AuthorBartell, Laura B.

Under [section] 548(a)(1)(B) of the Bankruptcy Code, (1) the bankruptcy trustee is permitted to avoid as a fraudulent transfer a transfer of an interest of the debtor in property made within two years before the commencement of the bankruptcy case if the debtor "received less than a reasonably equivalent value in exchange for such transfer" (2) and one of the provisions of [section] 548(a)(l)(B)(ii) is satisfied. (3)

Prior to 1994, courts assumed that in all cases the determination of whether "reasonably equivalent value" had been received in exchange for a transfer required a comparison of the value actually received by the debtor with the fair market value of the property transferred by the debtor, and if the disparity between the two was too great, the transfer was potentially avoidable. The Supreme Court rejected this approach in BFP v. Resolution Trust Corp., (4) concluding that "a fair and proper price, or a 'reasonably equivalent value,' for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State's foreclosure law have been complied with." (5)

However, the Court limited its holding to "an otherwise lawful mortgage foreclosure sale of real estate." (6) In footnote 3 of its opinion, the Court emphasized, "our opinion today covers only mortgage foreclosures of real estate. The considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different." (7) The dissenting Justices, criticizing the notion that "reasonably equivalent value" as used in [section] 548 has different meanings depending on the context of the transfer, seized upon this footnote and commented, "Indeed, the Court candidly acknowledges that the proliferation of meanings may not stop at two: not only does 'reasonably equivalent value' mean one thing for foreclosure sales and another for other transfers, but tax sales and other transactions may require still other, unspecified 'benchmark[s].'" (8)

In this Article I look at the actual and potential impact of footnote 3 in the BFP opinion on fraudulent transfer cases involving tax foreclosure sales. (9) In Part I I discuss the cases that gave rise to the decision in BFP, and what the Court decided and implied in the decision. Next, I review subsequent cases addressing the issue in Part II. In Part III, I examine state statutes providing varying remedies upon non-payment of property taxes, and whether dispositions of property pursuant to their provisions are potentially voidable. In Part IV I argue that, notwithstanding recent cases to the contrary, the implementation of state tax sales of property should not be subject to fraudulent transfer attack, without regard to whether the state law provides for a public auction of the property to satisfy delinquent taxes. Part V is my conclusion.


The Fifth Circuit fired the opening salvo in the attack on foreclosures as fraudulent transfers in 1980 in Durrett v. Washington Rational Insurance Co. (10) The debtor in possession sought to avoid as constructively fraudulent (11) a transfer of real property made in a regularly-conducted foreclosure sale pursuant to Texas law conducted nine days prior to its bankruptcy filing. (12) The property was sold by the trustee under a deed of trust at a public sale to an unaffiliated purchaser for $115,400, the only bid received and the exact amount necessary to pay in full the indebtedness secured by the deed of trust. (13) The debtor in possession challenged this amount as less than the "fair equivalent" of the property within the meaning of [section] 67(d)(1) of the Bankruptcy Act. (14) The district court found that the fair market value of the property on the date of the sale was $200,00015 (a finding accepted by both parties), (16) but nevertheless held that the amount paid at the foreclosure sale was a "fair equivalent" for the property and rejected the fraudulent transfer claim. (17)

On appeal the Fifth Circuit concluded that the price paid at the trustee's sale, which was approximately 57-7 percent of the fair market value of the property, was not a "fair equivalent" for the transfer of the property. (18) It vacated the judgment of the district court, and remanded with instructions to order the rescission of the sale and take action to protect the equity of the purchaser. (19)

Although the Fifth Circuit did not purport to establish any kind of bright line test for the percentage of fair market value that must be obtained at a foreclosure sale to immunize the sale from fraudulent transfer attack, it did note that it had 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." (20)

