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U.S. v. Barrett

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


argued: February 6, 1991.

THOMAS J. BARRETT AND SHARON B. BARRETT, APPELLANTS
v.
COMMONWEALTH FEDERAL SAVINGS AND LOAN ASSOCIATION, ROBERT J. GUNN, AND JOHN GREEN, SHERIFF, APPELLEES

On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil Action No. 90-3615.

Mansmann, Scirica, and A. Leon Higginbotham, Jr., Circuit Judges.

Author: Higginbotham

Opinion OF THE COURT

HIGGINBOTHAM, JR., Senior Circuit Judge

I.

This case presents the debtors' (the "Barretts") appeal from the district court's decision not to set aside a foreclosure sale as a fraudulent transfer under 11 U.S.C. § 548(a)(2). There have been two appeals from the bankruptcy court to the district court. In both instances the order of the bankruptcy court was vacated. Barrett v. Commonwealth Federal Savings and Loan, 111 Bankr. 78 (E.D. Pa. 1990); In Re Barrett, 118 Bankr. 255 (E.D. Pa. 1990). The district court last considered this case on appeal from the Memorandum and Order of the bankruptcy court dated April 27, 1990 which set aside the foreclosure sale. A brief review of the complex history of this case is provided to clarify the dispute before us.*fn1

The appellants here wish to set aside the foreclosure sale of their personal residence on the ground that they received less than the reasonably equivalent value for their house at the foreclosure sale. This case arose when the mortgagee, Commonwealth Federal Savings and Loan Association, instituted foreclosure proceedings after the debtors defaulted. After a default judgment was entered against the debtors, their personal residence was sold at a sheriff's sale to Robert J. Gunn (hereinafter "Gunn") for $66,000. Subsequently, the debtors filed for bankruptcy. The debtors then filed a complaint in the bankruptcy court to avoid transfer of their property.

In the initial proceeding, the bankruptcy court determined that the value of the property was $95,000. The bankruptcy court also found that the amount received at the foreclosure sale "($66,000) is sixty-nine and five tenths (69.5%) percent of the fair market value of the property of $95,000, slightly less than the seventy (70%) percent benchmark which we have consistently accepted." Barrett, 104 Bankr. 688, 692 (E.D. Pa. 1989). Relying on the rule articulated in Durrett v. Washington Nat'l Ins. Co., 621 F.2d 201, 203-04 (5th Cir. 1980), the bankruptcy court voided the sale because the sale had not yielded the "reasonably equivalent value" of the property.

Gunn, the purchaser of the property at the foreclosure sale, then appealed the bankruptcy court's decision to the district court. The district court held that the bankruptcy court's valuation of the property was not "clearly erroneous,"*fn2 but vacated the order setting aside the sheriff's sale and remanded "to determine whether under § 548(a)(2) a 'reasonably equivalent value' was obtained at the foreclosure sale in light of the surrounding circumstances." Barrett, 111 Bankr. 78, 81 (E.D. Pa. 1990). The district court instructed the bankruptcy court to consider the price obtained at the foreclosure sale in light of "the totality of the transaction including such factors as the encouragement of competitive bidding," the scope of advertisement and the relationship between the parties, as well as the fair market value of the property in accordance with the Seventh Circuit's opinion in Bundles v. Baker, 856 F.2d 815 (7th Cir. 1988). Barrett, 111 Bankr. at 81.

On remand, after considering the additional factors, the bankruptcy court restated its prior holding, and once again, set aside the sheriff's sale. Barrett, 113 Bankr. 175 (E.D. Pa. 1990). The bankruptcy court found that, in addition to the inadequate price received, the conditions of the sale, in particular the limited extent to which the sale was advertised, were inadequate. Id.

Gunn, the purchaser at the foreclosure sale, again appealed to the district court. The district court reversed and upheld the foreclosure sale because the bankruptcy court had not properly evaluated the fair market value of the property or the conditions of sale in light of the foreclosure. Barrett, 118 Bankr. 255 (E.D. Pa. 1990). The district court concluded that the evidence presented below showed that the foreclosure sale had been conducted in accordance with state law, and that the sale procured the reasonably equivalent value of the property under foreclosure conditions.*fn3 The debtors then filed their appeal with this court.

We have jurisdiction over this matter pursuant to 28 U.S.C. § 1291. The district court exercised appellate jurisdiction in this matter pursuant to 28 U.S.C. § 158(a) governing appeals from final judgments of the bankruptcy court. The bankruptcy court had subject matter jurisdiction pursuant to 28 U.S.C. § 157(b), and 28 U.S.C. § 1334(b).

II.

We must determine whether the district court erred in reversing the order of the bankruptcy court which, after allegedly considering the totality of the circumstances, set aside the foreclosure sale on the grounds that the debtor did not receive reasonably equivalent value for the house. In order to make this decision, we must decide what constitutes reasonably equivalent value under § 548 of the Bankruptcy Code.

Since § 548(a)(2) does not contain a definition of the term "reasonably equivalent value," the courts have been left with the responsibility of defining this term. In Re Morris Communications NC, Inc., 914 F.2d 458, 466 (4th Cir. 1990). The Fifth Circuit's decision in Durrett v. Washington, 621 F.2d at 201, and the Seventh Circuit's decision in Bundles v. Baker, 856 F.2d at 823-24, represent two different approaches to defining the term "reasonably equivalent value." The Fourth Circuit, in Morris Communications has recently outlined the two positions:

One of the standards known generally as the mathematical formula originated in the setting of a foreclosure sale in Durrett, . . . and was followed in Madrid v. Lawyers Title Ins. Co., 21 Bankr. 424 (9th Cir. 1982), aff'd on other grounds, 725 F.2d 1197 (9th Cir.), cert. denied, 469 U.S. 833, 105 S. Ct. 125, 83 L. Ed. 2d 66 (1984). Under this standard, a consideration less than 70% of the fair market value will normally not qualify as "reasonably equivalent value." Durrett, supra, at 201. The rules to be applied in defining reasonable equivalence, as adopted by the later cases, however, take a less rigid approach and are most accurately summarized in Bundles v. Baker, 856 F.2d 815, 823-24 (7th Cir. 1988). That decision rejects any fixed mathematical formula for determining reasonable equivalence and opts for the standard that "reasonable equivalence should depend on all the facts of each case," an important element of which is market value. Such a rule "requires case-by-case adjudication," as a starting point [for such review] the fair market value of the property transferred.

914 F.2d at 466-67.

On the instant appeal, the parties agree that the Bundles standard should be used to determine reasonably equivalent value because that standard has been widely accepted by the courts. See, e.g., In Re Lindsay, 98 Bankr. 983, 988-91 (Bankr. S.D. Cal. 1989); General Industries, Inc. v. Shea, 79 Bankr. 124, 129-34 (Bankr. D. Mass. 1987); In Re Pruitt, 72 Bankr. 436, 444-46 (Bankr. E.D.N.Y. 1987); Ruebeck v. Attleboro Savings Bank, 55 Bankr. 163, 167-68 (Bankr. D. Mass. 1985); In Re Adwar, 55 Bankr. 111, 113-15 (Bankr. E.D.N.Y. 1985); In Re Richardson, 23 Bankr. 434, 448 (Bankr. D. Utah 1982). However, the appellants here contend that the district court misinterpreted the Seventh Circuit's holding in Bundles by failing to fully consider the process by which reasonably equivalent value under § 548 must be determined.*fn4 First, appellants note that the fundamental purpose of § 548 is to "preserve the assets of the estate." Next, appellants assert that by upholding the foreclosure sale in this case, the district court did not insure that the bankrupts would receive the "reasonably equivalent value" of their property. Under the holding in Bundles, there are a number of factors which should be considered when determining value under § 548. These factors include whether the property was appraised fairly, "whether the property was advertised widely, and whether competitive bidding was encouraged." Bundles, 856 F.2d at 824. On this appeal, the appellants take issue with two related factors. Appellants contend that the foreclosure sale was not "widely advertised," and because of this they contend that competitive bidding was not encouraged.

We must consider whether the appellants' assertions are correct (i.e. whether the district court misinterpreted the Bundles holding). In Bundles, the Seventh Circuit considered essentially the same issue that is before us, that is, "whether a debtor in bankruptcy may set aside under section 548(a)(2) of the Bankruptcy Code, . . ., the sale of his personal residence upon foreclosure of the mortgage." Id. at 816. The Bundles court reviewed the lower court decisions and concluded that the sale price at a sheriff's sale should not be automatically presumed to provide the debtor with the reasonably equivalent value. Id. at 825. The Bundles court noted that "in usual circumstances, it would be appropriate to permit a rebuttable presumption that the price obtained at the foreclosure sale represents a reasonably equivalent value."*fn5 Id. at 824. In so noting, the court reviewed the legislative history § 548(a)(2), and concluded ". . . that Congress did not legislate an irrebuttable presumption in the case of mortgage foreclosure sales."*fn6 Id. at 821.

The court then adopted its "totality of the circumstances" test:

The bankruptcy court also must examine the foreclosure transaction in its totality to determine whether the procedures employed were calculated not only to secure for the mortgagee the value of its interest but also to return to the debtor-mortgagor his equity in the property.

