Bundles v. Baker

• Decision Date: 12 June 1987
• Docket Number: No. IP 86-890-C,Adv. No. 85-0578.,Bankruptcy No. IP 85-4206 WP,IP 86-890-C
• Citation: 78 BR 203
• Parties: In re Donald Eugene BUNDLES, Appellant, v. William J. BAKER, Indiana National Bank, and James C. Wells, Appellees. In re Donald Eugene BUNDLES, Debtor. Donald Eugene BUNDLES, Plaintiff, v. William J. BAKER, Indiana National Bank, and James Wells, Defendants.
• Court: U.S. District Court — Southern District of Indiana

78 B.R. 203 (1987)

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

In re Donald Eugene BUNDLES, Debtor.

Donald Eugene BUNDLES, Plaintiff, v. William J. BAKER, Indiana National Bank, and James Wells, Defendants.

No. IP 86-890-C, Bankruptcy No. IP 85-4206 WP, Adv. No. 85-0578.

United States District Court, S.D. Indiana, Indianapolis Division.

June 12, 1987.

Dennis A. Jackey, Judith E. Seubert, UAW Legal Services Plan, for debtor.

Richard Shevits, Hopper and Opperman, for William Baker.

Laura L. Larson, Robert G. Grant, Ecklund, Frutkin and Grant, Indianapolis, Indiana for Indiana Nat. Bank.

Jan J. Kinzie, City Legal Counsel, Indianapolis, Ind. for James C. Wells.

Robert A. Brothers, Indianapolis, Ind., trustee.

DECISION

BARKER, District Judge.

This matter is before the court on appeal from the June 17, 1986 entry of the Honorable Robert L. Bayt, Judge, United States Bankruptcy Court for the Southern District of Indiana, denying the debtor's "Complaint to Set Aside and Vacate a Fraudulent Conveyance" pursuant to 11 U.S.C. § 548(a)(2)(A) (1982), 61 B.R. 929. On September 29, 1986, the debtor-appellant, Donald Eugene Bundles ("Bundles"), filed his brief in support of reversal of the bankruptcy court's decision. William J. Baker ("Baker") filed an opposing brief on November 10, 1986. On November 14, 1986, James C. Wells adopted Baker's brief in opposition as his own. On December 3, 1986, Indiana National Bank ("INB") filed its opposing brief. Finally, on January 20, 1987, Bundles filed a reply brief.

The court, being duly advised in the premises, now AFFIRMS the bankruptcy court's decision. The reasons for the court's ruling are set forth in the following memorandum.

Memorandum

I. Background

The parties stipulated the following facts: Don Bundles has lived at 106 South Webster Avenue, Indianapolis, Indiana, since 1964. Sometime in 1984 or 1985, Bundles became unable to make his mortgage payments to INB because of various financial and health problems. On March 4, 1985, INB commenced an action in Marion County Superior Court, Division 6, Cause No. S685-0241, seeking foreclosure of the Webster Avenue property. On July 10, 1985, INB obtained a default judgment against Bundles in the amount of $4,696.46 plus interest and costs. In addition, the IRS lien against the real estate was converted to a personal judgment against Bundles in the amount of $2,666.00 plus interest.

On September 11, 1985, after proper notice under Indiana law, the Webster Avenue property was sold at a sheriff's sale to William J. Baker for $5,066.80. At the time of the sale, Bundles was insolvent.

On September 12, 1985, James C. Wells, the Sheriff of Marion County, executed a deed to the Webster Avenue property to Baker. The deed was recorded on September 24, 1985, in the Marion County Recorder's office.

On September 25, 1985, Bundles filed a petition for relief under chapter 13 of the Bankruptcy Code. On November 14, 1985, Bundles filed a complaint to set aside the foreclosure sale of his residence as a fraudulent conveyance under 11 U.S.C. § 548(a)(2) (1982). The value of the Webster Avenue property on November 14, 1985, was $15,500.00. On June 17, 1986, the bankruptcy court entered its judgment on Bundles' complaint, refusing to set the foreclosure sale aside.

It is this judgment from which Bundles appeals.

II. Discussion

Section 548(a)(2) of the Bankruptcy Code provides:

(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. § 548(a)(2) (1982). Thus, to establish a fraudulent transfer, five elements must be proven:

1) that the debtor had an interest in property,

2) that the debtor\'s interest was voluntarily or involuntarily transferred,

3) that the transfer occurred within one year of the date of the filing of the petition,

4) that the debtor received less than a reasonably equivalent value for his interest, and

5) that the debtor was insolvent at the time of transfer, or became insolvent as a result thereof.

The bankruptcy court concluded that elements 1, 2, 3, and 5 were all satisfied, but held that the debtor had not proven that he had received less than a reasonably equivalent value for his interest in the Webster Avenue property. The bankruptcy court wrote: "Given a regularly conducted, non-collusive foreclosure sale and resulting recorded sheriff's deed, this court shall conclusively presume that the sale price constitutes `reasonably equivalent value' under 11 U.S.C. section 548(a)(2)(A)." June 17, 1986 Entry, at p. 936.

