Memorandum of Decision Re: Avoidance of Foreclosure Sale

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re CHARLES and DENISE BUNHEIRAO,                                       No. 1-90-01094      Debtors. ___________________________/ CHARLES and DENISE BUNHEIRAO,      Plaintiffs,    v.                                                                                              A.P. No. 1-90-0149 MICHAEL A. DILLINGHAM, et al.,      Defendants. ______________________________/
Memorandum of Decision
     In the spring of 1989, the Savings Bank of Mendocino commenced foreclosure proceedings against the debtors' home in Kelseyville. The debtors consulted a mortgage broker to arrange refinancing, and the broker matched the debtors up with defendant John Dillingham, who agreed to lend the debtors $20,000.00 to pay off the bank. Dillingham is a licensed real estate broker and real property appraiser.      Due to an apparent mixup in the paperwork being handled by a title company, the loan escrow did not close although the debtors believed that it had. Dillingham went to the foreclosure sale with $30,000.00 in cashier's checks, figuring to purchase the property himself.      There was another bidder at the foreclosure sale, one Michael Santarelli. Dillingham and Santarelli bid against each other briefly, and then Dillingham stopped. Santarelli was pronounced the successful bidder at $16,900.00. Dillingham then approached Santarelli and asked him if he wished to sell. Santarelli agreed to sell the property to Dillingham for $26,900.00, cash, which Dillingham immediately paid. The trustee's deed had been delivered to Santarelli in blank, so Santarelli merely handed it to Dillingham. Dillingham placed the name of his son, defendant Michael Dillingham, on the deed as grantee.      Within a year after the foreclosure sale, the debtors filed the instant Chapter 13 proceeding. In this adversary proceeding, they seek to avoid the foreclosure sale as a fraudulent transfer pursuant to section 548 of the Bankruptcy Code. Now before the court is Dillingham's motion for summary judgment. He argues first that the Appellate Panel decision in In re Madrid, 21 B.R. 424 (9th Cir.BAP 1982) is binding on this court and mandates judgment in his favor. Second, he argues that the state court unlawful detainer judgment is res judicata as to the issues raised in this action.      This court has been an open critic of the Appellate Panel ruling in Madrid, as that decision is based on the total fiction (exemplified in this case) that properties sell for fair value at foreclosure sales. Moreover, the court feels that the policy behind that decision, that foreclosure sales should not be set aside, is one for Congress to set, not the courts. Nonetheless, the court has considered itself to be bound by Madrid, and therefore free to criticize it but not to disregard it. See In re Kachanizadeh, 108 B.R. 734 (Bkrtcy.C.D.Cal.1989).      While the court is bound to follow Madrid, it is not bound to expand upon it or apply it to circumstances other than those before the court in that case. By its own terms, Mardrid applies only to only regular and non-collusive foreclosure sales. Without deciding whether the facts in this case constitute grounds under state law for setting the foreclosure aside (which they well may), the court finds that they are more than sufficient to make Madrid inapplicable. In a regularly conducted sale, there is no agreement between the bidders, tacit or otherwise, which results in depriving the owners of the full value of their property contrary to the intent of the law providing for such sales. Even if neither Dillingham nor Santarelli had specific intent to cheat the debtors, the effect of their agreement is enough to distinguish this case from Madrid.      The unlawful detainer judgment does not preclude the present litigation. "The summary nature of unlawful detainer proceedings means that a judgment for the purchaser [after trustee's sale] is not necessarily res judicata, and will not bar a subsequent suit by the trustor to vacate the sale or recover damages." Bernhardt, California Mortgage and Deed of Trust Practice (CEB 1979), section 6.67, citing Cheney v. Trauzettel (1937) 9 Cal.2d 158, Byrne v. Baker (1963) 221 Cal.App.2d 1, and Patapoff v. Reliable Escrow Service (1962) 201 Cal.App.2d 484.      For the above reasons, Dillingham's motion for summary judgment will be denied. Counsel for the debtors shall submit an appropriate form of order.
Dated: December 11, 1990                                                                        _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy