Amicus Curiae Brief — BFP v. Resolution Trust Corporation
Supreme Court brief1994
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AVAILA
SS
No. 92-1370
In The
Supreme Court of the United States
October Term, 1993
.
BFP, A Partnership,
Petitioner,
THE RESOLUTION TRUST CORPORATION As Receiver for
IMPERIAL FEDERAL SAVINGS & LOAN ASSOCIATION;
PAUL OSBORNE; WILLIAM LITTLE; DENNIS ROY;
ARTHUR RITZ; JOSE CRUZ; RICHARD MARCZ,
Respondents
+
On Writ Of Certiorari To The
United States Court Of Appeals
For The Ninth Circuit
+
BRIEF OF THE AMERICAN COUNCIL OF
LIFE INSURANCE AND THE AMERICAN COLLEGE
OF REAL ESTATE LAWYERS AS AMICI CURIAE
IN SUPPORT OF RESPONDENTS
+
CuristorpHer F. GRAHAM
Counsel of Record for Amici Curiae
THACHER Prorritt & Woop
Two World Trade Center
New York, New York 10048
(212) 912-7400
Of Counsel:
RicHarD E. BARNSBACK James L. CUNNINGHAM
American Council of Life President, American College
Insurance of Real Estate Lawyers
1001 Pennsylvania Avenue, SHERMAN & Howarp
N.W. 3000 First Interstate
Washington, DC 20004-2599 Tower North
(202) 624-2183 633 17th Street
Denver, CO 80202
(303) 299-8356
COCKLE LAW BRIEF PRINTING CO. (800) 225.6964
OR CALL COLLECT (402) 342 2831
QUESTION PRESENTED
Was the Ninth Circuit’s holding that the “reasonably
equivalent value” standard set forth in Section 548 of the
Bankruptcy Code was satisfied by the price received at a
noncollusive, regularly conducted foreclosure sale a permis-
sible interpretation of Section 548?
Page
QUESTION PRESENTED ............----- eee ee eens 1
STATEMENT OF INTEREST OF AMICI CURIAE.... 1
SUMMARY OF ARGUMENT .............-----+5555 2
REMUIBEIAE .. ow co ccccccccccccesecesevccccscsccesces 3
TABLE OF CONTENTS
THE NINTH CIRCUIT DID NOT ERR IN HOLD-
ING THAT THE PRICE RECEIVED AT A NON-
COLLUSIVE, REGULARLY CONDUCTED
FORECLOSURE SALE SHOULD ESTABLISH
REASONABLY EQUIVALENT VALUE UNDER 11
U.S.C. § S4B(aM2MA). .. 25. c cee wee c ccc eeeeeecees
A. Congress Did Not Expressly Provide For A Method
Of Determining “Reasonably Equivalent Value”
Pursuant To 11 U.S.C. § 548(aX(2A) And The
Ninth Circuit’s Holding Is A Permissible Interpreta-
B. Congress Did Not Intend Section 548 of the
Bankruptcy Code To Apply To Noncollusive,
Regularly Conducted Foreclosure Sales. ......
1. Historical Basis For Section 548 Of The
Bankruptcy Code ....... 2.2... 66 eee ee eees
2. For More Than 400 Years, Fraudulent- Con-
veyance Laws Have Not Been Applied To
Noncollusive, Properly Conducted Fore-
CE TED occ cccceccvecesossescessess
iii
TABLE OF CONTENTS -— Continued
Page
3/ The Legislative History Of Section 548 And Its
4. By Incorporating State Fraudulent-Transfer
Law Into The Bankruptcy Act And The
Bankruptcy Code, Congress Adopted The
Common State Law Understanding Of The
Meaning Of “Fair Consideration” And
“Reasonably Equivalent Value”...........
5. The 1984 Amendments To The Bankruptcy
Code Had No Effect On The Meaning Of
Reasonably Equivalent Value Or The Appli-
cation Of Fraudulent-Transfer Law To Non-
— Regularly Conducted Foreclosure
BED ccccesesececsesesesoueseceoseeses:s
C. “Reasonably Equivalent Value” Does Not Mean
Fair Market Value In The Context Of A Fore-
GE ee onccccadnnenssedenesecknnsebds<
APPLICATION OF THE CONSTRUCTIVE FRAUD
PROVISIONS TO NONCOLLUSIVE FORE-
CLOSURE SALES CONDUCTED IN ACCOR-
DANCE WITH STATE LAW MAKES NO SENSE
WHEN PRACTICAL REALITIES ARE CONSID-
SEED co cv cvcececescusseceseececovescoecoesestes
A. Adoption Of The Durrett Principle Would Have
A Severe Adverse Effect On The Mortgage
Market, The Availability Of Credit And The
Effective Use Of Real Property..............
10
12
16
20
23
iv
TABLE OF CONTENTS -— Continued
Page
B. Response To The Policy Arguments Asserted In
The Petitioner’s Amici Brief ................ 25
1. The Shuchman “Empirical Study” On The
Effect Of The Durrett Rule Is Inaccurate
And Represents An Attempt To Buttress
Counter-Intuitive, Politically-Oriented Con-
Se cian snecenenedseeekekebseséeee e 25
2. The Petitioner's Amici Brief Incorrectly
Cites Other Studies As Support.......... 28
3. The Case At Bar Does Not Involve A Tax
i -¢cedvdideudbdbichenasasaueneaes 30
ee oe ol uasbadvenevanesenest 30
TABLE OF AUTHORITIES
Page
Cases
Abramsom v. Lakewood Bank and Trust Co., 647 F.2d
547 (Sth Cir. 1981), cert. denied, 454 U.S. 1164
(FRc cevevcscsccecccecesosscees sebenbneedeecsd 9, 27
BFP v. Imperial Savings & Loan Association, 974
RBS CBOSS GD GR, Tee cc cccccccccceccccceceses 2, 16
Barrett v. Commonwealth Federal Savings and Loan
Association, 939 F.2d 20 (3d Cir. 1991)............. 21
In re Coleman, 21 B.R. 832 (Bankr. S.D Tex. 1982).... 24
Dewsnup v. Timm, ___ U.S. __, 112 S. Ct. 773, 116
SS © Rr eee 15
Durrett v. Washington National Insurance Co., 621
PBS Fe Goad Gee FRED cc ccccccccccccccccceces passim
Graffam v. Burgess, 117 U.S. 180 (1885)........... 11, 13
Heydon’s Case, 76 Eng. Rep. 637 (Exchequer 1584).... 14
Hood v. Williams, 92 B.R. 648 (Bankr. E.D. Va. 1988) .... 21
In re Littleton, 888 F.2d 90 (11th Cir. 1989)........... 24
Madrid v. Lawyers Title Insurance Corp., 21 B.R. 424
(9th Cir. BAP 1982), aff'd, 725 F.2d 1197 (9th
Cir.), cert. denied, 469 U.S. 833 (1984).......... 16, 17
Madrid v. Lawyers’ Title Insurance Corp., (In re
Madrid), 725 F.2d 1197 (9th Cir.), cert. denied, 469
te FF ee rrrrrrrrrrrrie err 18, 26
Northern Pipeline Construction Co. v. Marathon Pipe
Line Co., 458 U.S. 50 (1982) ........ 02 cece eee enees 19
vi
TABLE OF AUTHORITIES — Continued
Page
Twyne’'s Case, 76 Eng. Rep. 809 (Star Chamber 1601)..... 6
Union Bank v. Wolas, __ U.S. __, 112 S. Ct. 527,
B06 L.. HG. BO SOO CURVE) oc cccccccccccccesccccesess 19
STATUTORY AND OFFICIAL AUTHORITIES
Bankruptcy Act of July 1, 1898, ch. 541, § 67d, 30
Stat. 544 (repealed 1978) .........22c cee eeees 7, 10, 13
Bankruptcy Amendments and Federal Judgeship Act
of 1984, Pub. L. 98-353, 98 Stat. 333............... 16
Bankruptcy Reform Act of 1978, Pub. L. No. 95-598,
§§ 101-151326, 92 Stat. 2549 (1978).............655.. 7
Chandler Act, ch. 575, 52 Stat. 9 (1938) (repealed
PE nd e6bensdeneseesndesdaddcasssnedbnues castidee 7
130 Cong. Rec. $7617 (daily ed. June 19, 1984)....... 19
Se We, Oe cca Siennceenendebeedbuseseras bat passim
(Gt! 5 FRPPPPTTTTIT TT Tri rir erie 23
BP Ge ls Ge Oe Ms crc dccccsccccesccucuesscvcecéss 5
Oe es Oi Oy Geter cccccccesevessubenceenséeen ets 5
DF, Wes G, BD Gc ccc ccccddancssescciossvéveeees 5
Unif. Fraudulent Transfer Act § 3(b), 7A U.L.A. 643
PP ncesnnvedeneuvecesdasntaketessivssousuasers 15
SCHOLARLY AUTHORITIES
Orlando F. Bump, A Treatise Upon Conveyances
Made by Debtors to Defraud Creditors § 237, at
276-77 (James M. Gray ed., 4th ed. 1896)............ &
vii
TABLE OF AUTHORITIES — Continued
Page
Lawrence D. Coppel and Lewis A. Kann, Defanging
Durrett: The Established Law of “Transfer,” 100
EE Oe Ss oo nus ceinadenbunduiessaese 18
Henry M. Hart, Jr. and Albert M. Sacks, The Legal
Process: Basic Problems In The Making And
Application Of Law, 1144, 1414-15 (Tentative Edi-
Ss PN an desécbdeubddes soeecstressdtaereces ose 14
3 William Holdswoth, A History of English Law
PPT CTT TT ETT TTT TTT CTTTTS 5
1 Garrard Glenn, Fraudulent Conveyances and Prefer-
ences § 214a at 367 (2d ed. 1940)................... %
Frank R. Kennedy, Involuntary Fraudulent Transfers,
9 Cardozo L. Rev. 531, 566 (1987)........... 9, 18, 29
H. W. May and W. Douglas Edwards, The Law of
Fraudulent and Voluntary Conveyances 4-5 (3d ed.