On appeal, Bundles argues that he did receive less than a reasonably equivalent value for his interest in the Webster Avenue property at the foreclosure sale and that the bankruptcy court's conclusive presumption to the contrary was erroneous. The defendants, of course, disagree.

The first step in deciding what a term within a statute means is to look to the statute, itself, for a definition of the term. Unfortunately, the Bankruptcy Code provides no definition of the term "reasonably equivalent value." The second step, then, is to examine the legislative history of the statutory section encompassing the term and of the statute generally. The only guidance available in that respect is from a colloquy between Senators DeConcini and Dole, set out in the Congressional Record following the adoption of the 1984 amendments to the Bankruptcy Code. That colloquy occurred as follows:

Mr. DeCONCINI. Apparently there may have been some misunderstanding regarding the effect of certain technical amendments made by the recently enacted bankruptcy legislation . . . which amended the definition of transfer . . . to add the phrase "and foreclosure of the debtor\'s equity of redemption," . . . and amended section 548(a) . . . to add the phrase "voluntarily or involuntarily." . . . Neither of the amendments purport to deal with the question of whether a noncollusive, regularly conducted foreclosure sale should be deemed to be for a reasonably equivalent value.

Mr. DECONCINI. Than I am correct in concluding that parties in bankruptcy proceedings who seek avoidance of prepetition foreclosure sales would find no support for their arguments in these amendments?

Mr. DOLE. The Senator\'s conclusion is correct.

130 Cong.Rec. S.13771-S.13772 (No. 131, Pt. II, October 5, 1984). This exchange suggests that Congress did not attempt to establish what constitutes reasonably equivalent value when it adopted the 1984 amendments to the Bankruptcy Code. Thus, the legislative history is of little help in this matter. It demonstrates only that Congress intentionally chose not to address reasonable equivalency when it amended the Code.

Other courts dealing with this issue have reached a variety of results. One line of cases, beginning with Durrett v. Washington Nat'l Ins. Co., 621 F.2d 201 (5th Cir. 1980), provides as a matter of federal bankruptcy law that a foreclosure sale occurring within one year prior to the bankruptcy is a transfer subject to avoidance as a fraudulent conveyance if the sale price is not a sufficiently high percentage of the fair market value of the property. In Durrett, the sale price was approximately 57% of the fair market value, and the court concluded that such a percentage was inadequate to withstand avoidance. The Durrett court noted that it could find no other decision approving a transfer of real property for less than 70% of the market value of the property. See also Abramson v. Lakewood Bank and Trust, 647 F.2d 547 (5th Cir.1981), cert. denied, 454 U.S. 1164, 102 S.Ct. 1038, 71 L.Ed.2d 320 (1982) (approving Durrett's adoption of a 70% standard for determining reasonable equivalency); In re Richardson, 23 B.R. 434 (D.Utah 1982) (reserving a ruling on whether a transfer for 21% of the equity is for reasonably equivalent value); In re Perdido Bay Country Club Estates, Inc., 23 B.R. 36 (S.D.Fla.1982) (accepting Durrett's holding that a transfer for 57.7% of the fair market value was not for a "fair equivalent"); In re Coleman, 21 B.R. 832 (S.D. Tex.1982) (transfer for 28% of the equity was not for reasonably equivalent value); In re Smith, 21 B.R. 345 (M.D.Fla.1982) (transfer for 12% of the equity was not for reasonably equivalent value); In re Smith, 24 B.R. 19 (W.D.N.C.1982) (transfer for 77% of fair market value was not avoidable); In re Jones, 20 B.R. 988 (E.D.Pa. 1982) (transfer for one-third to one-half of the market value is not for reasonably equivalent value); Wickham v. United Am. Bank (In re Thompson), 18 B.R. 67 (E.D.Tenn.1982) (transfer for 81% of the fair market value was not avoidable); In re Marshall, 15 B.R. 738 (W.D.N.C.1981) (transfer for approximately 30% of fair market value was avoidable).

Another court effectively immunized a foreclosure sale from avoidance by concluding that the transfer effected by the foreclosure sale related back to the time of the original execution of the mortgage deed. Because that date was more than one year prior to bankruptcy, section 548 of the Bankruptcy Code did not apply and there was no need to even address reasonable equivalency. See Alsop v. Alaska (In re Alsop), 14 B.R. 982 (D.Alaska 1981), aff'd, 22 B.R. 1017 (1982).

A third approach was taken in Matter of Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir.1985). There, the Sixth Circuit adopted the view that reasonable equivalence should be determined under the state law of fraudulent conveyances. Because, under Nevada and Michigan law, mere...