862 F.2d 1015 (3rd Cir. 1988), 88-1033, Butler v. Lomas and Nettleton Co.

Docket Nº:88-1033.
Citation:862 F.2d 1015
Party Name:BUTLER, Bernard, Butler, Mary v. LOMAS AND NETTLETON COMPANY, The Secretary of Housing and Urban Development, Appeal of LOMAS AND NETTLETON COMPANY.
Case Date:December 07, 1988
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 1015

862 F.2d 1015 (3rd Cir. 1988)

BUTLER, Bernard, Butler, Mary


LOMAS AND NETTLETON COMPANY, The Secretary of Housing and

Urban Development, Appeal of LOMAS AND NETTLETON COMPANY.

No. 88-1033.

United States Court of Appeals, Third Circuit

December 7, 1988

Argued June 24, 1988.

David B. Comroe, Robert J. Wilson (argued), Maureen E. Laflin, Robinson, Greenberg and Lipman, Philadelphia, Pa., for appellant.

Henry J. Sommer (argued), Community Legal Services, Inc., Philadelphia, Pa., for appellees.

Before GIBBONS, Chief Judge, and HIGGINBOTHAM, Circuit Judge, and ROTH, District Judge. [*]


ROTH, District Judge:


This is an appeal from an order of the district court, affirming the judgment of the bankruptcy court in In re Butler, 75 B.R. 528 (Bankr.E.D.Pa.1987). Appellees, the Butlers, filed a Chapter 13 bankruptcy petition on June 17, 1986, and thereafter sought to have the bankruptcy court avoid a sheriff's sale of their residence which had taken place on May 6, 1985. To that end, debtors relied upon 11 U.S.C. Sec. 548 of the federal bankruptcy law, which section allows a bankruptcy trustee to avoid constructively fraudulent transfers of the debtors' property made within one year prior to the filing of a bankruptcy petition. A debated issue, unresolved to date by this court, is whether a mortgage foreclosure may ever be considered a constructively fraudulent transfer as defined in section 548. 1 We are not required here to decide

Page 1016

that issue for we find that, even assuming section 548 may be applied to foreclosures, 2 in this case the transfer did not take place within one year of the Butlers' bankruptcy petition. Because the transfer did not take place within the one-year window, we reverse the decision of the lower courts to set aside the sheriff's sale.

Moreover, because our decision on the timing of the transfer is dispositive of this appeal, we need not review here the finding of the lower courts that less than reasonably equivalent value was paid by the purchaser at the Sheriff's sale.

Jurisdiction for appeal to this court is founded on 28 U.S.C. Sec. 158(d), which allows for appeals from the final orders of the district courts. As this appeal presents a question of law, review is de novo. 1 Collier on Bankruptcy p 3.03.


In 1969, Bernard and Mary Butler purchased a home in Philadelphia with financing provided by the Lomas and Nettleton Company, the appellant (hereinafter "Lomas"). The Butlers have not made any mortgage payments to Lomas since April 1, 1983, but to date remain in the home. In December, 1984, Lomas instituted an action in mortgage foreclosure. The complaint alleged a principal debt of $7,871.06, and a total amount due of $9,122.82.

Lomas obtained a judgment of foreclosure, and a Sheriff's sale of the premises was conducted on May 6, 1985. No bids were made. The premises were sold to Lomas for the sum of $2,664.90, an amount representing the taxes and costs toward the Sheriff's sale. On June 24, 1985, the Sheriff of Philadelphia County signed the deed to consummate the Sheriff's sale, and the deed was recorded that day.

  1. Section 548

    On June 17, 1986, the Butlers filed a petition in bankruptcy under Chapter 13 of the federal Bankruptcy Code. 11 U.S.C. Secs. 1301, et. seq. The Butlers then brought the instant action to set aside the sale as a fraudulent conveyance under section 548. 3

    Page 1017

    Section 548 empowers the trustee to avoid conveyances made with fraudulent intent, i.e., actually fraudulent (Sec. 548(a)(1)) as well as constructively fraudulent conveyances (Sec. 548(a)(2)). A conveyance is constructively fraudulent if: 1) the debtor was insolvent on the date of transfer (Sec. 548(a)(2)); 2) the debtor received less than "a reasonably equivalent value" in exchange for the transfer (Sec. 548(a)(2)(A)); and 3) the transfer is made within one year prior to filing the bankruptcy petition (Sec. 548(a)).

  2. The Bankruptcy Court Opinion

    The bankruptcy court found the foreclosure sale to be constructively fraudulent under the three-part test set out above. First, the parties agreed that the Butlers were insolvent at all relevant times. Appendix 4a. Second, the bankruptcy court found that the property was transferred for less than its reasonably equivalent value. Relying on an appraisal of the property offered by the Butlers' expert witness, the court found that property was worth $18,000. 75 B.R. at 531 & n. 3. Given this appraisal, the court found that the debtors realized through the sale 57.3% of the value of the premises, i.e., the mortgage balance of $7,871.06 plus the $2,644.90 paid by Lomas to cover the taxes and costs of the sale for the sum of $10,515.96. Id. at 531. Based on two cases in which the court found inadequate value had been received, the bankruptcy court concluded that the Butlers had not received reasonably equivalent value. Id. at 531-32 (citing In re...

To continue reading