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U.S. v. Barrett

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 ...


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