BFP v. Resolution Trust Corporation
511 U.S. 531 (1994)
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Rule of Law:
The price received at a non-collusive, mortgage foreclosure sale of real property that is conducted in conformance with applicable state law is, as a matter of law, considered 'reasonably equivalent value' under § 548(a)(2) of the Bankruptcy Code.
Facts:
- BFP, a partnership, purchased a home in Newport Beach, California, from Sheldon and Ann Foreman.
- To finance the purchase, BFP took title subject to a first deed of trust in favor of Imperial Savings Association for a $356,250 loan.
- BFP also granted a second deed of trust to the Foremans to secure a $200,000 promissory note.
- BFP failed to make payments on the Imperial loan, causing Imperial to enter a notice of default and schedule a foreclosure sale.
- At the properly noticed and conducted foreclosure sale, Paul Osborne purchased the home for $433,000.
- BFP later alleged that at the time of the sale, the home was actually worth over $725,000.
Procedural Posture:
- BFP, acting as a debtor in possession, filed a complaint in Bankruptcy Court seeking to set aside the foreclosure sale to Paul Osborne as a fraudulent transfer under § 548.
- The Bankruptcy Court dismissed the complaint, finding the sale was conducted in compliance with California law and was not collusive or fraudulent.
- The U.S. District Court affirmed the Bankruptcy Court's dismissal.
- A divided Bankruptcy Appellate Panel affirmed the Bankruptcy Court, holding that a non-collusive, regularly conducted sale establishes 'reasonably equivalent value' as a matter of law.
- BFP (petitioner) appealed to the U.S. Court of Appeals for the Ninth Circuit, which consolidated the appeals and affirmed the lower courts.
- The U.S. Supreme Court granted BFP's petition for a writ of certiorari.
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Issue:
Does the consideration received from a non-collusive, real estate mortgage foreclosure sale conducted in conformance with applicable state law conclusively satisfy the Bankruptcy Code's requirement that a transfer be for 'reasonably equivalent value' under 11 U.S.C. § 548(a)(2)?
Opinions:
Majority - Justice Scalia
Yes. A non-collusive and regularly conducted mortgage foreclosure sale price conclusively constitutes 'reasonably equivalent value' under § 548(a)(2)(A) of the Bankruptcy Code. The term 'fair market value' is notably absent from § 548, while it is explicitly used in other sections of the Code, indicating Congress intended a different standard. Fair market value is the antithesis of a forced-sale value, as it presumes market conditions of a willing buyer and seller with ample time, which do not exist in a foreclosure. The value of property subject to a forced sale under state law is the price it fetches at that sale. To impose a federal 'reasonable' foreclosure price would be a radical departure from pre-existing practice and an unwarranted federal intrusion into the traditional state domain of real estate law and title security. The phrase 'reasonably equivalent value' is compatible with the long-standing principle that a proper foreclosure sale itself determines the value of the property.
Dissenting - Justice Souter
No. The price received at a non-collusive, regularly conducted foreclosure sale does not conclusively establish 'reasonably equivalent value' and should be subject to judicial review. The plain meaning of § 548(a)(2)(A) requires a court to compare the price received with the worth of the property and to set aside the transfer if the price was unreasonably low. The majority's interpretation effectively renders this statutory provision a dead letter for real estate foreclosures, making the 1984 Congressional amendments that explicitly brought foreclosure sales under § 548's ambit superfluous. It is untenable to give 'reasonably equivalent value' a purely procedural meaning for foreclosures while giving it a substantive meaning for all other transfers. Bankruptcy courts are fully capable of determining a property's value under forced-sale conditions, and doing so serves the core bankruptcy policies of maximizing the estate for creditors and ensuring a debtor's fresh start.
Analysis:
This decision resolved a significant circuit split by rejecting the 'Durrett rule,' which allowed avoidance of sales that yielded less than 70% of fair market value. The ruling provides certainty and finality to foreclosure sales, protecting purchasers and lenders from subsequent avoidance actions in bankruptcy. By creating an irrebuttable presumption of value, the Court prioritized the stability of state real estate title systems over the bankruptcy policy of augmenting the debtor's estate. This makes it much harder for bankruptcy trustees to challenge low-priced but procedurally correct foreclosure sales, potentially reducing recoveries for unsecured creditors.
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