See ddddedscksdedecdabie Kevevedestencess ceeenses 5
James A. McLaughlin, Application of the Uniform
Fraudulent Conveyance Act, 46 Harv. L. Rev. 404,
GE GN 6 hn 66 dbs buns cuebbededabesédbdedoccsoces 7
John Mixon, Deficiency Judgments Following Home
Mortgage Foreclosure: An Anachronism that
Increases Personal Tragedy, Impedes Regional Eco-
nomic Recovery, and Means Little to Lenders, 22
Ta, Te Ee Te By Fe Geers bcctesevcccccces 29
1 Dewitt C. Moore, A Treatise on Fraudulent Convey-
ances and Creditors’ Remedies at Law and in
ss gg 2 k fl EE rer rr rr 8
Nelson and Whitman, Real Estate Finance Law,
Be fg RR eer ar eee &
Max Radin, Handbook of Roman Law 153 (1927)..... 4, §
=
viii
TABLE OF AUTHORITIES — Continued
Real Estate Appraisal Terminology 137 (Byrl N.
Boyce ed., 1975) ....... cece cece e cece ee eeeeenees
Philip Shuchman, Data on the Durrett Controversy, 9
Cardozo L. Rev. 605 (1987). ........-eeeeees 25,
Robert H. Skilton, Assessing the Mortgage Debtor’s
Personal Liability, 90 U. Pa. L. Rev. 440, 444-45
(\_) © -) errr rr rrr errr
Steven Wechsler, Through the Looking Glass: Fore-
closure Sale As De Facto Strict Foreclosure — An
Empirical Study of Mortgage Foreclosure and Sub-
sequent Resale, 70 Cornell L. Rev. 850, "4 e41
12, 13, 22,
2 Charles H. Wiltsie, A Treatise On the Law and
Practice of Real Property Mortgage Foreclosure
§ 647 at 1049-1051 (Sth ed. 1939).........--. 9,
Robert M. Zinman, Durrett Data: Shucking the Husks
from the Grain, ¥ Cardozo L. Rev. 1013 (1988) .
Robert M. Zinman, Noncollusive, Regularly Con-
ducted Foreclosure Sales: Involuntary, Non-
fraudulent Transfers, 9 Cardozo L. Rev. 581, 586
Page
28, 29
(TDG cc ccc ccccccececccesencccesccsecevecs 18, 20, 28
MISCELLANEOUS
Symposium, Bankruptcy Reform Circa 1993, ALI-
ABA Conference (June 10-12, 1993)..........-.
STATEMENT OF INTEREST OF AMICI CURIAE!
The American Council of Life Insurance (the “Council”)
is a nonprofit voluntary trade association, the membership of
which totals 634 legal reserve life insurance companies doing
business throughout the United States. The member com-
panies of the Council account for 89.9 percent of the legal
reserve life insurance in force in this country and afford
protection to approximately 140 million insureds. At the end
of 1992, life insurance companies held $247 billion of long-
term debt secured by mortgages on real property in the United
States, which represented 15 percent of the total assets held
by life insurance companies in that year.2 A reversal of the
decision below would have a serious adverse effect on these
mortgage investments. On the other hand, life insurance com-
panies have billions of dollars invested in unsecured corpo-
rate obligations that would be benefitted by a reversal of the
decision below. Therefore, the Council is in a unique position
to advise as to the proper resolution of the issue now before
this Court.
The American College of Real Estate Lawyers
(“ACREL”) is a nonprofit corporation, organized on April 28,
1980, for the purpose of, inter alia, gathering together law-
yers “to improve and reform real estate law and practice.”
(ACREL Articles of Incorporation at 2). ACREL’s member-
ship consists of approximately 800 attorneys from nearly
every state and the District of Columbia who have concen-
trated their practice in real estate law for a period of ten years
or more, and law school professors specializing in the field of
real estate law. In addition, members elected to ACREL must
have demonstrated a willingness to devote time to improving
real property law through writing, teaching or participation in
1 Amici have obtained the permission of both parties in this case to file this
brief. Written evidence of such permission is being submitted concurrently
herewith.
2 American Council of Life Insurance, 1993 Life Insurance Fact Book
Update (ACLI, Washington, D.C. 1993).
2
professional association activities. ACREL’s membership rep-
resents the entire spectrum of the real estate industry includ-
ing borrowers, lenders, investors and developers. ACREL is
therefore in a position to offer an unbiased opinion as to the
proper resolution of the issue now before this Court.
This brief supports the position of the Respondent in this
case. Due to the background of the Amici and their experi-
ence as lenders and as counsel to lenders, borrowers, and
prospective purchasers at foreclosure sales, they are in a
unique position to offer their expertise to this Court concern-
ing the serious adverse impact that a reversal of the decision
below would have on real estate financing.
+
SUMMARY OF ARGUMENT
Congress did noi define the phrase “reasonably equiva-
lent value” contained in Section 548 of the Bankruptcy Code.
The Ninth Circuit’s holding below in BFP v. Imperial Savings
& Loan Association, 974 F.2d 1144 (9th Cir. 1992) — which
construed the “reasonbly equivalent value” standard to be
satisfied by the price received at a noncollusive, regularly
conducted foreclosure sale — is the only interpretation of these
words that makes sense in light of the history and purpose of
the statute.
A review of the history of Section 548 demonstrates that
Congress never intended that it be used to attack noncollu-
sive, regularly conducted foreclosure sales, but rather adopted
into the Code state fraudulent conveyance law as it existed at
the time of enactment. State fraudulent transfer law was and
remains consistent with state foreclosure law in not permit-
ting an attack on a foreclosure sale based upon inadequacy of
price where the sale was free from collusion and inequitable
conduct and conducted in accordance with the requirements
of state law. The Fifth Circuit decision in Durrett v. Washing-
ton National Insurance Company, 621 F.2d 201 (Sth Cir.
1980) went beyond the scope of Section 548, constituted an
aberration from the prior law of fraudulent conveyances, and
3
represented an unjustified interference with carefully devel-
oped foreclosure requirements of state law.
Adoption of any other interpretation of the phrase “rea-
sonably equivalent value” by this Court can only have a
severe and negative impact on the real estate financing mar-
ket. It would result in the tightening of the availability of
credit, rising interest rates, and under-utilization of property.
Accordingly, the decision of the Ninth Circuit should be
affirmed.
+
ARGUMENT
1.
THE NINTH CIRCUIT DID NOT ERR IN HOLDING
THAT THE PRICE RECEIVED AT A NONCOLLUSIVE,
REGULARLY CONDUCTED FORECLOSURE SALE
SHOULD ESTABLISH REASONABLY EQUIVALENT
VALUE UNDER I1 U.S.C. § 548(a)(2)({A)
A. Congress Did Not Expressly Provide For A Method Of
Determining “Reasonably Equivalent Value” Pur-
suant To 11 U.S.C. § 548(a)(2)(A) And The Ninth
Circuit’s Holding Is A Permissible Interpretation Of
That Phrase
Under Section 548 of Title 11 of the United States Code,
11 U.S.C. §§ 101 et seq. (the “Bankruptcy Code”), a transfer
of a debtor’s interest in property may not be avoided unless
the debtor “received less than a reasonably equivalent value
in exchange for such transfer... .” 11 U.S.C. § 548(a)(2)(A).
However, the phrase “reasonably equivalent value” is not
defined in the Bankruptcy Code. Although it is axiomatic that
the starting point of statutory interpretation is the language of
the statute itself, where the statute does not define its terms,
the courts must interpret those terms based on the history and
overall purpose of the statute. Accordingly, since Section 548
of the Bankruptcy Code does not supply a definition for the
4
phrase “reasonably equivalent value,” the Petitioner and Peti-
tioner’s Amici’s? insistence that the clear language of Section
548 requires reversal of the decision below is misplaced. A
review of the history and purpose of Section 548 of the
Bankruptcy Code indicates that Congress never contemplated
that transfers of a debtor’s interest in property by means of a
noncollusive foreclosure sale, conducted in accordance with
procedures long established by state law, could be collaterally
attacked in bankruptcy because of a claimed inadequacy of
price. Rather, Congress intended to incorporate the meaning
of the phrase “reasonably equivalent value” as it was under-
stood under state law. The Ninth Circuit’s decision below
comports with this interpretation.
B. Congress Did Not Intend Section 548 of the Bank-
ruptcy Code To Apply To Noncollusive, Regularly
Conducted Foreclosure Sales
1. Historical Basis For Section 548 Of The Bank-
ruptcy Code
Section 548 of the Bankruptcy Code is the most recent
codification of fraudulent-transfer laws, the roots of which
trace back over 2,000 years to early Roman law. A brief
review of that history will help explain the purpose of Section
548.
a. Roman Law
Under Roman law, a defrauded creditor could avoid a
fraudulent conveyance by an insolvent debtor by use of a tort
action known as a “Paulian Action.” Max Radin, Handbook of
Roman Law 153 (1927). Where the debtor had deliberately
stripped himself of property while insolvent, suit could be
brought against both the debtor and a mala fide purchaser
3 “Petitioner’s Amici Brief” refers to the brief submitted by Frank Allen,
Levander and Elnora McKeever, the Consumer Education and Protective
Association, The Consumers League of New Jersey, and Chapter 13 Trustee
Edward Sparkman as Amici Curiae in support of Petitioner. “Petitioner's Amici”
refers to the proponents of the Petitioner’s Amici Brief.
5
from the debtor as an accessory to the fraud. Jd. However,
such an action was conditioned on (1) the insolvency of the
debtor, and (2) reckless disregard for the creditor’s rights. /d.
at 154.
b. English Law
The first Anglo-American fraudulent-conveyance laws
were created in response to a perceived abuse of “sanctuary
laws” which allowed debtors to transfer their property col-
lusively and then seek sanctuary in various privileged places.
3 William Holdsworth, A History of English Law 305-06 (Sth
ed. 1966). In response to this abuse, Parliament enacted a
Statute permitting creditors to execute on land and chattels
collusively conveyed, 50 Ed. III, c. 6 (1376), and it later
passed a statute that avoided gifts of chattels made in trust
with intent to defraud creditors, 3 Hen. VII, c. 4 (1476). Thus,
from their inception, Anglo-American fraudulent-conveyance
laws were enacted to curb the abuses of deliberately fraudu-
lent debtors.
c. The Statute of 13 Elizabeth
The Statute of 13 Elizabeth, generally considered the
foundation of modern fraudulent-transfer law, was enacted in
1570 and states, in pertinent part, that “covinous and fraudu-
lent Feoffments, Gifts, Grants, Alienations, Conveyances,
Bonds, Suits, Judgments And Executions . . . devised and
contrived of Malice, Fraud, Covin, Collusion Or Guile, to the
End, Purpose and Intent, to delay, hinder or defraud Creditors
and others .. . shall be . . . utterly void, frustrate and of none
Effect. ...” 13 Eliz., c. 5 (1570). As can be seen from the
language of the statute, a showing of intent to defraud was
required. However, due to the fact that people do not normally
make public their intent to commit fraud, it became necessary
to look to the facts surrounding the transfer to uncover such
intent. As a result, over time, the statute was judicially
expanded to presume that certain acts or circumstances were
in themselves indicative of the necessary fraudulent intent. H.
W. May and W. Douglas Edwards, The Law of Fraudulent and
6
Voluntary Conveyances 4-5 (3d ed. 1908). Thus, even if a
creditor could not show actual intent to defraud, the creditor
could still meet this burden by showing the requisite circum-
stances or “badges of fraud” to create a presumption of actual
intent to defraud. Nevertheless, proof of actual intent to
defraud either by direct or circumstantial evidence was still
necessary if relief was to be afforded under the statute.
Accordingly, the purpose of the “badges of fraud” was not to
eliminate the requirement of actual intent to defraud, but to
allow proof of such intent by indirect means. See Twyne’s
Case, 76 Eng. Rep. 809 (Star Chamber 1601). This English
-body of law formed the foundation of American fraudulent-
conveyance law.
d. The Uniform Fraudulent Conveyance Act
In response to confusion resulting from inconsistent
applications of the badges and presumptions of fraud, and
from the fact that creditors were attempting to use badges of
fraud to characterize all conveyances that had an adverse
effect on creditors as fraudulent, the National Conference of
Commissioners on Uniform State Laws approved the Uniform
Fraudulent Conveyance Act (the “UFCA”) in 1918. The
UFCA eliminated the badges of fraud and instead grouped
some of the badges of fraud into constructive frauds for which
no showing of intent was required.* However, the intent of the
UFCA was not to change the law, but to clarify it and produce
the same substantive results as the Statute of 13 Elizabeth.
Thus, the prefatory note to the UFCA states: “In most states,
the bill if enacted will not so much change the law as clearly
define what heretofore has been indefinite.” UFCA, Commis-
sioners’ Prefatory Note, 7A U.L.A. 427-28 (1985). Indeed, a
leading scholar of fraudulent-conveyance law stated that “[the
UFCA] is a modernized statute of Elizabeth and nothing
4 It was one of these constructive frauds that was later incorporated into
American bankruptcy law by the Chandler Act of 1938 that forms the basis for
challenges to noncollusive, regularly conducted foreclosure sales at issue in this
case.
7
else.” James A. McLaughlin, Application of the Uniform
Fraudulent Conveyance Act, 46 Harv. L. Kev. 404, 405
(1933). Fhus, although constructive fraud was substituted for
the presumptions and badges of fraud, there was no change in
the purpose of the law — to ferret out those transactions that
were intended to hinder, delay or defraud creditors.
e. Early American Bankruptcy Law
Starting with the first bankruptcy law of the United
States enacted in 1800, every American bankruptcy act has
included a fraudulent conveyance provision. In the Bank-
ruptcy Act of 1898, Congress adopted, with only minor
changes, the language and law of the Statute of 13 Elizabeth
in Section 67d. Bankruptcy Act of July 1, 1898, ch. 541,
§ 67d, 30 Stat. 544 (repealed 1978) (the “Bankruptcy Act”).
In 1938, the bankruptcy law was amended by the Chandler
Act, ch. 575, 52 Stat. 9 (1938) (repealed 1979) (the “Chandler
Act”) which, but for minor changes, incorporated the provi-
sions of the UFCA.
f. Section 548 of the Bankruptcy Code
In 1978, Congress once again overhauled the Bankruptcy
Act. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598,
§§ 101-151326, 92 Stat. 2549 (1978). In the 1978 revision,
Section 548 replaced Section 67d with only minor changes.
The principal changes were: (1) the reordering of the listing
of fraudulent conveyances; (2) the substitution of “reasonably
equivalent value” for “fair consideration;” and (3) the
removal of the requirement that the purchaser acquire the
property in “good faith.” Because so few changes were made
to the substance of Section 67d, there is very little commen-
tary on Section 548 and absolutely no indication that Con-
gress intended radical revisions to the federal law of
fraudulent conveyances. Section 548 is thus a direct successor
to the Uniform Fraudulent Conveyance Act, the Statute of 13
Elizabeth and the prior English and Roman laws concerning
fraudulent conveyances. Over the course of centuries, the
difficult-to-prove subjective test necessary to establish a
fraudulent conveyance has evolved into the wholly objective
tests currently found in the UFCA and Section 548. However,
the main purpose of fraudulent-conveyance laws has remained
constant: prevention of inequitable transfers that would divert
assets from the debtor’s creditors. A noncollusive, regularly
conducted foreclosure sale does not violate this policy.
2. For More Than 400 Years, Fraudulent-Convey-
ance Laws Have Not Been Applied To Noncollu-
sive, Properly Conducted Foreclosure Sales
Foreclosure sales have never been exempt from subse-
quent legal challenges. Failure to comply with statutory
requirements applicable to foreclosure sales or fraudulent
conduct designed to chill bidding at a sale are generally
grounds under state foreclosure law to set aside a foreclosure
sale. See Nelson and Whitman, Real Estate Finance Law
§ 7.11 (2d ed. 1985). Moreover, it is clear that fraudulent-
conveyance laws can be used to invalidate a transfer of the
debtor's property at a mortgage sale initiated by a creditor if
collusion between the debtor and the creditor can be shown. |
Dewitt C. Moore, A Treatise on Fraudulent Conveyances and
Creditors’ Remedies at Law and in Equity § 13 at 50 (1908); 1
Garrard Glenn, Fraudulent Conveyances and Preferences
§ 214a, at 367 (2d ed. 1940); Orlando F. Bump, A Treatise
Upon Conveyances Made by Debtors to Defraud Creditors
§ 237, at 276-77 (James M. Gray ed., 4th ed. 1896). Invalida-
tion of such unfair foreclosure sales is consistent with the
policy of fraudulent-conveyance laws and consequently is not
surprising.
Equally unsurprising is that no reported case decided
prior to Durrett v. Washington Nat'l Ins. Co., 621 F.2d 201
(Sth C.r. 1980) under English or American fraudulent-convey-
ance law had ever invalidated a noncollusive, regularly con-
ducted foreclosure sale of the debtor’s property.> Importantly,
5 See Robert M. Zinman, Noncollusive, Regularly Conducted Foreclosure
Sales: Involuntary, Nonfraudulent Transfers, 9 Cardozo L. Rev. 581, 586 (1987);
9
even when a foreclosure action and sale are conducted under
the applicable state law and procedural rules and are free of
any collusive or fraudulent conduct, state mortgage law pro-
vides an additional protection for the debtor and the debtor’s
creditors. Under American mortgage law, it has always been
clear that a foreclosure sale could be set aside if the inade-
quacy of price is so great as to shock the conscience of the
court. See 2 Charles H. Wiltsie, A Treatise On the Law and
Practice of Real Property Mortgage Foreclosure § 647, at
1049-51 (Sth ed. 1939). Against this background of state
mortgage laws and fraudulent-conveyance laws, Congress
incorporated fraudulent-conveyance law into the bankruptcy
law. The Durrett court ignored 400 years of fraudulent-con-
veyance law and held that under Section 548 of the Bank-
ruptcy Code a noncollusive, regularly conducted foreclosure
sale could be set aside because of the inadequacy of the price
obtained at the sale. Thus, a new federal measure of adequacy
of price was created by the Durrett court without regard to the
applicable mortgage doctrine that a foreclosure sale could
only be set aside if the price paid is so inadequate as to shock
the conscience of the Court. Thus, the decision of the Fifth
Circuit in Durrett should be seen as an aberration from both
the precedent and policy of the law of fraudulent conveyances
which has developed as part of the Anglo-American legal
system for over 400 years and from American bankruptcy law.
The Durrett court’s failure to cite even one case in which a
noncollusive, regularly conducted mortgage foreclosure sale
was invalidated as a fraudulent conveyance demonstrates that
decision’s abrupt departure from well-settled principles of
fraudulent-conveyance law. Judge Clark, dissenting in Abram-
son v. Lakewood Bank and Trust Co., 647 F.2d 547 (Sth Cir.
but see Frank R. Kennedy Involuntary Fraudulent Transfers, 9 Cardozo L. Rev.
531, 532 (1987) (“the ‘Durrett doctrine’ is not so novel. . . . "). However, all of the
cases cited by Professor Kennedy in support of this statement involved fac-s
consistent with a determination of actual fraud. None involved noncollusive,
regularly conducted foreclosure sales until the Durrett case was decided. Zinman, 9
Cardozo L. Rev. at 584 n.19 (1987).
10 ;
1981) (Clark, J., dissenting), cert. denied, 454 U.S. 1164
(1982), recognized this flaw in the Durrett holding:
It is interesting to me that Durrett is the first case to
treat this problem — after 90 years of bankruptcy
law and mortgages of a time greater than the mem-
ory of man. It again establishes what an imaginative
lawyer can do when he adds persuasion.
Id. at 550.°
3. The Legislative History Of Section 548 And Its
Predecessors Does Not Demonstrate Any Intention
‘To Depart Radically From Over 400 Years Of
Fraudulent-Conveyance Law
An examination of the legislative history underlying Sec-
tion 548 of the Bankruptcy Code, as well as its predecessors,
Bankruptcy Act Sections 67d and 67e, shows that at no time
did Congress ever intend radically to change existing fraudu-
lent-conveyance law.
The Bankruptcy Act of 1898, as it exis‘ed prior to the
Chandler Act, contained a virtual restatement of the Statute of
13 Elizabeth.’ Since the Statute of 13 Elizabeth had been
clarified by the UFCA in many jurisdictions, Congress
amended the Bankruptcy Act in 1938 with the enactment of
the Chandler Act to reflect the law of fraudulent conveyances
as codified in the UFCA:
We have condensed the provisions of the Uniform
Fraudulent Conveyance Act, retaining its sub-
Stance, and as far as possible, its language. Analysis
of H.R. 12339, 74th Cong., 2d Sess. 214 (1936)
© During substantially the same period, if not longer, many states have had on
their books a version of the UFCA and a complementary body of law regulating
foreclosures.
7 The first sentence of Bankruptcy Act Section 67e provided:
All conveyances, transfers, assignments, or encumbrances of his
property. .. . made or given by a person . . . with the intent and
purpose on his part to hinder, delay, or defraud his creditors, . . . shall
be void as against the creditors of such debtor. .. . Bankruptcy Act of
July 1, 1898, ch. 541, § 67e, 30 Stat. 544.
11
(emphasis added). Cited in 4 Collier on Bankruptcy
q 67.29[1], at 475 n.6 (James W. Moore et al. eds.,
14th ed. 1978). ‘
The UFCA was used by the drafters of the Chandler
Act because it was considered to be declaratory of
the better decisions of American state courts con-
struing the Statute of Elizabeth and because, as it
was believed, it would promote uniformity under
the Bankruptcy Act with respect to the subject of
fraudulent conveyances. 4 Robert D’ Agastino et al.,
Collier on Bankruptcy { 548.01, at 548-15 (Law-
rence P. King et al. eds., 15th ed. 1993).
To summarize, the Bankruptcy Act of 1898 essentially re-
enacted the Statute of 13 Elizabeth; the UFCA clarified the
Statute of 13 Elizabeth but did not intend any radical depar-
ture from it; and the Chandler Act codified the UFCA in
American bankruptcy law. Throughout this process, there was
never any indication that a radical departure from the prior
precedent or policy of fraudulent-conveyance law was
intended, or that regularly conducted foreclosure sales, in the
absence of some inequitable conduct, were to be included in
the coverage of the law. Indeed, when the Bankruptcy Act of
1898 and the Chandler Act were passed, it was settled Ameri-
can law that a foreclosure sale could not be set aside for mere
inadequacy of price unless the inadequacy was so great as to
shock the conscience of the Court. Graffam v. Burgess, 117
U.S. 180, 191-92 (1885); See 2 Wiltsie, supra at 1049-51.
Congress presumably knew what the law was at the time it
passed the Bankruptcy Act and the Chandler Act and pre-
sumably would have made it clear if it had intended a radical
departure from that law. However, as discussed above, not
only did Congress not intend to change the law drastically, it
specifically intended to restate and clarify existing law.
Similarly, in 1978 when the Bankruptcy Code was
enacted, Congress presumably was cognizant of the prior
history of fraudulent-conveyance law and presumably was
aware of the fact that no case under English or American
fraudulent-conveyance law had invalidated a noncollusive,
12
regularly conducted foreclosure sale. Thus, if the provisions
of Section 548 of the Bankruptcy Code were intended to
result in a radical change from the past, one would expect that
Congress would have made that intention clear. However, as
previously discussed, the language of Section 548 and its
legislative history evidence no such distinguishing language
or intent to make such a radical change.
4. By Incorporating State Fraudulent-Transfer Law
Into The Bankruptcy Act And The Bankruptcy
Code, Congress Adopted The Common State Law
Understanding Of The Meaning Of “Fair Consid-
eration” And “Reasonably Equivalent Value”
a. State Foreclosure Law, Designed To Balance
The Interests Of Borrower And Lender, Per-
mitted Setting Aside Of Foreclosure Sales
Only For Price And Fairness Considerations
Akin To Intentional Fraud
From the inception of mortgage foreclosure law to the
present day, courts and legislatures have wrestled with the
problem of balancing the interests of mortgage lenders on the
one hand and mortgage borrowers and their creditors on the
other. See Steven Wechsler, Through the Looking Glass:
Foreclosure Sale As De Facto Strict Foreclosure — An Empiri-
cal Study of Mortgage Foreclosure and Subsequent Resale, 70
Cornell L. Rev. 850, 855 (1985), and sources cited therein.
The “equity of redemption” was developed to protect the
borrower who missed payment of the mortgage on “law day;”
the foreclosure process was designed to protect the mortgagee
by allowing the equity court to cut off, or foreclose, the
equity of redemption; the foreclosure sale was created to
safeguard the borrower in a variety of ways, including provid-
ing a forum for open bidding as a means of bringing the best
foreclosure sale price possible given the forced-sale nature of
13
the process;® legislatures intervened to aid the borrower with
additional protective devices, including restricting or limiting
the ability of the lender io obtain deficiency judgments,
providing the borrower and junior creditors with rights of
redemption after the sale and establishing court confirmation
requirements; and the courts have been willing to set aside a
foreclosure sale if it were found to be collusive or in bad faith
shown by a gross price inadequacy and other evidence of
fraud. Jd. at 855-865. Because this state foreclosure law was
designed by the legislatures and interpreted by the courts to
balance the relative interests of borrowers and lenders, state
courts refused to set aside a foreclosure sale because of
claimed inadequacy of price absent circumstances amounting
to intentional fraud. See 2 Wiltsie, supra at 1049-51.
When the Bankruptcy Act of 1898 and the Chandler Act
were enacted, it was settled law that a foreclosure sale would
not be set aside by the courts based on a claimed inadequacy
of price unless the price inadequacy was so great as to shock
the conscience of the court or unless additional circumstances
showed that the sale was unfair. Indeed this Court in Graffam
v. Burgess, 117 U.S. 180, 191 (1885), after reviewing existing
mortgage foreclosure cases, concluded that foreclosure sales
might be set aside only if:
the inadequacy of price is so gross as to shock the
conscience, or if, in addition to gross inadequacy,
the purchaser has been guilty of any unfairness, or
has taken any undue advantage, or if the owner of
the property, or party interested in it, has been for
any other reason, misled or surprised, then the sale
will be regarded as fraudulent and void or the party
injured will be permitted to redeem the property
sold.
Thus, when the Bankruptcy Act of 1898 was enacted, it
was Clear that unless the conduct of the foreclosure was so
8 It is ironic that the foreclosure sale process, designed to protect the
borrower by providing the best possible price, is the process that is being described
as fraudulent and being used to attempt to overturn legitimate, noncollusive sales
conducted under state law.
14
inequitable as to be tantamount to intentional fraud or collu-
sion, courts would not set aside the foreclosure sale based
merely on an allegation of inadequacy of price. State courts to
this day follow this rule, which recognizes the price paid at a
noncollusive foreclosure sale pursuant to the provisions of
State law as constituting reasonably equivalent value. Only
failure to comply with state foreclosure law, gross disparity of
price, lack of good faith, fraud or other inequitable conduct
would permit a state court to invalidate a foreclosure sale.
b. State Fraudulent-Transfer Law Has Always
Been Wholly Consistent With State Fore-
closure Law, Under Which Noncollusive
Mortgage Foreclosure Sales Conducted Pur-
suant To State Law Were Always Considered
To Meet The Requirements Of Reasonably
Equivalent Value
The mortgage foreclosure law and equity jurisprudence
of the respective states, not the fraudulent-conveyance laws
of those states, determines the validity of a noncollusive
foreclosure sale. State courts interpreting the UFCA and other
State fraudulent-transfer law recognized the meaning attrib-
uted to “fair consideration” or “reasonably equivalent value”
in their confirmation of foreclosure sales and never applied
fraudulent-transfer law to set aside noncollusive, regularly
conducted foreclosure sales as fraudulent transfers.? This
made sense because, as discussed above, fraudulent-transfer
law, including the use of badges and presumptions of fraud
and the development of constructive frauds, was always
intended as a means of ferreting out transactions designed to
hinder, delay and defraud creditors. If a foreclosure sale were
noncollusive, it would be, by definition, nonfraudulent and
not within the mischief'® for which the statute was written.
9 See supra note 5.
10 Lord Coke’s “mischief rule” for judicial interpretation of statutes is
articulated in Heydon’s Case, 76 Eng. Rep. 637 (Exchequer 1584). The case is
excerpted and its principle discussed in Henry M. Hart, Jr. and Albert M. Sacks, The
15
State law has been so clear that noncollusive foreclosure
sales conducted in accordance with state law are presumed to
be for a reasonably equivalent value, that after the Fifth
Circuit in Durrett attempted to turn existing law on its head
by applying the Bankruptcy Act version of the UFCA to a
noncollusive, regularly conducted foreclosure sale, the
National Conference of Commissioners on Uniform State
Laws specifically rejected Durrett in the Uniform Fraudulent
Transfer Act (the Commissioner’s revision of the UFCA),
Unif. Fraudulent Transfer Act § 3(b), 7A U.L.A. 643 (1984),
as an incorrect interpretation of both the law and the defini-
tion of reasonably equivalent value as it relates to noncollu-
sive mortgage foreclosure sales.'! Jd. § 3, Comment 5.
c. By Incorporating State Fraudulent-Transfer
Law Into The Bankruptcy Act And The Bank-
ruptcy Code, Congress Adopted The State
Law As It Was Interpreted At The Time Of
Enactment
As pointed out by this Court, Congress does not write on
a clean slate. Dewsnup v. Timm, ___ U.S. __, 112 S. Ct. 773,
779, 116 L. Ed. 2d 903 (1992). In enacting the fraudulent
transfer provisions of the Bankruptcy Act and later in the
Bankruptcy Code, Congress did not write new law, but on the
contrary clearly indicated its intent to incorporate state fraud-
ulent-transfer law as it existed at the times of enactment of
those laws. Reversal of the decision below would, in effect,
expose every foreclosure sale to subsequent attack in a case
under the Bankruptcy Code merely because, with hindsight,
Legal Process: Basic Problems In The Making And Application Of Law, 1144,
1414-15 (Tentative Edition, 1958).
il Indeed, the National Bankruptcy Conference has proposed amending the
Bankruptcy Code to overrule Durrett, Symposium, Bankruptcy Reform Circa 1993,
ALI-ABA Conference (June 10-12, 1993). (The Conference concluded that a
regularly conducted, noncollusive foreclosure sale should not be subject to attack
under 11 U.S.C. § 548 and any problem of inadequacy of price at foreclosure sales
should be remedied by amending the foreclosure process to ensure foreclosure sales
are condicted in a commercially reasonable manner.)
16
the bankruptcy court, applying some non-statutory measure,
finds the purchase price to be too low. This result would
trample on state law without any evidence that Congress
intended to pre-empt established state law.
5. The 1984 Amendments To The Bankruptcy Code
Had No Effect On The Meaning Of Reasonably
Equivalent Value Or The Application Of Fraudu-
lent-Transfer Law To Noncollusive, Regularly
Conducted Foreclosure Sales
In 1984, Congress enacted the Bankruptcy Amendments
and Federal Judgeship Act of 1984, Pub. L. 98-353, 98 Stat.
333, July 10, 1984 (the “1984 Amendments”). These amend-
ments contained two clarifying amendments — adding “fore-
closure of the debtor’s equity of redemption” to the definition
of transfers in 11 U.S.C. § 101(54), and making it clear in 11
U.S.C. § 548(a) that the fraudulent-transfer provisions
applied to involuntary as well as voluntary transfers (here-
inafter collectively referred to as the “Clarifying Amend-
ments”). These Clarifying Amendments have been used by the
Petitioner as a basis for arguing that they represent an intent
by Congress to “change the rule” announced by the Bank-
ruptcy Appellate Panel in Madrid v. Lawyers Title Ins. Corp.,
21 B.R. 424 (9th Cir. BAP 1982), aff’d, 725 F.2d 1197 (9th
Cir.), cert. denied, 469 U.S. 833 (1984), which held, as the
Ninth Circuit has held in BFP, that the price received at a
noncollusive, regularly conducted foreclosure sale satisfies
the “reasonably equivalent value” standard of Section 548 of
the Bankruptcy Code. As will be analyzed below, there is
absolutely no basis for such a contention. !?
12 Whatever the interpretation of the Clarifying Amendments may be,
however, they have no relevance to the instant case. The Ninth Circuit decision is
not inconsistent with them. Indeed, in order to reach the conclusion that a
noncollusive, regularly conducted foreclosure sale should be deemed to be for a
reasonably equivalent value under 11 U.S.C. § 548, the Ninth Circuit had to
conclude that the foreclosure sale was a transfer and that Section 548 applied to
involuntary transfers. At no time did the Ninth Circuit even imply an interpretation
at variance with these amendments.
