FOR THE NORTHERN DISTRICT OF CALIFORNIA
FRANK and PATRICIA DONALDSON, No. 91-10759
FRANK and PATRICIA DONALDSON,
v. A.P. No. 91-1052
WORLD SAVINGS & LOAN ASSN.,
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The Donaldsons objected to World that the foreclosure sale should be rescinded, and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.
AVOIDABILITY OF FORECLOSURE SALE
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
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
VIABILITY OF REPURCHASE AGREEMENT
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
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 _______________________