In re Bundles

• Decision Date: 17 June 1986
• Docket Number: Bankruptcy No. IP85-4206WP,Adv. No. 85-0578.
• Citation: 61 BR 929
• Parties: In re Donald Eugene BUNDLES, Debtor. Donald Eugene BUNDLES, Plaintiff, v. William J. BAKER, Indiana National Bank and James C. Wells, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

61 B.R. 929 (1986)

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

Bankruptcy No. IP85-4206WP, Adv. No. 85-0578.

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

June 17, 1986.

Richard Shevitz, Hopper & Opperman, Indianapolis, Ind., for defendant William J. Baker.

Laura L. Larson, Robert G. Grant, Ecklund, Frutkin & Grant, Indianapolis, Ind., for defendant Indiana Nat. Bank.

Robert A. Brothers, Christ, Hadler & Brothers, Indianapolis, Ind., trustee.

Dennis Jackey, Judith Seubert, UAW Legal Services Plan, Indianapolis, Ind., for debtor.

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

ENTRY ON DEBTOR'S COMPLAINT TO SET ASIDE AND VACATE A FRAUDULENT CONVEYANCE

ROBERT L. BAYT, Bankruptcy Judge.

1. Factual Statement

On September 25, 1985, Debtor filed his bankruptcy petition under Chapter 13 of Title 11 of the United States Code. On November 14, 1985, Debtor filed the instant complaint to set aside and vacate a fraudulent conveyance ("Complaint"), praying that this Court exercise its avoiding powers under 11 U.S.C. Section 548(a)(2) to a foreclosure sale of Debtor's residence.

Counsel for Debtor has presented this Court with a sympathetic "test case" of first impression in this district. Debtor owned and resided in the subject property for approximately 21 years before the home mortgage was foreclosed and sold at sheriff's sale.

All parties have stipulated to the facts and this adversary proceeding is ripe for the legal decision of this Court. The text of the parties' February 18, 1986, stipulation as to facts follows:

1. Donald Eugene Bundles, Plaintiff and Debtor, filed a petition under Chapter 13 of the United States Bankruptcy Code on September 25, 1985. He has maintained 106 South Webster Avenue, Indianapolis, Indiana, as his residence since 1964.

2. Indiana National Bank ("INB"), a defendant herein, was the assignee of the mortgage on Debtor\'s residence located at 106 South Webster Avenue, Indianapolis, Indiana.

3. James C. Wells, Sheriff ("Sheriff"), a defendant herein, is the Sheriff of Marion County.

4. William J. Baker ("Baker"), a defendant herein, is the present title holder of the debtor\'s residence.

5. Sometime in 1984 and 1985, due to various financial and health problems, Debtor was unable to make his mortgage payments, and INB commenced an action in the Marion County Superior Court, Division 6, Cause No. S685-0241, on March 4, 1985, seeking foreclosure of the above-mentioned property.

6. INB obtained a default judgment, and judgment was entered against Debtor on July 10, 1985, in the amount of Four Thousand Six Hundred Ninety-Six and 46/100 Dollars ($4,696.46) plus interest and costs. The IRS lien against the real estate was reduced to a personal judgment in the amount of Two Thousand Six Hundred Sixty-Six Dollars ($2,666.00) plus interest.

7. A sheriff\'s sale of Debtor\'s residence was scheduled and held on September 11, 1985, after proper notice and in compliance with Indiana law.

8. Debtor was insolvent on September 11, 1985.

9. The price bid and paid by Baker to obtain Debtor\'s residence was Five Thousand Sixty-Six and 80/100 Dollars ($5,066.80).

10. The value of the property on November 14, 1985, was Fifteen Thousand Five Hundred Dollars ($15,500.00).

11. On the 12th day of September, 1985, Sheriff executed a deed to Baker, conveying Debtor\'s residence to him. Said deed was recorded on September 24, 1985, in the Office of the Marion County Recorder.

The sole issue before this Court is whether a regularly conducted, non-collusive foreclosure sale is subject to avoidance under 11 U.S.C. Section 548(a)(2).

2. Analysis

The relevant statutes read:

(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;

* * * * * *

(d)(1) For the purposes of this section, a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer is made immediately before the date of the filing of the petition.

