In re Garrison

Decision Date18 April 1985
Docket NumberNo. 84 M 0773.,84 M 0773.
Citation48 BR 837
PartiesIn re Harry D. GARRISON, Joe Allen Jeans, Debtors. Albert HOFFMAN, Trustee, Plaintiff, v. HERITAGE SAVINGS AND LOAN ASSOCIATION and Shirley A. Pinkston, Defendants.
CourtU.S. District Court — District of Colorado

Bruce C. Bernstein, Denver, Colo., for plaintiff.

Shari L. Ulery, Denver, Colo., attorney for defendant, Heritage Sav. and Loan Ass'n John Pinkston, pro se.


JOHN F. McGRATH, Bankruptcy Judge.

The Plaintiff, Albert Hoffman, Trustee (Plaintiff), filed this Complaint against the Defendants, Heritage Savings and Loan Association (Heritage) and Shirley A. Pinkston (Pinkston) seeking to avoid a fraudulent transfer of property pursuant to 11 U.S.C. 548. Trial was held on March 25, 1985, at which time Heritage and the Plaintiff submitted a stipulation of facts and argued the merits of the case. Defendant Pinkston did not appear, but her husband, John S. Pinkston, appeared as her attorney-in-fact. Not being a licensed attorney, Mr. Pinkston was not allowed to represent Pinkston at trial.

The facts, as stipulated, are as follows:

1. Harry D. Garrison and Joe Allen Jeans (Debtors) owned certain real property located in Denver, Colorado. On April 12, 1977, they executed a Promissory Note to Megapolitan Mortgage Co. in the principal amount of $33,000.00. The Note was secured by a Deed of Trust on the above-referenced property. The Note and Deed of Trust were subsequently assigned to Heritage.

2. The Debtors defaulted on the Note, and a Public Trustee's Sale was held on December 6, 1983. The only bidder at the sale was Heritage, who bid the amount of its outstanding indebtedness, plus costs of sale, for a total of $34,599.13. The sale in all respects complied with Colorado law. The Public Trustee issued a Certificate of Purchase to Heritage reflecting its bid on the property and cancelled the Note and Deed of Trust.

3. On February 15, 1984, Heritage assigned the Certificate of Purchase to Pinkston. In consideration for the assignment, Pinkston paid Heritage the sum of $35,844.73, representing the bid amount together with interest thereon through February 15, 1984.

4. On February 24, 1984, Debtors filed separate petitions in bankruptcy. Under state law, the Debtors' redemption period would have expired February 27, 1984. By virtue of the bankruptcy filings, the redemption period was extended for 60 days beyond February 24th.

5. On May 29, 1984, Pinkston filed a Motion for Relief from Stay, seeking relief from stay so that Pinkston could apply for and receive a Trustee's Deed to the property.

6. On June 13, 1984, the Trustee advised counsel for Heritage, who at that time also represented Pinkston, that the Trustee intended to avoid the transfer made by the Public Trustee's Sale, under 11 U.S.C. 548.

7. On June 21, 1984, this Court entered an order granting Pinkston relief from stay. On or about June 29, 1984, the Public Trustee issued its Deed No. 3634 conveying the property to Pinkston.

8. On August 28, 1984, the Trustee filed a Complaint pursuant to 11 U.S.C. 548 seeking to avoid the alleged transfer of the property by the Public Trustee to Heritage, and seeking relief in the amount of the difference between the amount bid by Heritage at the sale and the fair market value of the property at the time of sale.

9. The fair market value of the property at the time of sale was between $85,000 and $100,000, with $85,000 representing liquidation value, and $100,000 representing value obtainable given an unlimited time to market the property, and taking into consideration the payment of all liens on the property at the time of the sale and the expenses of holding the property through the statutory redemption period.

At trial, Plaintiff and Heritage further stipulated that the Debtors were insolvent at the time of the sale. Mr. Pinkston informed the Court that title to the property had been subsequently placed in his and his wife's names jointly.