Some cases following Dunett adopted the so-called Durrett rule, (21) finding that whether a property was sold for at least seventy percent of its fair market value was the test of whether reasonably equivalent value had been provided for purposes of fraudulent transfer law. (22) Other courts, following the analysis by the Seventh Circuit in Bundles v. Baker, (23) rejected a bright line standard, concluding that the determination of whether reasonably equivalent value had been provided must be made on a case by case basis taking into account the totality of the circumstances. (24) Still others adopted the approach of the Ninth Circuit Bankruptcy Appellate Panel in Lawyers Title Ins. Corp. v. Madrid (25) which concluded that the price received at a regularly-conducted non-collusive foreclosure sale always constitutes reasonably equivalent value and that such sales cannot be challenged as fraudulent transfers. (26)

The Supreme Court resolved the controversy in BFP v. Resolution Trust Corp., (27) at least with respect to mortgage foreclosure sales. BFP was a partnership which purchased a home in Newport Beach, California, granting a first priority deed of trust to Imperial Savings Association to secure a $356,250 loan. (28) When BFP defaulted on the loan payments, Imperial Savings conducted a foreclosure sale at which the home was purchased for $433,000. (29) BFP subsequently filed for chapter 11 bankruptcy protection, and (acting as debtor in possession) sought to set aside the foreclosure sale as a fraudulent transfer under [section] 548 of the Code, alleging that the home was worth more than $725,000 at the time of the sale and therefore there was not reasonably equivalent value obtained. (30) The bankruptcy court refused to avoid the sale, and the bankruptcy appellate panel affirmed, holding that the consideration received at a "non-collusive and regularly conducted nonjudicial foreclosure sale" constitutes reasonably equivalent value "as a matter of law." (31) The Ninth Circuit affirmed, (32) and the Supreme Court granted certiorari. (33)

The Court first noted that the courts of appeals had adopted differing interpretations of the term "reasonably equivalent value" used in [section] 548, describing the Dunett rule and the case-by-case approach. (34) The flaw in these interpretations, the Court stated, was that each began with the premise that fair market value of the property was the benchmark against which the amount received from the sale should be compared. The Court said, "In the context of an otherwise lawful mortgage foreclosure sale of real estate, (3) such reference is in our opinion not consistent with the text of the Bankruptcy Code." (35) This is the sentence that includes footnote 3, which reads "We emphasize that our opinion today covers only mortgage foreclosures of real estate. The considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different." (36)

The "text of the Bankruptcy Code" to which the Court referred was the absence of the term "fair market value" in [section] 548, despite its usage in other sections of the Code. (37) Its absence in [section] 548 was understandable because property subject to a judicial foreclosure was a forced sale, and "'fair market value' presumes market conditions that, by definition, simply do not obtain in the context of a forced sale." (38) Therefore, it would be inappropriate to compare the price obtained at a foreclosure sale with a value for the property that would be obtainable in a different marketplace. The Court concluded:

[Foreclosure has the effect of completely redefining the market in which the property is offered for sale; normal free' market rules of exchange are replaced by the far more restrictive rules governing forced sales. Given this altered reality, and the concomitant inutility of the normal tool for determining what property is worth (fair market value), the only legitimate evidence of the property's value at the time it is sold is the foreclosure-sale price itself. (39) The Court supported its textual analysis with policy justifications. The Court noted that the terms applicable to foreclosure sales are established by state law and vary from state to state. (40) The Court described some alternative state mechanisms, including judicial foreclosure, foreclosure by private power of sale, foreclosure requiring the auction be conducted by a government official, and auctions setting a minimum bid price based on a presale fairmarket appraisal. (41) Typically, the Court noted, state foreclosure statutes "require notice to the defaulting borrower, a substantial lead time before the commencement of foreclosure proceedings, publication of a notice of sale, and strict adherence to prescribed bidding rules and auction procedures." (42) But compliance with the state's procedures protects the sale from attack based on the inadequacy of the purchase price unless the state allows the sale to be set aside because the price is so low as to "shock the conscience." (43)

Were the Court to adopt an...

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