Matter of Berge, Adv. No. 82-0246.

• Decision Date: 03 October 1983
• Docket Number: Adv. No. 82-0246.
• Citation: 33 BR 642
• Parties: IN the Matter of Philip L. BERGE and Betty Jo Berge, Debtors. Philip L. BERGE and Betty Jo Berge, Plaintiffs, v. Robert J. SWEET, Helen Sweet, and Robert J. Sweet Co., Inc., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

33 B.R. 642 (1983)

IN the Matter of Philip L. BERGE and Betty Jo Berge, Debtors.

Philip L. BERGE and Betty Jo Berge, Plaintiffs, v. Robert J. SWEET, Helen Sweet, and Robert J. Sweet Co., Inc., Defendants.

Adv. No. 82-0246.

United States Bankruptcy Court, W.D. Wisconsin.

October 3, 1983.

William J. Rameker, Murphy, Stolper, Brewster & Desmond, S.C., Madison, Wis., for plaintiffs.

Stuart C. Herro, Madison, Wis., for defendants.

James Sweet, Madison, Wis., for creditors' committee.

DECISION ON MOTIONS FOR SUMMARY JUDGMENT

ROBERT D. MARTIN, Bankruptcy Judge.

In 1977, chapter 11 debtors, Philip and Betty Jo Berge, signed a contract to purchase 2,777 acres of land in Adams County, Wisconsin, from the defendants, Robert and Helen Sweet ("Sweets"). As a result of debtors' default on the land contract, the Sweets obtained a judgment of strict foreclosure which became absolute hours before the debtors filed their chapter 11 petition. In this adversary proceeding the debtors¹ seek to set aside that foreclosure judgment as a preferential transfer or a fraudulent conveyance to the Sweets. The debtors also seek recovery of farm profits arising after the strict foreclosure, and the rental value of irrigation equipment on the land. Debtors have moved for partial summary judgment on their claims to set aside the foreclosure and to recover farm profits. The Sweets have also moved for summary judgment or for dismissal of this adversary proceeding. The following facts, drawn from the pleadings and affidavits filed by the parties, are undisputed, unless otherwise noted.

In July of 1980, the Sweets first commenced an action in Adams County to foreclose the debtors' rights under the 1977 land contract. The debtors stipulated to a default in that action. The parties settled the suit in January of 1981, before the redemption period expired, and the judgment was vacated. The settlement agreement provided that the parties would amend the land contract to include a formula for allocation of appreciation if the property were transferred, by which debtors would receive the first $300,000.00 of appreciation, with the remainder to be split evenly. The agreement further called for conveyance of two irrigation systems from the Sweets to debtors.

Debtors defaulted on the amended contract when they missed the payment of principal ($10,000.00) and interest ($51,419.18) due on January 1, 1982. On March 2, 1982, the Sweets filed a second strict foreclosure action in Adams County Circuit Court. The debtors did not appear at a hearing held on April 30, 1982, and a default judgment was entered. There is no contention that debtors lacked notice of the hearing. Based upon the testimony of an expert witness at that hearing, the court determined the fair market value of the property to be $2,555,000.00 for purposes of the appreciation sharing formula. The court gave the debtors 31 days from April 30, 1982, in which to redeem. The property could be redeemed for $1,735,437.12, calculated as follows:

                Principal                          $1,020,000.00
                Vendor's share of appreciation        581,412.74
                Interest and default charges          125,438.74
                Attorney's fees and disbursements       7,135.64
                Appraisal fee                           1,450.00
                

The judgment of strict foreclosure was signed on May 24, 1982, nunc pro tunc April 30, 1982. Notice of entry of judgment was served on debtors on May 28, 1982. Whether the debtors had actual notice before that is disputed. The debtors failed to redeem by May 31, 1982, so on June 1, the judge for the circuit court of Adams County signed an order making the judgment of strict foreclosure absolute. That order was docketed in the register's office in Adams County at 1:45 p.m. on June 1, 1982. At approximately 4:25 p.m. June 1, the debtors' attorney filed a chapter 11 petition on behalf of the debtors.

The debtors' motion for reconsideration of the Adams County order making the foreclosure judgment final was denied. The validity of the strict foreclosure was on appeal to the Wisconsin Court of Appeals, the debtors contending that they had no notice of the redemption period and that since the last day of the redemption period was May 31, Memorial Day, the redemption period actually ran through June 1, 1982. The court has been informed that the circuit court order was affirmed by the Court of Appeals and that review of that decision was denied by the Wisconsin Supreme Court.