The issues remaining for this Court to resolve are:

1. Whether the foreclosure sale constituted a transfer of an interest in property within the meaning of 11 U.S.C. § 548.

2. Whether reasonably equivalent value was received for the transfer.

3. Whether the Plaintiff is estopped from seeking or has waived his rights to seek to avoid the transfer due to his failure to redeem the property within the statutory redemption period, as extended by 11 U.S.C. § 108(b).


1. A foreclosure sale and issuance of a certificate of purchase is a transfer of an interest of the debtor in property within the meaning of 11 U.S.C. § 548.

2. Reasonably equivalent value was not received for the transfer.

3. The Plaintiff is not estopped from seeking to avoid the transfer, nor has he waived his right to do so, due to his failure to redeem the property.


After the trial of this proceeding, this Court rendered its ruling in the case of Christian v. Ryan, 48 B.R. 833 (Bankr. Colo.1985), wherein it was held that a non-collusive, regularly conducted foreclosure sale and issuance of certificate of purchase is a transfer of an interest of the debtor in property, subject to avoidance under 11 U.S.C. § 548, assuming all other requirements for avoidance are met. That decision was rendered in a case filed after the effective date of P.L. 98-353, the Bankruptcy Amendments and Federal Judgeship Act of 1984, which amended the provisions of both 11 U.S.C. § 548 and the definition of "transfer", now found at 11 U.S.C. § 101(48). The case in question here was filed prior to the effective date of those amendments. This Court finds, however, that the amendments did not effectively alter the definition of "transfer" under 11 U.S.C. § 101 and the right to avoid a fraudulent transfer under 11 U.S.C. § 548. Therefore, the decision rendered in Christian v. Ryan will be applied to this proceeding, and the foreclosure sale and issuance of a certificate of purchase by the Public Trustee to Heritage was a transfer of an interest of the Debtors in property, subject to avoidance under 11 U.S.C. § 548.

In order to avoid a transfer, the trustee must establish that, under 11 U.S.C. § 548(a)(2)(A), the debtor received less than a reasonably equivalent value in exchange for the transfer, and, as asserted here, under 11 U.S.C. § 548(a)(2)(B)(i), the debtor was insolvent on the date such transfer was made. The parties have stipulated that the Debtors were insolvent on the date of the foreclosure sale. Therefore, this Court must determine whether the Debtors received reasonably equivalent value for the transfer.

The Bankruptcy Code nowhere defines the term "reasonably equivalent value." Consequently, courts have varied widely in their interpretation of its meaning. The Bankruptcy Appellate Panel of the Ninth Circuit held that the consideration received at a non-collusive and regularly conducted foreclosure sale is conclusively presumed to be reasonably equivalent value. In re Madrid, 21 B.R. 424, 427 (Bankr.App. 9th Cir.1982). The Fifth Circuit concluded that a sale price approximately 57.7 percent of the fair market value of the property was not a fair equivalent, and noted that it was unable to locate a decision approving a transfer for less than 70 percent of the fair market value, thereby creating the so-called "Durrett 70 percent rule." Durrett v. Washington Nat. Ins. Co., 621 F.2d 201, 203 (5th Cir.1980). The Eighth Circuit rejected the Madrid rule, and found that the question of whether the sale price provided a reasonably equivalent value must be determined on a case by case basis, through an evidentiary hearing, and remanded the proceeding to the bankruptcy court to make such a determination. In re Hulm, 738 F.2d 323, 327 (8th Cir.1984).

This Court agrees with the Eighth Circuit's reasoning. The Madrid rule's conclusive presumption ignores the realities of foreclosure sales, for, typically,

when no buyer appears at the sale, the lender normally sells to itself for the amount of its unpaid loan. When a buyer appears, it is usually seeking to pay as little as possible. The lender is usually eager to jettison on the property for a price equalling its unpaid debt. Thus, in cases where another measure of value is available, the price obtained at foreclosure sale is weak evidence of value.

In re Richardson, 23 B.R. 434, 446 (Bankr. Utah 1982).

Assuming that Durrett creates a 70 percent rule, that rule is also rejected. Reasonable...

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