Memorandum of Decision Re: Stare Decisis, 108(b)

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re FRANK and PATRICIA DONALDSON,                                       No. 91-10759      Debtors. _____________________________/ FRANK and PATRICIA DONALDSON,      Plaintiffs,    v.                                                                                              A.P. No. 91-1052 WORLD SAVINGS & LOAN ASSN.,      Defendant. ______________________________/
Memorandum of Decision
     This adversary proceeding arises out of the prepetition foreclosure of the debtors' residence by defendant World Savings. Now before the court is World's motion for summary judgment. For purposes of this motion only, the facts are assumed to be as the debtors have alleged.      In February, 1991, World nonjudicially foreclosed on the residence of plaintiffs and debtors Frank and Patricia Donaldson. World credit bid $571,000; there were no other bids. The property was worth over $1.2 million at the time.      Before foreclosure, there had been negotiations between World and the Donaldsons, who were trying to refinance but were unable to deliver clear title due to problems caused by a co-owner of the property. As a result of these negotiations, the Donaldsons believed that they had been granted more time to resolve their problems or file a bankruptcy petition. The foreclosure took them by surprise.      The Donaldsons objected to World that the foreclosure sale should be rescinded, and commenced suit in state court. The parties settled the suit by entering into an agreement whereby World would sell the property back to the Donaldsons for the loan balance if the full amount was tendered no later than the close of business on April 8, 1991. World later agreed to extend the deadline to April 10, 1991, at noon. The Donaldsons filed their Chapter 11 petition just before noon on April 10.      There are two bankruptcy issues raised by the Donaldsons in this adversary proceeding: whether the foreclosure sale is avoidable as a fraudulent transfer, and whether the repurchase agreement is still performable. Both issues are ripe for summary adjudication.
     Whether the foreclosure sale is avoidable as a fraudulent transfer depends on whether the 2-1 decision of the Bankruptcy Appellate Panel in In re Madrid, 21 B.R. 424 (9th Cir. BAP 1982) is still good law. In that case, the appellate panel ruled that any regular foreclosure sale is deemed to be for fair value. The decision was affirmed by the Ninth Circuit based on different reasoning which has been made inapplicable by subsequent amendment of the Bankruptcy Code.      This court is of the opinion that the BAP opinion in Madrid is terrible law. It is a classic example of judicial legislation. The court there basically decided that, as a policy matter, foreclosure sales should not be set aside. It then created law to support this result, ignoring the fact that Congress, not the courts, has the prerogative of setting policy.      Worse, the BAP decision in Madrid is contrary to the Bankruptcy Code itself. Section 548 is designed so that anyone who got a windfall from an insolvent debtor has to give back the excess over what it takes to make him whole, so that creditors can be paid. The complaint alleges that World got a huge windfall, yet the BAP decision means that World keeps the excess even if it means that the other creditors get nothing.      Worse still, the BAP decision in Madrid is based on a total and complete fiction. This court has seen numerous properties sold back to the lender or some shark at a foreclosure sale for a fraction of the value they could readily command on the open market. To say that any foreclosure sale is presumptively for fair consideration is akin to a judicial fiat that the moon is made of green cheese.      Having expressed its dislike for the BAP ruling in Madrid, the court will nonetheless follow it. The court agrees with the ruling in In re Kachanizadeh, 108 B.R. 734 (Bkrtcy. C.D.Cal.1989) that the BAP decision in Madrid is binding upon this court. While the doctrine of stare decisis may occasionally compel the court to reach a ruling it does not like, that is a small price to pay for not having to reinvent the wheel every time a disputed issue of law comes up.
     Section 108(b) of the Bankruptcy Code provides, in pertinent part, that "if . . . an agreement fixes a period within which the debtor . . . may . . . cure a default, or perform any similar act, and such period has not expired before the date of the filing of the petition, the [debtor in possession] may only . . . perform . . before the later of (1) the end of such period . . .; or (2) 60 days after the order for relief. The issue here is whether this provision is applicable, so that the Donaldsons' ability to repurchase expired June 10, 1991, or whether the more general provisions of section 365 allowing assumption of executory contracts apply.      Resolution of this issue requires the court to reconcile two disparate lines of cases. The first line, represented by literally dozens of reported cases, holds that redemption rights are governed by section 108(b). See, e.g., Matter of Tynan, 773 F.2d 177 (7th Cir.1985). The second line of cases holds that where a deadline is set in an executory contract for the performance of an act, the provisions of section 365 govern over section 108. See, e.g., Moody v. Amoco Oil Co., 734 F.2d 1200, 1215 (7th Cir.1984). It is of no real help in harmonizing these cases that the redemption period here is contractual and not statutory, since section 108 specifically refers to agreements as well as statutes.      Although not cited by either side, the controlling authority on this issue is clearly In re Santa Fe Development and Mortgage Corp., 16 B.R. 165 (9th Cir.1981). In that case, like the case at bar, the parties had entered into an agreement to settle litigation. Pursuant to the agreement, the debtor was to consummate its purchase of real property on or before a specified time, or lose any rights in the property. A few days before the deadline, the debtor filed a Chapter 11 petition. The bankruptcy court held that failure to consummate by the deadline was fatal to the debtor; the Appellate Panel reversed, with two judges holding that section 108(b) was applicable and gave the debtor at least 60 days after the filing to consummate. In a separate opinion, Judge Volinn took the position urged by the Donaldsons that section 365, and not section 108, controlled. Santa Fe Development has been subsequently cited as standing for the proposition that only section 108 is applicable where the debtor has an option to acquire property by payment of a specified sum by a specified date. In re Benge Corp., 54 B.R. 226, 228 (Bkrtcy.D.Hawaii 1985).      An examination of the agreement clearly shows that in return for a full settlement of their disputes, the Donaldsons received an option to redeem their property. As noted above, options and redemption rights are generally treated by the courts as governed by section 108, not section 365 (see also In re Dulan, 52 B.R. 739, 742 (Bkrtcy.C.D.Cal.1985)). Accordingly, the court finds that the Donaldsons' right to redeem expired 60 days after they filed their petition.
     The above rulings resolve all bankruptcy issues, but are not fully dispositive of the case. Since there appears to be gross disparity between the fair value of the property and the sale price at foreclosure, under state law the Donaldsons may yet prevail if they can show irregularities in the foreclosure process or other culpable conduct on the part of World. However, since no further bankruptcy issues are involved, it appears best for both sides that the court abstain from hearing the state court issues. This is especially so since state court litigation raising the same issues is already pending.
     Counsel for World shall submit an appropriate form of judgment in its favor dismissing the fraudulent conveyance claims with prejudice and declaring that any right of the debtors pursuant to the redemption agreement has expired. The judgment shall recite that the court abstains from hearing all other issues and the remaining claims are accordingly dismissed, without prejudice to state court proceedings.
Dated: June 25, 1991                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy