June 10, 1981. Rehearing and Rehearing En Banc Denied February 14, 1981.
Philip I. Palmer, Jr., Dallas, Tex., for plaintiff-appellant.
Storey, Armstrong, Steger Martin, William L. Bedard, Dallas, Tex., for defendant-appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before GODBOLD, Chief Judge, SIMPSON and THOMAS A. CLARK, Circuit Judges.
This is an appeal by Harold C. Abramson, acting as trustee in bankruptcy under Chapter XI of the old Bankruptcy Act, former 11 U.S.C. § 1, et seq., of the district court's order refusing to set aside an alleged transfer of real property within one year of the filing of debtor's bankruptcy petition. The district court granted summary judgment for the defendant-appellee, Lakewood Bank and Trust Company ("Lakewood Bank"), holding that the nonjudicial foreclosure sale of the debtor's land did not constitute a "transfer" within the meaning of § 67(d) of the Bankruptcy Act. We reverse.
The foreclosure sale of the property under attack here occurred August 3, 1976. Appellant filed a petition under Chapter XI of the Bankruptcy Act on February 24, 1977. Sec. 403(a) of Pub.L. No. 95-598, Title I (Nov. 6, 1978), 92 Stat. 2549 provides as follows:
A case commenced under the Bankruptcy Act, and all matters and proceedings in or relating to any such case, shall be conducted and determined under such Act as if this Act [Pub.L. 95-598] had not been enacted, and the substantive rights of parties in connection with any such bankruptcy case, matter, or proceeding shall continue to be governed by the law applicable to such case, matter, or proceeding as if the Act had not been enacted.
Since the events giving rise to this lawsuit occurred before the effective date of the new Bankruptcy Act the rights of the parties herein are governed by "repealed Title XI." When reference is made in this opinion to the "Act" or the "Bankruptcy Act" this same shall refer to "repealed Title XI."
The facts can be stated briefly. The appellant, Abramson, brought this action in his capacity as court appointed trustee in the bankruptcy of Frank L. Johnson and Nina P. Johnson. The appellee, Lakewood Bank, is a Dallas bank. The bankrupts owned seventy-three acres of land in Kaufman County, Texas. In August of 1975, the bankrupts borrowed $74,000 on an installment loan. This loan was secured by a conventional deed of trust in favor of the bank on the seventy-three acres.
The deed of trust was recorded by the bank on August 5, 1975. When the bankrupts were unable to fulfill their financial obligations to the Lakewood Bank, a foreclosure sale was held on August 3, 1976, at which time the Lakewood Bank, through its agent Louis McClain, purchased the property for $65,000 cash. At the time of the foreclosure sale, the bankrupts owed approximately $71,000 on the mortgage. On February 24, 1977, the Johnsons filed a petition to be adjudicated bankrupt in the United States Bankruptcy Court for the Northern District of Texas.
The Trustee brought this action in March, 1978, to have the August, 1976, foreclosure sale declared a fraudulent transfer under § 67(d) of the Bankruptcy Act. While the deed of trust had been executed more than one year prior to the date of the filing of the bankruptcy petition, the actual foreclosure sale occurred less than seven months before the filing. Section 67(d)(2) provided that "[e]very transfer made and every obligation incurred by a debtor within one year prior to the filing" of the bankruptcy petition "is fraudulent . . . as to creditors existing at the time of such transfer or obligation, if made or incurred without fair consideration by a debtor who is or will be thereby rendered insolvent, without regard to his actual intent." 11 U.S.C. § 107(d)(2) (1966) (current version at 11 U.S.C. § 548(a) (1978)) (emphasis supplied).
In granting summary judgment for the Lakewood Bank, the district court held that for purposes of the Bankruptcy Act, there was only one "transfer" in this case and that it "occurred at the latest on August 5, 1975, more than 18 months prior to the adjudication of bankruptcy."
More than a year after the issuance of the district court's ruling in the Abramson case, this court of appeals decided the remarkably similar case of Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir. 1980). As to the narrow issue before us on this appeal, i. e., whether the bank's non-judicial foreclosure sale constituted a "transfer" within the meaning of the Act, we consider the holding in Durrett as controlling.
The word "transfer" was defined in Section 1 of the Act as including:
the sale and every other and different mode, direct or indirect, of disposing of or of parting with property or with an interest therein or with the possession thereof or of fixing a lien upon property or upon an interest therein, absolutely or conditionally, voluntarily or involuntarily, by or without judicial proceedings, as a conveyance, sale, assignment, payment, pledge, mortgage, lien, encumbrance, gift, security, or otherwise; the retention of a security title to property delivered to a debtor shall be deemed a transfer suffered by such debtor.
11 U.S.C. § 1(30).
The current version of the definition of transfer is located at 11 U.S.C. § 101(40):
"transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest.
