Matter of Littleton
| Citation | 82 BR 640 |
| Decision Date | 18 January 1988 |
| Docket Number | Adv. No. 187-0021. |
| Parties | In the Matter of Harold Ray LITTLETON (Chapter 7 Case 186-00980), Debtor. James D. WALKER, Jr., Trustee, Plaintiff, v. Harold Ray LITTLETON, Philadelphia Savings Fund Society, and First Federal Savings and Loan Association, Defendants. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Georgia |
James D. Walker, Jr., Augusta, Ga., for plaintiff.
C. Stanley Lowery, Martinez, Ga., for Littleton.
Andrew J. Kilpatrick, II, Chuck R. Pardue, Martinez, Ga., for PSFS.
William A. Trotter, III, Augusta, Ga., for FFS & LA.
Plaintiff, acting in his capacity as Chapter 7 Trustee, has brought this adversary proceeding under Sections 548 and 550 to recover the value of an alleged fraudulent transfer. The adversary arises out of a foreclosure proceeding on the Debtor's property. After consideration of the evidence adduced at the trial on August 26, 1987, I make the following Findings of Fact and Conclusions of Law.
1) The parties have stipulated to numerous facts, including that:
a) This Court has jurisdiction.
b) Harold Littleton, Debtor/Defendant, owned certain real property located at 2322 Cadden Road.
c) Philadelphia Savings Fund Society ("Philadelphia Savings") held, by assignment, a first deed to secure debt which secured a 1977 loan for $38,000.00 to purchase the property.
d) First Federal Savings and Loan Association ("First Federal") held, by assignment, a second deed to secure debt which secured a $15,305.80 loan to the Debtor.
e) On December 3, 1985, Philadelphia Savings foreclosed on its security interest in the property. Philadelphia Savings bid into the property for $34,917.09 which was the outstanding balance due on the first deed to secure debt. The foreclosure sale extinguished First Federal's second deed to secure debt upon which $15,925.48 was owed at the time of foreclosure.
f) On March 27, 1986, Philadelphia Savings sold the real property to First Federal for the sum of $35,877.89.
g) On October 8, 1986, within one year of the foreclosure sale, Harold Ray Littleton, the Debtor, filed a petition for relief under Chapter 7.
h) In August of 1987, First Federal sold the real property to Ray Dunigan for the sum of $50,000.00.
2) The testimony regarding the value of the property at the time of foreclosure is conflicting. Philadelphia Savings' appraiser, Henry B. Garrett, III, testified that the property had a fair market value of $49,000.00 at the time of foreclosure. In contrast, the Plaintiff introduced into evidence the February 10, 1986, appraisal done by Joyce E. Thompson and Merrill L. Thompson in which they found that the property had a fair market value of $53,000.00.1
The Debtor testified that the property had a fair market value of $55,000.00 at the time of foreclosure. As finder of fact, I am persuaded by the Debtor's testimony and find that the fair market value of the property at the time of foreclosure was $55,000.00.2
The fact that Henry B. Garrett, III, neither visited nor entered the real property diminished his appraisal's credibility, and further strengthened the credibility of the Debtor's testimony.
3) In December, 1985, the Debtor was a self-employed barber who operated a barbershop which employed five barbers. The Debtor's income was approximately $2,000.00 per month. The value of the equipment at the time of foreclosure was approximately $7,000.00. The Debtor owed past-due rent, Southern Bell, $35,000.00 on the first deed to secure debt, $15,000.00 on a second deed to secure debt, and $3,000.00 on a third deed to secure debt. The barbershop was a shoestring operation with little or no cash on hand and plagued by employee turnover. The Debtor no longer operates the barbershop, and now works for others.
The issue of whether a non-judicial foreclosure sale may be set aside as a fraudulent conveyance has been resolved in this jurisdiction by Durrett v. Washington National Insurance Company, 621 F.2d 201 (5th Cir.1980). Under former Section 67(d)(2) of the Bankruptcy Act of 1898, the Fifth Circuit held (1) that a non-judicial foreclosure sale constitutes a "transfer made" within the contemplation of the fraudulent transfer provision of the Act, and (2) that recovery of only 57.7% of the property's value was not a "fair equivalent" value for the property. The Fifth Circuit was "unable to locate a decision of any district or appellate court which had approved the transfer for less than 70% of the market value of the property". Id. at 203.