11 U.S.C. § 548(a)(2), (d)(1).

(48) "transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor\'s equity of redemption;

11 U.S.C. § 101(48).

According to the express language of the above statutes, the foreclosure sale at bar may be avoided if there has been (1) a "transfer" of an interest of the debtor (2) made while Debtor was insolvent or which rendered Debtor insolvent (3) for less than "reasonably equivalent value" (4) which occurred within one year of the filing of the bankruptcy petition. See, e.g., In re Verna, 58 B.R. 246, 248 (Bkrtcy.C.D.Cal.1986).

The Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAA") created two material changes from prior law. First, the phrase "foreclosure of the debtor's equity of redemption" was added to the statutory definition of "transfer". Second, Section 548(a)(2) avoidance powers were expressly granted to "involuntary" transfers.

Debtor's insolvency at the time of the sheriff's sale has been stipulated. The Complaint will therefore succeed if the Court concludes that (1) the sale in question constituted a "transfer" within one year of the petition's filing, and (2) the sale price constituted less than "reasonably equivalent value" for the subject realty.

A. Survey of the Circuits

The instant question was first addressed in Durrett v. Washington Nat. Ins. Co., 621 F.2d 201 (5th Cir.1980). Applying the 1898 Bankruptcy Act, Section 67(d), 11 U.S.C. § 107(d),¹ the Fifth Circuit held a sale price of $115,400.00 for property valued at $200,000.00 ". . . was not a `fair equivalent' for the property. Under such circumstances, it is our duty to declare the transfer voidable under section 67(d). * *" (citations omitted) 621 F.2d at 204. The sale in Durrett was a result of the debtor's default on a note secured by a deed of trust which contained a provision for public sale in event of default. Durrett also concluded that the 1898 Bankruptcy Act's definition of "transfer", 11 U.S.C. § 1(30), included the sale under the deed of trust. Id.

Durrett was followed in Abramson v. Lakewood Bank and Trust Co., 647 F.2d 547 (5th Cir.1981), cert. denied 454 U.S. 1164, 102 S.Ct. 1038, 71 L.Ed.2d 320 (1982). However, a vigorous dissent by Clark, J., stated, in pertinent part:

By our decision here and in Durrett we cast a cloud upon mortgages and trust deeds. Foreclosure within twelve months before a filing creates a sale voidable by a trustee in bankruptcy if the public sale did not bring a `fair consideration.\' It is generally known that such sales do not bring the best price. . . .

The cloud created over mortgages and trust deeds by making foreclosure sales subject to being voided by a bankruptcy trustee will naturally inhibit a purchaser other than the mortgagee from buying at foreclosure. This tends to depress further the prices at foreclosure sales and thus increase the potential size of the deficiency. . . .

It is interesting to me that Durrett is the first case treating this problem — after 90 years of bankruptcy law and mortgages of a time greater than the memory of man. . . .

647 F.2d at 549.

The Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") and the Ninth Circuit Court of Appeals disagreed on the analysis underlying their respective decisions that a foreclosure sale is not subject to avoidance under Section 548(a)(2). In re Madrid, 21 B.R. 424 (Bkrtcy.App. 9th Cir. 1982), aff'd on other grounds, 725 F.2d 1197 (9th Cir.1984), cert. denied ___ U.S. ___, 105 S.Ct. 125, 83 L.Ed.2d 66 (1984), like Durrett, involved a default upon a deed of trust where the purchaser at the trustee's sale paid 64% to 67% of the property's fair market value. 21 B.R. at 425.

The BAP declined to follow Durrett ". . . for the reason that a regularly conducted sale, open to all bidders and all creditors, is itself a safeguard against the evils of private transfers to relatives and favorites." 21 B.R. at 424-425. The BAP therefore concluded that

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.

21 B.R. at 427.

While agreeing upon the ultimate result reached by the BAP, the Ninth Circuit did

... 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.

725 F.2d at 1198. Creating a "one transfer" rule and applying Section 548(d)(1) as the relevant definitional section regarding "transfer", the Ninth Circuit concluded that the Section 548(a)(2) transfer occurred when the secured creditor's security interest in the debtor's residence was...