17
a. The 1984 Amendments Were Not Intended To
Overrule The Decision In Madrid Or To Cod-
ify The Decision in Durrett
Petitioner’s contention that the Clarifying Amendments
were intended to overrule the Bankruptcy Appellate Panel’s
decision in Madrid is belied by the language of the Clarifying
Amendments themselves, as there is absolutely no language
in the Clarifying Amendments regarding the construction of
the phrase “reasonably equivalent value.” Surely Congress
was aware of this approach to the resolution of the Durrett
problem. However, the Clarifying Amendments do not in any
way deal with the issue of defining “reasonably equivalent
value.” If Congress intended to do more than make clear that
foreclosure sales are transfers and that Section 548 applies to
involuntary transfers, and intended to legislate the reasonably
equivalent value could not be presumed to be the price paid at
a noncollusive foreclosure sale, it could have specifically
done so. Since Congress did not do so, the Petitioner’s con-
tention that the Clarifying Amendments were designed to
overrule the Bankruptcy Appellate Panel’s decision in Madrid
is wholly misplaced.
b. The Clarifying Amendments Were Part Of A
Package Of Anti-Durrett Legislation And
Were Not Intended To Support The Durrett
Concept In Any Way. The Retention Of The
Clarifying Amendments When The Matters
Relating To Durrett Were Ordered Expunged
From The Draft Was Purely A Scrivener’s
Error
To the extent that it is necessary to look to the legislative
history of the Clarifying Amendments, it becomes even
clearer that they were not intended to overrule Madrid.
Rather, the history of the Clarifying Amendments makes it
clear that they were only intended to ensure that intentionally
fraudulent foreclosure sales did not escape the reach of Sec-
tion 548, and nothing more.
18
As originally introduced in Congress, the Clarifying
Amendments were part of a package of legislation contained
in the Senate version of the 1984 Amendments designed to
overrule the Durrett decision. Robert M. Zinman, Noncollu-
sive, Regularly Conducted Foreclosure Sales: Involuntary
Nonfraudulent Transfers, 9 Cardozo L. Rev. 581, 587 (1987).
The main provision dealing with Durrett would have codified
into federal law the approach taken by the Bankruptcy Appel-
late Panel in Madrid (now incorporated into the language of
the Uniform Fraudulent Transfer Act) making it clear that the
price received at a noncollusive, regularly conducted fore-
closure sale would constitute reasonably equivalent value. /d.
With Durrett rejected, the drafters decided to deal with two
possible arguments: (1) that foreclosure sales were not trans-
fers'> or (2) that Section 548 did not apply to involuntary
transfers.'* If either of these two arguments were generally
accepted, collusive foreclosure sales could escape the reach of
11 U.S.C. § 548. Thus, the Clarifying Amendments were
merely intended to make clear that collusive foreclosure sales
were within the reach of Section 548.'5
13 This concern is illustrated by a law review article by Messrs. Coppel &
Kann, Lawrence D. Coppel and Lewis A. Kann, Defanging Durrett: The
Established Law of “Transfer,” 100 Banking L. J. 676 (1983) in which the authors
argued that foreclosures were not transfers for fraudulent transfer purposes.
14 This concer is illustrated by Judge Farris’ concurring opinion in the Ninth
Circuit's decision in Madrid wherein he argued that Section 548 required voluntary
action by the debtor. Madrid v. Lawyers’ Title Ins. Corp. (In re Madrid), 725 F.2d
1197, 1203-04 (9th Cir. 1984) (Farris, J., concurring), cert. denied, 469 U.S. 833
(1984).
15 This view is even supported by Durrett sympathizers. See Frank R.
Kennedy, Involuntary Fraudulent Transfers, 9 Cardozo L. Rev. 531, 566 (1987)
(“the 1984 Amendments ‘did not purport to deal with the question of whether a
noncollusive, regularly conducted foreclosure sale should be deemed to be for a
reasonably equivalent value.’ "’)
19
c. The Enactment Of The Clarifying Amend-
ments Was The Result Of A Scrivener’s Error
If one looks further into the history of the enactment of
the Clarifying Amendments, it becomes apparent that the
Clarifying Amendments would not have been enacted but for
a clerical mistake. During the debate on the 1984 Amend-
ments, including the original anti-Durrett amendment, Sena-
tor Metzenbaum raised various objections to those
amendments. Because of Senator Metzenbaum’s objections,
the short time available for debate on the floor and the
necessity of passage of the 1984 Amendments to restructure
the Bankruptcy Courts in light of the constitutional defects
identified by this Court in Northern Pipeline Constr. Co. v.
Marathon Pipe Line Co., 458 U.S. 50 (1982), Senator Thur-
mond acquiesced in Senator Metzenbaum’s objection to the
inclusion of the Durrett amendments and ordered deletion of
“provisions relating to the . . . Durrett issue.” 130 Cong. Rec.
$7617 (daily ed. June 19, 1984). However, because of a
scrivener’s error,'© only the major anti-Durrett amendment
was deleted, and the Clarifying Amendments were inadver-
tently left in the bill when it was enacted. Clearly, from this
background it is impossible to conclude, as the Petitioner
argues, that “sections 101 and 548 were amended to change
the rule announced” by the Bankruptcy Appellate Panel in
Madrid."?
16 Cf., Union Bank v. Wolas,__ U.S. ___, 112 S. Ct. 527, 534, 116 L. Ed. 2d
514, (1991) (Scalia J., concurring)
17 These events are recounted in a colloquy between Senator Dole, the
Chairman of the Subcommittee of the Senate Committee on the Judiciary
responsible for bankruptcy legislation at the time of the passage of the 1984
Amendments, and Senator DeConcini, who was Chairman of that subcommittee
when the Bankruptcy Code was enacted. The colloquy has not been directly relied
upon in this brief because it has been attacked as “post-enactment” legislative
history and it is believed that the outcome of a debate on that question is not
necessary to the determination of the issues here presented. However, it should be
borne in mind that the colloquy did not purport to modify clear language of the
statute through post-enactment legislative history. It does not attempt to undo what
was written in the statute, but rather to indicate that the language of the statute
20
C. “Reasonably Equivalent Value” Does Not Mean Fair
Market Value In The Context Of A Foreclosure Sale
The Petitioner’s Amici argue that the phrase “reasonably
equivalent value” should be construed to mean “fair market
value.” (Petitioner’s Amici Brief at 13-27.) As set forth
below, this argument is not supported by the plain language of
the statute and makes no practical sense in the context of the
realities of a foreclosure sale.
The definition of “fair market value” typically used by
appraisers when appraising a parcel of real property is as
follows:
Market Value — The highest price in terms of money
which a property will bring in a competitive and
open market under all conditions requisite to a fair
sale, the buyer and seller, each acting prudently,
knowledgeably and assuming the price is not
affected by undue stimulus.
Implicit in this definition is the consummation of a
sale as of a specified date and the passing of title
from seller to buyer under conditions whereby: 1.
buyer and seller are typically motivated 2. both
parties are well informed or well advised, and each
acting in what he considers his own best interest 3.
a reasonable time is allowed for exposure in the
open market 4. payment is made in cash or its
equivalent 5. financing, if any, is on terms generally
available in the community at the specified date and
typical for the property type in its locale 6. the price
represents a normal consideration for the property
sold unaffected by special financing amounts and/or
terms, services, fees, costs, or credits incurred in
the transaction.
should not be interpreted beyond its clear meaning, as has been urged by
commentators supporting Durrett. See discussion in Robert M. Zinman,
Noncollusive, Regularly Conducted Foreclosure Sales: Involuntary, Nonfraudulent
Transfers, supra, note 5, at 592-94, and references therein to Professor Kennedy's
somewhat different conclusions.
21
Real Estate Appraisal Terminology 137 (Byrl N. Boyce ed.,
1975)
Amici submit that the definition of “fair market value”
typically employed by appraisers in determining the value of
property in an arms-length negotiated sale does not make
sense in the context of a foreclosure sale. The factors that go
into an appraiser’s definition of “fair market value,” and
therefore the factors that appraisers look at when evaluating
property, do not exist in a foreclosure proceeding. The
appraiser's definition assumes that the “buyer and seller are
typically motivated,” the “price is not affected by undue
stimulus,” the property may be sold at any time after exposure
for a “reasonable period” on the “open market,” and that
“financing . . . on the terms generally available in the commu-
nity” is available. On the other hand, the debtor and creditor
in a foreclosure proceeding are operating under a pre-deter-
mined state methodology which is inherently different than a
typical sale outside of foreclosure proceedings. The debtor is
not a willing seller — the property is being sold regardless of
(in fact, usually against) the debtor's wishes. In a foreclosure
proceeding, the property is sold on a day set by the court or
pursuant to statute and the buyer must generally pay the entire
sale price in cash at closing. Foreclosure sales are thus made
under circumstances that bear little resemblance or relevance
to the appraisers’ concept of “fair market value.”'*
Since the reasonably equivalent value to be arrived at
under 11 U.S.C. § 548 is the value on the date of the
foreclosure sale, to ignore the effect of the economic realities
of that sale, results in comparing the bid at the sale, which
18 Even some of the courts that support the theory that noncollusive,
regularly conducted foreclosure sales may be set aside based on inadequacy of price
have determined that “reasonably equivalent value” does not mean fair market
value, but rather, they conclude that “reasonably equivalent value” refers to the
price that can be obtained at a forced sale. See Barrett v. Commonwealth Federal
Savings and Loan Association, 939 F.2d 20 (3d Cir. 1991); Hood v. Williams, 92
B.R. 648 (Bankr. E.D. Va. 1988).