The question before this court is whether the uncontested facts alleged by the debtors support a finding that the judgment of strict foreclosure was a fraudulent conveyance which may be avoided pursuant to 11 U.S.C. § 548. To avoid the transfer as a fraudulent conveyance, debtors² rely on 11 U.S.C. § 548(a)(2), which provides in part:

(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—

. . . .

(2)(A) received less than a reasonably equivalent value in exchange for such a 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; . . .

Debtors do not contend that there has been any actual fraud in connection with the transaction. Their sole argument is that the foreclosure judgment constituted a transfer to the Sweets for "less than a reasonably equivalent value," while debtors were insolvent. Specifically, debtors cite the discrepancy between the $2.555 million value of the property transferred and the $1.14 million which they claim was the balance due on the land contract. A transfer which comes under 11 U.S.C. § 548(a)(2)(A)-(B)(i) is constructively fraudulent and may be set aside; no actual fraud need be found. See 4 Collier on Bankruptcy, ¶ 548.03 at 548-42 (15th ed. 1982).

In support of their motion for summary judgment debtors rely on a series of cases which hold that a foreclosure sale which brings a low bid may be set aside as a fraudulent transfer. One of the leading cases in this area is Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir.1980), decided under § 67(d) of the Bankruptcy Act. In that case, the property was sold at a public, non-judicial foreclosure sale, for approximately 58% of its fair market value. Durrett is significant for two reasons. First, the court found the foreclosure on and repossession of the realty, not the creation of the lien, to be the relevant "transfer" of debtor's property. See also Abramson v. Lakewood Bank and Trust Co., 647 F.2d 547 (5th Cir.1981). Second, the court held that the transfer was voidable as one for less than fair equivalent value stating:

We have been unable to locate a decision of any district or appellate court dealing only with a transfer of real property as the subject of attack under section 67(d) of the Act, which has approved the transfer for less than 70 percent of the market value of the property.

621 F.2d at 203. This language is the basis for what has come to be known as the Durrett 70% rule.³

In support of their motion for summary judgment, the Sweets cite In Re Alsop, 14 B.R. 982 (Bkrtcy. Alaska 1981) (aff'd 22 B.R. 1017 (D.Alaska 1982)) in which the bankruptcy court rejected the Durrett analysis. In Alsop the holder of a note and deed of trust was the only bidder at a non-judicial foreclosure sale, bidding just over $300,000.00, the amount owed on the note. Contending that the fair market value of the property was $600,000.00, the debtors sought to set aside the foreclosure sale as a fraudulent conveyance under 11 U.S.C. § 548(a)(2).

The Alsop court began by noting that under 11 U.S.C. § 548(d)(1) a transfer is deemed made when perfected by the transferee so that no bona fide purchaser from the debtor could acquire an interest superior to the transferee. Under Alaska law, a transfer at foreclosure sale is deemed to relate back to the date the lien was created, and thus no purchaser from debtors could have priority over a foreclosure sale purchaser. Since the deed of trust had been executed and recorded more than one year before bankruptcy, the court concluded that it was not a transfer which could be avoided under 11 U.S.C. § 548(a). The court expressly rejected Durrett's transfer analysis, concluding that the de facto right of redemption would only depress the already low bids at foreclosure sales and that creditors would be less willing to lend on a deed of trust because of inability to reach their security. Finally the court noted the debtors had failed to use the pre-foreclosure remedy of filing bankruptcy to invoke the protection of the stay under 11 U.S.C. § 362(a).

Sweets also rely on In Re Madrid, 21 B.R. 424 (Bkrtcy.App. 9th Cir.1982) in which the Bankruptcy Appellate Panel for the Ninth Circuit declined to adopt the Durrett test. In Madrid, the trustee under a deed of trust sold the property at public sale for 64-67% of its market value. The court criticized Durrett, noting that the Fifth Circuit's opinion cited no case where a public sale was set aside:

However valid it may be to hold that less than 70 percent of fair market value is not a fair equivalent for a private transfer to an insider, application of that standard to regularly conducted public sales is questionable.

We decline to follow Durrett\'s 70% fair market value rule 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.

Id. at 426-27. Thus the court rejected any percentage test. Further, the court emphasized that to set aside a foreclosure sale under Nevada law required more than price inadequacy; there must be some element of fraud or unfairness. The court sought to reconcile the law of foreclosure with the law of fraudulent conveyance:

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