As a result, the pre-bankruptcy non-judicial foreclosure sale was set aside as being fraudulent. The Durrett progeny have had no problems in applying the Durrett reasoning to cases decided under Section 548 of the Bankruptcy Code. See In re Hulm, 738 F.2d 323 (8th Cir.1984), cert. denied, 469 U.S. 990, 105 S.Ct. 398, 83 L.Ed.2d 331 (1984).
It is fair to say that Durrett has been heavily criticized by several well reasoned decisions. The two leading cases perhaps are In re Madrid, 725 F.2d 1197 (9th Cir. 1984) cert. denied, 469 U.S. 833, 105 S.Ct. 125, 83 L.Ed.2d 66 (1984) and Matter of Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir.1985). To summarize them, these decisions find fault with Durrett on policy as well as legal grounds. On the policy side, they argue that Durrett is an unwarranted interference with state real property laws and that creating a "defacto right of redemption" under federal bankruptcy law will do nothing but chill participation at foreclosure sales and further suppress the likely purchase prices obtained at them. Madrid, at 1202; Winshall, at 1139.
On the legal side these cases have held that there was no "transfer made" at the time of the foreclosure sale. Rather, the transfer, for purposes of fraudulent conveyance analysis occurred when the mortgage or debt deed was perfected under state law. Madrid, at 1200; Winshall, at 1138. Both cases point out that the definition of what constitutes a transfer adopted by Durrett was the general definition found in Section 1(30) of the former Bankruptcy Act, now codified as 11 U.S.C. Section 101(50). According to Madrid and Winshall, however, what Durrett overlooked was that even accepting the proposition that a foreclosure sale constituted a "transfer" in the general sense, the transfer was not "made" for the purposes of 11 U.S.C. Section 548 at the time of the non-judicial sale but at the time of perfection as set forth in 11 U.S.C. Section 548(d), formerly Section 67(d)(5) of the Bankruptcy Act.3
This distinction is not purely academic. In Durrett, Madrid and the case at bar, the perfection of the debt deed occurred long before the one year proscribed period, whereas the foreclosure sale was within the one year period of Section 548. Thus, the determination of when the transfer occurred is critical.
Durrett has also been criticized within its own Circuit. 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). There, the court reaffirmed its holding in Durrett and voided a foreclosure sale that occurred within one year of bankruptcy when the deed of trust was perfected prior to the one year period. The dissenting opinion, however, characterized Durrett as "simply wrong". Id. at 549. The dissent focused upon the fact that a foreclosure sale is not a transfer by the debtor under Section 67(d) or presumably 11 U.S.C. Section 548(a) rather than the approach in Madrid, or Winshall, but would have adopted their result if it had not been "bound" by Durrett.
After an analysis of these authorities, were I free to rule on this question as a case of first impression, I would follow Madrid and Winshall and hold that the foreclosure sale conducted within one year of the filing of this case may not be set aside as fraudulent if the debt deed was recorded more than one year prior to the filing of the bankruptcy case. However, I feel bound, as did the dissent in Abramson to follow the Durrett rule, unless and until the Court of Appeals for this Circuit announces a different rule. Accordingly, I conclude that the foreclosure sale may be set aside as fraudulent if the other requirements of Section 548 are met.
In this regard, the only issues which remain to be resolved by this Court are whether the Debtor: (1) "Received less than a reasonably equivalent value in exchange for such transfer . . ." Section 548(a)(2)(A); and (2) "was insolvent on the date that such transfer was made . . . or became insolvent as the result of such transfer . . ." Section 548(a)(2)(B)(i).
In determining whether the Debtor received a reasonably "equivalent value" as a result of the foreclosure sale, the Durrett 70% guideline is helpful. The Debtor's property was sold at the foreclosure sale for $34,917.09 or 63.49% of the fair market value of the property. The foreclosure sale price bid in by the first deed to secure debt holder failed to capture $20,082.91 of value which existed in the property at the time of foreclosure. Based on the guidelines set forth in Durrett, I conclude that Philadelphia Savings did not pay the "reasonably equivalent value" as required by Section 548(a)(2)(A). While a 70% rule may seem arbitrary or mechanical, if Durrett is the law, a certain, fixed standard is to be preferred to one which leaves the question of what is "reasonably equivalent value" to a case-by-case analysis.
Whether the Debtor was insolvent on the date of the foreclosure sale is answered by applying Code Section 101(31) to the facts at hand. Code Section 101(31) defines "insolvent" in terms of a balance sheet test. The burden is on the Trustee to prove that at the time of the foreclosure that the Debtor's liabilities exceeded his assets, at fair evaluation, exclusive of his allowable exemptions under Code Section 522. Code Section 101(31). At the time of foreclosure...
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