22
must be based on those economic realities, with a hypotheti-
cal value that does not consider those realities.'? As state
courts have always recognized, the test of the validity of a
foreclosure sale is its noncollusiveness and its compliance
with well-developed requirements of state law, not a hindsight
determination by a court as to whether the price paid repre-
sented “fair market value.”
The essence of the Ninth Circuit’s construction of the
reasonably equivalent value requirement to mean the same as
the consideration received at a noncollusive, regularly con-
ducted foreclosure sale, is to recognize that the best evidence
of value is what bona fide buyers are willing to pay at a state
authorized public sale rather than what an appraiser hypothes-
izes to a bankruptcy court as to what the value had been at the
time of the transfer. The Ninth Circuit’s approach is the only
approach that makes sense when the economic realities of a
foreclosure sale are considered and it harmonizes the law of
foreclosures with the law of fraudulent conveyances without
doing violence to the policies underlying either body of law.
19 This conclusion is not intended as support for the proposition that
properties acquired by mortgagees at foreclosure sales are generally acquired for
less than their market value. More often than not, mortgagees lose money on resale
of foreclosed properties (see text at notes 26 and 27 infra). This is because
properties with substantial equity value above the mortgage generally do not go to
foreclosure. Borrowers normally are aware of their precarious financial condition
long before default and there is normally a significant period of time before
foreclosure is commenced and thereafter before sale of the property during which
tume the borrower can sell the property and preserve its equity. Most mortgagees
sincerely believe that property will not go to foreclosure if the value exceeds the
mortgage balance in any meaningful degree. Wechsler, supra at 853. Amici's
concern, however, is that the imposition of an unrealistic requirement that fair
market value be received in a forced foreclosure sale places every foreclosure
purchaser at a severe disadvantage and encourages Durrett attacks on the
foreclosure process.
23
Il.
APPLICATION OF THE CONSTRUCTIVE FRAUD PRO-
VISIONS TO NONCOLLUSIVE FORECLOSURE SALES
CONDUCTED IN ACCORDANCE WITH STATE LAW
MAKES NO SENSE WHEN PRACTICAL REALITIES
ARE CONSIDERED
A. Adoption Of The Durrett Principle Would Have A
Severe Adverse Effect On The Mortgage Market, The
Availability Of Credit And The Effective Use Of Real
Property
The Durrett principle, if adopted by this Court and
thereby made applicable nationwide, can only have a severe
and negative effect on the entire mortgage market. It would
result in more cautious lending by institutions; the tightening
up on the availability of credit; increased interest rate costs to
borrowers; reduced bids at foreclosure sales to reflect the
Durrett risk; and unreasonable under-utilization of property
as purchasers at foreclosure sales wait out the applicable
holding period?° until the risk of a Durrett attack has
passed.2! These consequences can only be exacerbated by a
20 Section 548 of the Bankruptcy Code limits fraudulent transfer attack to the
year prior to bankruptcy. However, a fraudulent transfer may also be attacked by the
trustee by using state fraudulent-transfer law under § 544(b), which gives the trustee
the rights of a creditor under state law against whom the lien is invalid. State
fraudulent-transfer law is not conditioned on bankruptcy and thus, unless the state
has adopted the Uniform Fraudulent Transfer Act, which rejects the Durrett
principle as an incorrect interpretation of fraudulent-transfer law, the only limitation
on its use in an attempt to attack mortgage foreclosures is the state statute of
limitations for fraud. While state courts have not applied fraudulent-transfer law to
noncollusive, regularly conducted foreclosure sales in the past, it is not clear that
bankruptcy courts would feel constrained to adhere to that precedent if this Court
were to reject the reasoning of the decision below and hold that “reasonably
equivalent value” means something other than what had been previously
understood. Thus in many states, foreclosed property could be exposed to a possible
Durrett attack for many years.
2! Provisions of the Bankruptcy Code designed to alleviate these risks are
insufficient. For example, § 548(c) provides that upon setting aside a transfer, the
transferee may have “a lien” to the extent of the amount bid at the foreclosure sale,
and § 550(d) provides that the transferee may have “a lien” to the extent any
24
severe real estate recession, banking institutions struggling
with insolvency, and major financial institutions shifting
lending away from real estate mortgages.
The Amici support the thorough and well-reasoned ana)-
ysis of the harmful and negative impact the Durrett principle
will have on all participants in real estate transactions con-
tained in the Amici brief of the Federal Home Loan Mortgage
Corporation, the Mortgage Bankers Association of America,
and the American Land Title Association.
improvement it made increased the value of the property transferred. These
remedies are available only if the court determines that the transferee acted in “good
faith.” Given decisions such as Jn re Littleton, 888 F.2d 90 (11th Cir. 1989) where
the court questioned the good faith of any mortgagee bidding less than the court's
hindsight determination of what value had been, these provisions do not give the
mortgagee/purchaser much confidence. Furthermore, the lien for improvements is
lumited to the increase in the value of the property resulting from the improvements.
This requires a subjective determination of the amount by which a particular
expenditure increased property value and appears to ignore the fact that some
repairs and other expenses are necessary merely to keep the property from
depreciating further in value. No remedy is given to the foreclosure sale purchaser
who sells the property after the sale to a good faith purchaser. In such a case, the
remote purchaser is free from attack and the original foreclosure sale purchaser wil!
be responsible for paying the difference between the bid price and what the court
determines to have been the value of the property. See In re Coleman, 21 B.R. 832
(Bankr. S.D. Tex. 1982) where the foreclosed property had been sold by the
transferee, after acquisition, for the same price bid at the foreclosure sale. The court
nevertheless found the price was less than 28% of the value of the property and
indicated that the mortgagee would be called upon to pay that difference if the
remote purchaser Lad been in good faith.
25
B. Response To The Policy Arguments Asserted In The
Petitioner’s Amici Brief
1. The Shuchman”? “Empirical Study” On The
Effect Of The Durrett Rule Is Inaccurate And
Represents An Attempt To Buttress Counter-Intu-
itive, Politically-Oriented Conclusions
The Petitioners, and especially the Petitioner's Amici,
rely inordinately on the “empirical study” prepared by Pro-
fessor Philip Shuchman, which purports to “prove” the
dubious proposition that increased costs and risks to lenders
associated with the Durrett rule have no effect on costs or
availability of financing. This difficult task is attempted
through the use of inconclusive and inaccurate “empirical”
evidence.
a. Incorrect Theory And Analysis
The underlying premise of the Shuchman study is that
lenders will decrease mortgage lending when the federal court
covering a particular state adopts the Durrett principle, and
contrariwise, lenders will increase lending activity when the
governing court rejects Durrett. This premise is incorrect
when applied to jurisdictions rejecting Durrett. Where a juris-
diction, not having previously adopted Durrett, rejects an
22 Philip Shuchman’s “empirical” study, Data on the Durrett Controversy, 9
Cardozo L. Rev. 605 (1987) is cited throughout the Petitioner's Amici Brief to
prove, inter alia, that general adoption of the Durrett principle will have no effect
on the cost or availability of mortgage financing. The reasoning and accuracy of this
study was strongly questioned in the very next issue of the same law review. Robert
M. Zinman, Durrett Data: Shucking the Husks from the Grain, 9 Cardozo L. Rev.
1013 (1988). Yet the refutation is neither cited nor rebutted anywhere in the
Petitioner's Amici Brief. Similarly, Professor Frank R. Kennedy's article,
Involuntary Fraudulent Transfers, 9 Cardozo L. Rev. 531 (1987), is cited
extensively in the Petitioner's Amici Brief. However no mention was made of the
fact that the Kennedy article was part of a two-article debate on the subject of
foreclosure sales as fraudulent transfers in the same issue of the law review, the
other article disputing the contentions of the Kennedy article. Robert M. Zinman,
Noncollusive, Regularly Conducted Foreclosure Sales: Involuntary, Nonfraudulent
Transfers, 9 Cardozo L. Rev. 581 (1987).
26
attempt to apply that rule, the decision represents no change
in the law and should have no effect on mortgage lending
practices. California is an example of the study’s faulty rea-
soning. Shuchman, supra at 633. The study presumes that
after the decision of the Ninth Circuit in Madrid, rejecting a
fraudulent transfer attack on a foreclosure sale, that interest
rates would decline and loans would increase, an incongruous
result since the Ninth Circuit had never been a Durrett juris-
diction.2* What makes the Shuchman study’s reliance on Cali-
fornia especially egregious is that the Ninth Circuit decision
in Madrid actually represented a disappointment for lenders
because it did not adopt the Bankruptcy Appellate Panel's
determination that the price received at a noncollusive, regu-
larly conducted foreclosure sale should be deemed to meet the
reasonably equivalent value standard. In Madrid, the affir-
mance was on other grounds.?* Thus, if anything, according to
Professor Shuchman’s premise, the results should have had a
negative rather than positive effect on mortgage lending.