In Durrett, this court held that a Texas non-judicial foreclosure sale constituted a transfer within the meaning of § 67(d). There, a deed of trust to secure debt had been executed in 1969. In January, 1977, some nine days prior to the debtor's filing for bankruptcy, the trustee in the deed of trust sold the property at a non-judicial foreclosure sale as authorized by the deed of trust and Texas law. The debtor in possession under Chapter XI of the Bankruptcy Act brought suit to set aside the sale of the property as a voidable transfer.
In considering whether the foreclosure sale was a "transfer" made by the debtor in possession, a panel of this court set forth the definition of "transfer" and wrote:
The comprehensive character of this definition leads us to conclude that the transfer of title to the real property of the debtor in possession pursuant to an arrangement under Chapter XI of the Act, by a trustee on foreclosure of a deed of trust, to a purchaser at the sale constitutes a "transfer" by debtor in possession within the purview of section 67(d). The actual transfer of title was made by Durrett to Fields, as trustee, via the deed of trust, executed April 7, 1969, to secure an indebtedness then owing to Southern and thereafter assigned to Washington. Possession of the property was retained by Durrett subject to the power of the trustee to sell and deliver possession of the property, on default, at a foreclosure sale. While the actual conveyance of title by Durrett was made on April 7, 1969, possession was retained until foreclosure of the deed of trust. The "transfer" within the contemplation of the Act, was not final until the day of the foreclosure sale, January 4, 1977. This was accomplished within the one-year period provided by section 67(d)(2), 11 U.S.C. § 107(d)(2).
Durrett v. Washington National Insurance Co., 621 F.2d at 204.
Accordingly, the foreclosure sale of the Johnsons' seventy-three acres was also a transfer within the meaning of the Act. As this transfer occurred within the one-year period, it is subject to being set aside as fraudulent if it was made without fair consideration. Therefore we reverse and remand for further proceedings consistent with this opinion.
REVERSED and REMANDED.
I dissent. Although I recognize our panel is bound by Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir. 1980), Durrett is simply wrong in its holding that a foreclosure sale is a transfer within the meaning of § 67(d). Subparagraph (2) of that section of the former Bankruptcy Act reads in part as follows:
Every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition initiating a proceeding under this title by or against him is fraudulent . . . if made or incurred without fair consideration by a debtor . . . without regard to his actual intent; . . .
A foreclosure sale by a mortgagee or trustee is not a transfer by the debtor, although done in his name pursuant to a power of sale in the mortgage or deed of trust. The debtor's act which triggers foreclosure is the failure to fulfill some obligation in the promissory note which is secured by the mortgage or deed of trust. The creditor than declares the obligation due, forecloses, and sells at a public sale to the highest bidder. The mortgagor-trustor/bankrupt does nothing but default — that cannot be translated into a "transfer." It is not a voluntary conveyance on his part. The power of sale vested in the mortgagee or trustee, when coupled with an interest as here, is a valuable property right acquired by that party at the time of the execution of the initial mortgage or trust deed. When that time is more than twelve months before the filing of the bankruptcy petition, the power of sale is vested absolutely in the mortgagee or trustee.
Technically a mortgage does not contain a power of sale, while a deed of trust or deed to secure debt does contain such a power. However, in common parlance the generic term "mortgage" embraces all forms of instruments creating a lien on realty for the purpose of securing a debt. Many contain powers of sale in order to avoid court proceedings which are necessary in strict mortgage states.
It is basic mortgage law that at the time of the foreclosure sale the purchaser (who may or may not be the mortgagee or trustee) takes the same title to the property which the mortgagor or trustor had at the time of the initial mortgage or trust deed, subject only to property taxes (and perhaps some statutory intervening limitations as changes in zoning, etc., and the right of redemption by the mortgagee with a specified number of days granted statutorily in some states), and free and clear of any intervening liens or mortgages placed against the property by the debtor or any judgment creditor.
By our decision here and in Durrett we cast a cloud upon mortgages and trust deeds. Foreclosure within twelve months before a filing creates a sale voidable by a trustee in bankruptcy if the public sale did not bring a "fair consideration." It is generally known that such sales do not bring the best price, but most states, including Texas, mandate public sales when foreclosure is the creditor's remedy. Many states, but not Texas, prohibit a deficiency judgment against the debtor unless the mortgagee obtains confirmation of the sale through a court proceeding where the fairness of the consideration is adjudicated. Thus in those states a mortgagee who did not obtain judicial confirmation would be prohibited from filing a claim in the bankruptcy proceeding for the amount of the deficiency.
See, e. g., Ga. Code Ann. § 67-1503 (confirmation of foreclosure sales under powers).
The cloud created over mortgages and trust deeds by making foreclosure sales subject to being voided by a bankruptcy trustee will naturally inhibit a purchaser other than the mortgagee from buying at foreclosure. This tends to depress further the prices of foreclosure sales and thus increase the potential size of the deficiency in each foreclosure in all six states comprising this circuit.
It is interesting to me that Durrett is the first case treating this problem — after 90 years of bankruptcy law and mortgages of a time greater than the memory of man. It again establishes what an imaginative lawyer can do when he adds persuasion.
I would affirm.