Bundles, Matter of

• Citation: 856 F.2d 815
• Decision Date: 25 August 1988
• Docket Number: No. 87-2120,87-2120
• Parties: , 18 Bankr.Ct.Dec. 554, Bankr. L. Rep. P 72,461 In the Matter of Donald Eugene BUNDLES, Debtor-Appellant. In re Donald Eugene BUNDLES, Appellant, v. William J. BAKER, Indiana National Bank and James C. Wells, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 815

856 F.2d 815

57 USLW 2167, 18 Bankr.Ct.Dec. 554, Bankr.

L. Rep. P 72,461

In the Matter of Donald Eugene BUNDLES, Debtor-Appellant.

In re Donald Eugene BUNDLES, Appellant, v. William J. BAKER, Indiana National Bank and James C. Wells, Appellees.

No. 87-2120.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 18, 1988.

Decided Aug. 25, 1988.

Judith E. Seubert, UAW Ford Legal Services Plan, Indianapolis, Ind., for debtor-appellant.

Edward B. Hopper, II, Hopper & Cobb, Indianapolis, Ind., for appellee.

Before WOOD Jr., CUDAHY and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

In this appeal, we must decide whether a debtor in bankruptcy may set aside under section 548(a)(2) of the Bankruptcy Code (the Code), 11 U.S.C. Sec. 548(a)(2) (Supp. IV 1986), the sale of his personal residence upon foreclosure of the mortgage. The bankruptcy court and the district court held that he could not. We reverse and remand for further proceedings.

I Background

A. Statutory Background

Section 548 of the Code provides in pertinent part:

Sec. 548. Fraudulent transfers and obligations

(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 voluntarily or involuntarily--

....

(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; ....

11 U.S.C. Sec. 548(a)(2) (Supp. IV 1986).

This provision sets forth four elements that must be established before a debtor ¹ may set aside a transfer of property. These are: (1) the debtor had an interest in the property transferred; (2) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer; (3) the transfer occurred within one year of the filing of the bankruptcy petition; and (4) the transfer was for less than a "reasonably equivalent value." The parties agree that the debtor has established each of these elements except the last. ² Therefore, the only issue before us is whether the debtor received less than a reasonably equivalent value for the property in question.

B. Facts

The facts are stipulated. The debtor-appellant Donald Eugene Bundles has maintained a residence in Indianapolis, Indiana since 1964. Sometime in 1984 and 1985, due to various financial and health problems, Mr. Bundles was unable to meet his mortgage payments. On March 4, 1985, the mortgagee, Indiana National Bank (INB), commenced an action in state court seeking foreclosure of Mr. Bundles' residence. On July 10, 1985, the state court entered a default judgment against Mr. Bundles in the amount of $4,696.46. In addition, an IRS tax lien against the real estate was reduced to a personal judgment against Mr. Bundles in the amount of $2,666. A sheriff's sale of Mr. Bundles' residence was scheduled and held on September 11, 1985, after proper notice and in compliance with Indiana foreclosure law. As of this date, Mr. Bundles was insolvent. The property was purchased at the sale by William J. Baker for $5,066.80. The value of the property at this time was $15,500. ³ On September 12, 1985, Sheriff James L. Wells of Marion County executed a deed to Mr. Baker conveying Mr. Bundles' residence to him. The deed to the property was recorded on September 24, 1985.

On September 25, 1985, after the foreclosure and sale of his residence, Mr. Bundles filed a voluntary petition under Chapter 13 of the Code. Thereafter, on November 14, 1985, he filed a complaint in the bankruptcy court to set aside the foreclosure sale as a fraudulent conveyance. The complaint named as defendants Mr. Baker, the purchaser of his home; INB, the foreclosing mortgagee; and James C. Wells in his official capacity as the Sheriff of Marion County, Indiana.

C. The Bankruptcy Court Opinion

Under section 548, as we have noted already, a debtor in bankruptcy may set aside a transfer of his property as a fraudulent conveyance if he received less than a reasonably equivalent value for the property. In this case, the bankruptcy court held that Mr. Bundles had received a reasonably equivalent value for his home and therefore denied his complaint to set aside the transfer. The bankruptcy court determined that "any avoiding effect accorded a low purchase price by Section 548(a)(2)(A) is misplaced and overbroad with respect to regularly conducted, noncollusive foreclosure sales." Bundles v. Baker (In re Bundles), 61 B.R. 929, 936 (Bankr.S.D.Ind.1986), aff'd, 78 B.R. 203 (S.D.Ind.1987). Therefore, the court held that the sale price obtained at a regularly conducted, noncollusive foreclosure sale should be presumed to constitute a reasonably equivalent value under section 548(a)(2)(A). Id.