Id.

In the instant case, the district court concluded that the Bundles decision held that reasonably equivalent value under § 548(a)(2) should be determined by considering "the fair market value as affected by the fact of foreclosure." Barrett, 118 Bankr. at 257. As a result, the district court reversed the judgment of the bankruptcy court, and refused to set aside the foreclosure sale. We agree with the district court that the bankruptcy court had, on remand, incorrectly applied the precepts of Bundles. The bankruptcy court considered the circumstances surrounding the foreclosure sale, and focused specifically on two factors: 1) whether the sale was widely advertised, and 2) whether competitive bidding was encouraged. Id. at 256. We agree that the bankruptcy court erred by comparing the sale and the sale price to "a typical private sale of residential property in Philadelphia" when it should have considered how the sale compared to "a typical foreclosure sale in the area." Id. at 258.*fn7

III.

Upon review of the totality of the circumstances presented in the case at bar, we agree with the district court's holding that the sheriff's sale should not be set aside. If we consider the evidence in the light most favorable to the appellant, the debtor received 69.5% from the sheriff's sale. If we consider the evidence in the light most favorable to the appellee, the debtor received 77.6% of the value of the property.*fn8

The bankruptcy judge's confident determination of market value is not as evident to us as it was to him. For the date of the sheriff's sale, December 5, 1988, the appraiser hired by the debtor valued the property at $95,500 and the bankruptcy court valued the property at $95,000. The appraiser hired by the creditor valued the property at $85,000. Barrett, 104 Bankr. at 690. In order for the bankruptcy judge to find a violation of what he called the "70 percent rule" he had to find the value to be no less than $94,285.00, and because $66,000 was one half of one percent less than his 70% figure was (it was $420 less than the "required" $66,000 figure) he concluded that the sale had not yielded the reasonably equivalent value of the property.

We recognize that, as Justice Holmes noted, that in the adjudication process there "is the inevitable result of drawing a line where the distinctions are distinctions of degree; and the constant business of the law is to draw such lines." Dominion Hotel, Inc. v. State of Arizona, 249 U.S. 265, 268, 63 L. Ed. 597, 39 S. Ct. 273 (1919). However, we do not find that the miniscule distinction between 70% and 69.5% of a possibly inflated value is sufficient to render this sale void.

The trial court noted that relief from foreclosure sales should only be granted in extraordinary situations. The factual scenario in this case is not an extraordinary situation, therefore, it is not necessary for us to decide what the applicable law would be in such instances.

A. Scope of Advertisement - Local vs. State Rule

Appellants concede that the newspaper used for advertisement of the property met the standards under the applicable state rule, Pennsylvania R. Civ. P. 3129.2.*fn9 However, in support of their argument that the sale in this case was not advertised widely, appellant contends that a local rule of the Philadelphia Common Pleas court, Philadelphia Civ. R. 3192.2,*fn10 sets the standard for advertising sheriff's sales in Philadelphia. Appellant further contends that the foreclosure sale must be set aside because it was not advertised as extensively as the local rule required.

There is a preliminary issue as to whether the Philadelphia Common Pleas court local rule issue should be considered on this appeal since appellants never cited the local rule as a basis for relief when litigating before the bankruptcy court and the district court. As a general rule a party may not raise a new issue on appeal. See, Bethlehem Mines Corp. v. United Mine Workers of America, 494 F.2d 726, 735 (3d Cir. 1974) ("Ordinarily an issue not raised by the pleadings or otherwise in the District Court will not be heard on appeal absent extraordinary circumstances."). Though an appellate court may exercise some discretion on these matters, in this case we can not find any extraordinary circumstances that would justify our considering this issue de novo. The local rule was in existence when the matter was first before the bankruptcy court and appellant has on three occasions failed to call this rule to the attention of the judges who presided over the case. We are particularly loathe to decide state law issues which have not been litigated before the trial and bankruptcy courts. Since the advertisement at issue here complied with the state rule in that it appeared in a newspaper of general circulation, the foreclosure sale should not be set aside on the basis that the sale was not advertised in the fashion that appellants claim the Philadelphia Common Pleas court record requires.

B. Competitive Bidding

We are further persuaded that competitive bidding took place by the testimony regarding the unusually large number of bidders present at the foreclosure sale. Barrett, 118 Bankr. at 256. Mr. Gunn, the purchaser of the property at the foreclosure sale,

Id.

IV.

On the basis of the issues actually litigated before the bankruptcy and the district court, we conclude that the district court correctly determined that the foreclosure sale did not violate the applicable rules for sheriff's sales in this case. The judgment of the district court approving the foreclosure sale will be affirmed.


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