Other examples of the distortions embodied in the Shuch-
man study included the creative classification of states such
as New York, Pennsylvania and North Carolina as pro- or
anti-Durrett based on the existence at the time of one or two
bankruptcy court decisions without even District Court con-
sideration of the issue, much less consideration by the appro-
priate Courts of Appeals. /d. at 630-32. Lenders have never
contended that one bankruptcy court decision would have the
effect of stopping mortgage lending or increasing interest
23 Indeed, over a year before the Ninth Circuit decision in Madrid, the
Bankruptcy Appellate Panel in that case had rejected the Durrett principle and held
that a noncollusive, regularly conducted foreclosure sale would be deemed to be for
reasonably equivalent value. It is no surprise therefore that the empirical data failed
to show improvement in the mortgage market after the Ninth Circuit's decision
since the decision did not represent a meliorating change in the governing law.
24 The Madrid court determined that the transfer in that case had taken place
at the time the mortgage was recorded which was more than a year before the
bankruptcy, and the court did not reach the question of whether a noncollusive,
regularly conducted foreclosure sale meets the reasonably equivalent value
requirement of Section 548.
27
rates. What lenders contend is that if Durrett becomes gener-
ally accepted (such as by the approval of the Durrett principle
by this Court), it can only have the effect of increasing
mortgage lending costs nationwide and this will result in
more cautious underwriting of borrowers’ credit and
increased interest rates to reflect the increased risk.
b. Questionable Measuring Years
Even if the classification of jurisdictions in the Shuch-
man study were correct, the results would still be inaccurate
because of arbitrary use of measuring years. For example, the
Shuchman study considers the date of the 1980 Fifth Circuit
decision in Durrett as the crucial date in Texas, whereas
appeal of that decision continued until certiorari was denied
in a contemporaneous case in 1982. Abramsom v. Lakewood
Bank & Trust Co., 647 F.2d 547 (St Cir. 1981), cert. denied,
454 U.S. 1164 (1982). In fact, in the year after the denial of
certiorari, the Shuchman study itself shows that the increase
in residential lending in Texas dropped to less than half of the
national increase and that in 1984 residential lending
decreased by almost 12% in Texas while residential lending
actually increased nationally in 1984. Shuchman, supra at
628.25
c. One Factor Analysis
Even if the Shuchman study had been carefully and
neutrally prepared, its conclusions could be faulted because
of its assumption that mortgage lending costs and practices
can be based on one factor alone. This represents a denial of
the fact that economic conditions, government monetary pol-
icy, restrictions imposed by regulatory agencies, as well as
costs of operation and bankruptcy risks are all factors bearing
on the mortgage market. A change in one factor may offset a
change in another, but when it comes to the bottom line, each
25 The southwest was in a real estate recession at the time and this may have
affected the results. Nevertheless, the figures clearly do not support the Shuchman
conclusions.
28
of the factors has an effect on the availability and cost of
mortgage financing.
Clearly, if expenses of mortgage lenders increase, inter-
est rates will be affected; if bankruptcy rulings cause these
costs to increase, lenders will more carefully underwrite bor-
rowers’ credit; and, if mortgage lending becomes more diffi-
cult, investment dollars will flow into less difficult
investments, particularly from investors such as life insurance
companies which regularly invest in corporate and govern-
ment securities.
2. The Petitioner’s Amici Brief Incorrectly Cites
Other Studies As Support
Professor Wechsler’s empirical study of mortgage fore-
closures in New York is cited as support for the carefully
crafted statement “In reality, the foreclosure sale purchasers
obtain a significant windfall when property is sold for less
than a full fair value.” (Petitioner’s Amici Brief at 45.) The
statement hardly needs support of citations. If property is sold
for less than its value, it follows that a purchaser who does
not have an investment in the property exceeding its purchase
price will reap a benefit.2° What the Petitioner’s Amici Brief
does not disclose, however, is that the Wechsler study con-
cludes that mortgagees (when they are the “successful” bid-
ders at foreclosure) usually suffer a loss on resale of
foreclosed properties and thus receive no windfall.27
26 This brief does not contest that proposition. Indeed it is fully consistent
with the reasoning in this brief that if financing and foreclosure costs increase
because foreclosure sales are set aside, mortgagees will be more circumspect in
extending credit and that the cost will be passed on to borrowers in the form of
higher interest rates. See refutation of Shuchman study in section B1 of Part [I of
this brief.
27 The study showed that all resales of foreclosed properties, both residential
and commercial, produced an average loss of almost $14,000 per property.
Wechsler, supra at 870. The mortgagee was made whole in only 44% of the cases.
Id. As pointed out in Robert Zinman, Noncollusive, Regularly Conducted
Foreclosure Sales: Involuntary, Nonfraudulent Transfers, 9 Cardozo L. Rev. 581,
598, n.67 (1987), the figures understate the true extent of the mortgagee’s loss
29
To support its proposition that foreclosures normally pro-
duce a windfall, the Petitioner’s Amici Brief (at 45) also cites
to the Kennedy article, the Mixon article, John Mixon, Defi-
ciency Judgments Following Home Mortgage Foreclosure: An
Anachronism that Increases Personal Tragedy, Impedes
Regional Economic Recovery, and Means Little to Lenders, 22
Tex. Tech. L. Rev. 1, 33-4 (1991), and the Skilton article,
Robert H. Skilton, Assessing the Mortgage Debtor's Personal
Liability, 90 U. Pa. L. Rev. 440, 444-45 (1941-42).
Professor Kennedy’s article was not an empirical study.
However, while he made no mention of this issue on the page
cited by Petitioner’s Amici, he did imply that the Wechsler
study was support for the assertion in footnote 196 that
normally the mortgagee receives a windfall on foreclosure,
stating that the scenario is “so prevalent that it is the focus of
a recent empirical study and recommendations for reform in
foreclosure procedures.” Kennedy, supra at 578 n.196. While
it is true that the Wechsler study dealt with mortgage fore-
closures, that study clearly concluded that mortgagees lose
money on the sale of foreclosed properties. Wechsler, supra at
870.
Both the Mixon and Skilton articles dealt with the issue
of deficiency judgments, not with mortgagee windfalls. Nom-
inal bids at foreclosure sales are criticized in those jurisdic-
tions where they can result in deficiency judgments based on
the nominal bid. Professor Mixon at the page cited was
discussing statutes designed to limit or eliminate liability for
a deficiency. Professor Skilton also attacked nominal bidding
because of the possibility of large deficiency judgments. Nei-
ther claimed that the mortgagee usually receives a windfall
because the value of the property exceeds the mortgage bal-
ance. Deficiency judgments are not involved in the determina-
tion of this case, and this brief does not take issue with the
because profit would seem to have been determina by comparing the total amount
due the mortgagee on foreclosure with the resale price. Apparently not included
were lost opportunity costs, maintenance expenses, repairs, brokers’ fees, attorneys
fees, etc. Id.
30
professors’ conclusion supporting state legislation that limits
deficiency judgments.
3. The Case At Bar Does Not Involve A Tax Sale
The case at bar involves the issue of whether a noncollusive
and regularly conducted mortgage foreclosure sale can be deemed
by the court to be for reasonably equivalent value. Two of the
Petitioner’s Amici attempt to relate this case to tax sales of their
homes. A decision affirming the Ninth Circuit will not control a
decision on whether the constructive fraud provisions of Section
548 are applicable to tax sales of property. The Ninth Circuit did
not hold that the amount received at a tax sale equalled reasonably
equivalent value. Tax sales are not mortgage foreclosures and are
therefore distinguishable from the case at bar. For example, unlike
mortgage foreclosures, tax sales are for that portion of tax obliga-
tions in default, which bears no direct relation to the value of the
property being sold, while in almost all cases, a mortgage is based
on a Significant percentage of the value of a property. Furthermore,
if the tax sales’ price inadequacies described by Petitioner’s Amici
had been found in mortgage foreclosure sales, they could have
been struck down before the bankruptcy petitions were filed under
the traditional rule of nonbankruptcy mortgage foreclosure law that
foreclosure sales may be set aside when the price inadequacy is so
great as to shock the conscience of the court.
+
CONCLUSION
The decision of the Ninth Circuit should be affirmed.
Dated: August 19, 1993
Respectfully submitted,
CHRISTOPHER F. GRAHAM
THACHER Prorritr & Woop
Counsel of Record for Amici Curiae
Two World Trade Center
New York, New York 10048
(212) 912-7400
—
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.