a Sec. 548(a)(2)(A) fraudulent conveyance.

Arguments of the Parties

Madrid's Sec. 548 petition seeks to avoid and set aside the allegedly fraudulent transfer of her equity interest in the residence. Yet before Madrid may avail herself of the relief provided under Sec. 548(a), she must demonstrate that there has been a transfer of the residence within one year prior to filing of the bankruptcy petition. She alleges that such a transfer occurred at the nonjudicial foreclosure sale. Appellees, however, take the position that the only transfer that has taken place is the transfer at the perfection of the trust deed. They argue that the trust deed was perfected more than a year prior to the filing of the bankruptcy petition, and is thus not subject to avoidance as a fraudulent conveyance. See In re Alsop, 14 B.R. 982 (Bkrtcy.Alaska 1981), aff'd, 22 B.R. 1017 (D.Alaska 1982). ¹ We agree with the latter contention.

Historical Review

The modern law of fraudulent conveyances finds its origins in the 1570 English enactment of 13 Eliz., ch. 5. See 4 Collier, Collier on Bankruptcy, p 67.29 (14th ed. 1978); 4 H. Remington, Remington on Bankruptcy, Sec. 1638 (rev. ed. 1957). The statute was passed for the protection of creditors, and gave the creditors, inter alia, the power to avoid conveyances and transfers made with the intent and purpose to hinder, delay or defraud creditors. The American codification of this bankruptcy law was set forth in the Bankruptcy Act of 1898. A review of Sec. 67e of the 1898 Act demonstrates that it dealt only with conveyances made with actual intent to defraud.

The Chandler Act of 1938 replaced Sec. 67e with Sec. 67d. The 1938 Act expanded the law of fraudulent conveyances by creating "constructive fraudulent conveyances". This expansion permitted the setting aside of conveyances made by a debtor without fair consideration, regardless of the debtor's actual intent. 11 U.S.C. Sec. 67d(2)(a-c). The most recent codification of the fraudulent conveyance statute is at Sec. 548(a)(2)(A) & (B)(i).

In our short historical review of the fraudulent conveyance statutes we have found no evidence that the lineal ancestors of Sec. 548(a)(2) were to be used to attack a secured creditor's enforcement of a lien as a constructive fraudulent conveyance. These statutes instead provide authority for the proposition that conveyances are set aside when there is actual fraud or a situation indicative of fraud, such as the transfer of property for less than reasonable equivalence.

Legislative History

The statutory development of time of transfer for Sec. 548 purposes underscores the conclusion that the enforcement of a valid lien was not intended to be covered by Sec. 548. The first appearance of a section pinpointing time of transfer for fraudulent conveyance purposes was in Sec. 67d of the 1938 Chandler Act. That section read:

For the purposes of this subdivision d, a transfer shall be deemed to have been made at the time when it became so far perfected that no bona fide purchaser from the debtor could thereafter have acquired any rights in the property so transferred superior to the rights of the transferee therein, but, if such transfer is not so perfected prior to the filing of the petition initiating a proceeding under this Act, it shall be deemed to have been made immediately before the filing of such petition.

11 U.S.C. Sec. 67d(5) (repealed 1978). This formula for determining time of transfer remains significantly unchanged in Code Sec. 548(d)(1). The Uniform Fraudulent Conveyance Act, progenitor of the constructive fraudulent conveyance statutes, contained no comparable provision defining time of transfer. This raises the question why Congress added such a provision.

The answer lies in the legislative history, which demonstrates that by defining transfer for fraudulent conveyance purposes in terms of time of perfection, Congress effected two purposes: (1) time of perfection served as the pivotal point in computing the reach-back period during which the bankruptcy trustee could set aside fraudulent conveyances; and (2) a secret, i.e., unperfected transfer would not escape the trustee's avoidance powers by...