In re Hulm
| Decision Date | 23 November 1984 |
| Docket Number | Adv. No. 82-7319.,Bankruptcy No. 82-05409 |
| Citation | 45 BR 523 |
| Parties | In re Theodore George HULM, a/k/a Ted Hulm, Debtor. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BISMARCK, a corporation, Plaintiff, v. Theodore George HULM, a/k/a Ted Hulm, and Tom A. Brigham, Trustee, Defendants. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
James P. Rausch, Bismarck, N.D., for plaintiff First Federal.
Richard G. Carver, Bismarck, N.D., for defendant Theodore Hulm.
Alan Grindberg, Steele, N.D., for defendant Tom Brigham, trustee.
This case has been remanded to the Bankruptcy Court by Order of the United States Court of Appeals for the Eighth Circuit, entered July 5, 1984. In re Hulm, 738 F.2d 323 (8th Cir.1984). The appellate court directed remand for an evidentiary hearing to determine whether the sale price at the foreclosure sale provided a reasonably equivalent value in exchange for the transfer of the Debtor's interest in the property.
A brief recap of the history of these proceedings is helpful to understanding the Bankruptcy Court's decision on remand. This case originated in September of 1982 when First Federal Savings and Loan Association of Bismarck (FIRST FEDERAL) commenced an adversary proceeding in Bankruptcy Court seeking a declaration that the Debtor's residential property upon which it held a mortgage was not a part of the bankruptcy estate, and it should be relieved from the stay. The Trustee in his Answer alleged the mortgage foreclosure sale conducted by First Federal was a fraudulent transfer under section 548 of the Code. The Bankruptcy Court, premising its decision on the case of In re Madrid, 21 B.R. 424 (Bankr.App. 9th Cir. 1982), held that absent a showing of fraud or collusion, the sale price at a judicial foreclosure sale was a reasonably equivalent value for the property transferred. No evidentiary hearing was held on this issue at the time. The District Court on appeal affirmed. On appeal to the Eighth Circuit, that Court held that the judicial foreclosure of a mortgage, according to North Dakota statutes, affected a transfer of an interest of the debtor in the property which he had at the time of the sheriff's sale. Under North Dakota law, these interests included: alienable legal ownership; right to possession until expiration of the redemption period; and a right to excess of the value of the property above the mortgage indebtedness. All of these interests the Debtor retained after granting a mortgage to First Federal, and the appellate court held that a transfer of such interests did not occur within the meaning of section 548 until the mortgage foreclosure sale. All other elements of a section 548 preference were previously established. The only issue left unresolved on appeal was whether the price bid by First Federal at the foreclosure sale produced a "reasonably equivalent value" to the Debtor for his interest in the property. The appellate court held that the sale price received at a regularly conducted foreclosure sale, although absent fraud or collusion, is not conclusive of the issue. Such a determination can be made only by conducting an evidentiary hearing. For a complete procedural history, see Hulm, supra.
Pursuant to the appellate court's directive, an evidentiary hearing was held by the Bankruptcy Court on October 24, 1984. Present were Attorney Richard Carver for the Debtor, Attorney Alan Grindberg for the Trustee, and Attorney James Rausch representing First Federal. The sole issue before this Court is whether the sum of $64,443.64 paid by First Federal for its purchase of the property at the March 4, 1982, foreclosure sale provided a reasonably equivalent value in exchange for the transfer of the Debtor's interest in the property.
The Trustee and the Debtor contend the property at the time of the foreclosure sale had a fair market value of $123,100.00 and that the $64,443.64 paid by First Federal at the sale merely represented the amount of the lien plus costs and was less than a reasonably equivalent value in exchange for the Debtor's interest. First Federal argues that the value of the property at the foreclosure sale is not the same as market value and that the bid price was a fair consideration for transfer of the Debtor's interest. First Federal argues that in foreclosure sales, determination of "reasonably equivalent value" cannot be equated with market value but suggests instead that the Bankruptcy Court must determine exactly what interests of the Debtor were transferred and then attach a value to those interests. This approach was considered unnecessary by Hulm. The appellate court, while saying that the Bankruptcy Court should consider the value the Debtor received for his interest, went on to say, "This point is not of practical significance, however, since examination of the adequacy of the total sale price necessarily subsumes the issue of the adequacy of the value received for Hulm's interest." Hulm, 738 F.2d at 326. Hence, the focus on remand must be on the adequacy of the sale price rather than on the value of the various interests that passed to First Federal.
The property in question is a single-family residence in Bismarck, North Dakota. First Federal commenced a foreclosure action on December 31, 1981, with default judgment being entered in its favor on February 4, 1982. The property was sold at a judicial foreclosure sale on March 4, 1982, where First Federal purchased the property for $64,443.64 representing the loan balance, interest and costs of foreclosure.
At the evidentiary hearing, both sides produced real estate appraisers qualified to testify regarding the fair market value of the subject property. The Debtor's expert, Rick Buresh, had done a number of residential appraisals in the Bismarck area and testified that he did an appraisal of the subject property on June 8, 1981, for purposes of a possible sale. He had not inspected the property since that date nor done an appraisal of it since that time. His 1981 appraisal was based on the market approach using the comparable market values of three other similar properties, one of which was a block away from the Debtor's home. He also considered market influences existing at the time, testifying that there had been an increase in market values in the early 1980's and that the market for homes in the area was for the most part generally peaking in 1981 and 1982. He was not able to estimate the precise time when prices peaked but felt that the market value of the Debtor's home was probably stable from June 1981 to March 1982 despite a downward trend. He had also analyzed the home's replacement cost from a cost approach basis. In reaching his opinion, he also made use of the real estate valuation guide known as the Marshall and Swift Handbook. His conclusion was that the property had a market value as of June 8, 1981, of $123,100.00 and a replacement value of $130,900.00 using the cost approach. It was his further opinion that despite a softening of the market after and during the 1981-1982 time period, the market value for the Debtor's home as of March 8, 1982, would have been approximately the same as it was at the time of his June 1981 appraisal. On cross-examination, Mr. Buresh agreed that when a property is in foreclosure, there is a negative influence on its value caused by the fact that the mortgagor is entitled to remain in possession with a right of redemption. He did not state to what extent he thought the value would be affected.
First Federal produced as its expert, Donald Doll, an appraiser of considerable experience but who had not done an appraisal of the subject property and who stated he could not give an opinion as to its value either presently or as of March 8, 1982. His testimony focused on those factors which, in his experience, had had a chilling effect on values of property in foreclosure. He said that the existence of a right of redemption would have a definite influence as well as the inability of a prospective bidder to inspect the property. He also was unable to say to what degree these factors might actually influence the market value. When asked about what "reasonably equivalent value" was, he said he had never tried to evaluate such a thing, concluding that the only value he could base equivalent value upon would be the amount actually bid in by First Federal. This sum, he thought, would be a reasonably equivalent value in a foreclosure situation. However, on cross-examination he acknowledged that if the mortgage balance had only been 10% of the market value, a bid of that balance could be considered unreasonable.
On June 7, 1983, some nine months following the March 8, 1982, sale, First Federal sold the property for $95,000.00.
The evidence produced at the evidentiary hearing did not conclusively establish the fair market value of the property as of March 8, 1982, but did provide the Court with: a value range between June 1981 and January 1983; information regarding the factors that affect the value of property in foreclosure; and information regarding the market trends during this period. This information is helpful in arriving at a price the property would actually have brought in March of 1982. According to section 548(a)(2)(A), "The trustee may avoid any transfer of an interest of the debtor in property . . . if the debtor received less than a reasonably equivalent value in exchange for such transfer. . . ." The burden of proof is upon the trustee to establish each element of a fraudulent transfer including the question of whether the transfer was for "reasonably equivalent value." Rosenberg v. Trautwein, 624 F.2d 666 (5th Cir.1980). The question of a preferential transfer does not arise unless raised by the trustee. Transfers are cloaked with a presumption of non-preference. Once a section 548 challenge to a regularly conducted foreclosure sale...
To continue reading
Request your trial