In reaching this conclusion, the bankruptcy court focused primarily on legislative history and legislative intent. First, the court examined the legislative history of the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA). ⁴ Although the court found that the plain language of the amended statute allows avoidance of foreclosure sales, it nonetheless determined that this language conflicted with the obvious intent of the drafters of the amendments. This intent, the court concluded, was to "preserve rather than avoid regularly conducted, noncollusive foreclosure sales." Id. at 934.

Second, the court examined the historical roots of section 548. It noted that section 548 developed from the English law of fraudulent conveyances dating back to a 1570 statute enacted by the Parliament of Queen Elizabeth I. Id. at 935. The purpose of fraudulent conveyance law was "to prevent the debtor from taking deliberate action to hinder, delay, or defraud his creditors." Alden, Gross, and Borowitz, Real Property Foreclosure as a Fraudulent Conveyance: Proposals for Solving the Durrett Problem, 38 Bus.Law. 1605, 1605 (1983). As a result, fraudulent conveyance law originally focused solely on the debtor's subjective intent to defraud his creditors. American adaptation of this law in the Code, however, extended its reach "to cases where the objective result of the transaction is detrimental to creditors, whether or not the debtor actually intended such detriment." Id. at 1605-06 (footnote omitted). Despite the shift in American bankruptcy law from focus on subjective intent to focus on objective results, the bankruptcy court concluded that "Section 548(a)(2) [was] designed to produce '... the same substantive results as the Statute of 13 Elizabeth [i.e., to invalidate only transfers made with actual intent to defraud].* ' " Bundles, 61 B.R. at 935 (quoting Zinman, Houle & Weiss, Fraudulent Transfers According to Alden, Gross, and Borowitz: A Tale of Two Circuits, 39 Bus.Law. 977, 991 (1984) (footnote omitted)).

D. The District Court Opinion

The district court reached a similar result as the bankruptcy court albeit by a somewhat different route. The district court held that "the reasonable equivalency standard should be ... irrebuttably satisfied where property is sold at a regularly conducted, non-collusive foreclosure sale to a third party purchaser and where the deed to the property is executed and recorded before the debtor filed his bankruptcy petition." Bundles v. Baker (In re Bundles), 78 B.R. 203, 208 (S.D.Ind.1987) (emphasis supplied). Unlike the bankruptcy court, the district court limited its holding to the facts before it; the court applied the irrebuttable presumption only to the situation where the property was sold to a third-party purchaser and declined to decide whether the same irrebuttable presumption would apply if the mortgagee had purchased the property at the foreclosure sale. The district court reasoned that this limitation is justified on the theory that, where the property is sold to a third party, the sale is more likely to have been the result of competitive bidding thereby assuring that a fair price was given. Id. at 208-10.

In reaching this result, the district court reviewed the legislative history of the BAFJA and determined that it was inconclusive. Id. at 206. Therefore, instead of focusing on statutory interpretation, the district court directed its attention to the policy concerns raised by the parties. The policy issue, in the court's view, was one of defining the proper relationship between federal bankruptcy law and nonbankruptcy state law. This relationship has been addressed by the Supreme Court in Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The district court interpreted Butner as counseling that courts should not use section 548, or any other provision of the Code, "to alter existing property interests under state law absent an overriding federal interest." Bundles, 78 B.R. at 209. In this case, the court determined, both state foreclosure law and federal fraudulent conveyance law seek to protect creditors. The court continued that state foreclosure law achieves this goal by maximizing the likelihood of competitive bidding at foreclosure sales. As a result, the court concluded, there is no overriding policy underlying section 548 that would justify intervening and changing the rights of creditors as established under state law. Id.

II Discussion

We must interpret the phrase "reasonably equivalent value" as applied to a foreclosure sale. Our task is complicated by the fact that reasonably equivalent value is not defined in section 548 or in any other provision of the Code. The courts addressing this issue have expressed a variety of viewpoints. Nevertheless, two basic lines of authority, each espousing a different interpretation of reasonably equivalent value as that term is used in section 548(a)(2)(A), have developed. We begin by reviewing the cases on either side of...