BFP v. Resolution Trust Corporation

1994-05-23

Headline: Mortgage foreclosure buyers win: Court rules that a noncollusive, properly conducted state foreclosure sale conclusively establishes reasonably equivalent value, limiting bankruptcy trustees' power to undo routine foreclosures and stabilizing titles.

Holding: The Court held that a noncollusive real-estate foreclosure sale conducted under applicable state law conclusively establishes 'reasonably equivalent value' under 11 U.S.C. §548(a)(2), barring trustee avoidance absent collusion or state-law irregularity.

Real World Impact:

Makes it harder for bankruptcy trustees to undo routine, noncollusive foreclosure sales.
Gives buyers at proper foreclosure sales stronger protection for property titles.
Encourages title insurers and lenders to adjust practices around foreclosure purchases.

Topics: foreclosure sales, bankruptcy transfers, property titles, mortgage disputes

Summary

Background

A small partnership bought a Newport Beach home subject to a bank loan and later defaulted. The mortgage holder completed a properly noticed foreclosure sale on July 12, 1989, and a third-party buyer paid $433,000. The partnership then filed for Chapter 11 and argued the sale should be undone as a fraudulent transfer because the home was allegedly worth over $725,000 at the time. Lower courts found the sale complied with California law and was not collusive; the Ninth Circuit affirmed, and the Supreme Court granted review.

Reasoning

The key question was whether the money received at a lawful, noncollusive foreclosure sale automatically counts as “reasonably equivalent value” under the Bankruptcy Code so a bankruptcy trustee cannot undo the transfer. The Court rejected using fair-market value or an arbitrary percentage rule (for example, 70% of market value). The majority held that in a routine, noncollusive sale conducted according to state foreclosure law, the sale price itself conclusively establishes reasonably equivalent value. Only sales tainted by collusion or failure to follow state foreclosure procedures can be avoided under that bankruptcy provision.

Real world impact

The ruling gives clear protection to buyers who pay the foreclosure price in ordinary sales and narrows the situations in which bankruptcy trustees can recover property from those buyers. It also affects title stability and insurers, who already reacted in some places to earlier rules. The Court left open that the §548 standard still matters in nonforeclosure contexts and that irregular or collusive sales remain challengeable.

Dissents or concurrances

Justice Souter dissented, arguing the statute plainly requires courts to compare the sale price to the property’s worth and that treating lawful foreclosure prices as conclusively sufficient wrongly shields low-price sales from trustee review.