Opinion
Case No. 02-67845-T, Adversary Proceeding No. 02-6930-T
December 27, 2002
MEMORANDUM OPINION
Trial under plaintiff's amended complaint requesting injunctive relief and to set aside a foreclosure sale as a fraudulent transfer was held on December 16, 2002. At the conclusion of trial, the court ruled from the bench that the relief sought in the complaint would be denied and judgment entered for defendant Consolidated Bank and Trust Company.
This opinion supplements the court's bench ruling.
This opinion incorporates the court's letter to counsel dated October 24, 2002, and a memorandum opinion and order entered November 8, 2002.
Facts.
This adversary proceeding arises out of a foreclosure sale of real property located at 3021 Hawthorne Avenue, City of Richmond, Virginia, on September 6, 2002. The co-owners of the realty were debtor William T. Harris, Jr., and his wife Tomeseana J. Harris, and William T. Harris, III, and his wife, Sandra F. Harris. Only William T. Harris, Jr., was a debtor in a bankruptcy case at the time.
The foreclosure sale was conducted by Adam N. Harrell, Jr., substitute trustee under a deed of trust executed by the co-owners on May 11, 1992. The deed of trust secured a promissory note of debtor and his wife executed on May 11, 1992. The note was held by defendant Bank, which had made the original loan. Because of delinquencies in payment on the note the parties had executed loan modification and extension agreements in 1997 and 2001.
On February 12, 2002, Mr. Harrell as substitute trustee under the deed of trust, sent the co-owners thirty-day notices of default and acceleration of the loan as provided for in paragraph 21 of the deed of trust. On April 3, 2002, Harrell sent the co-owners a letter advising them that the Bank had instructed him to institute foreclosure proceedings against the realty because the loan had been in default for over five months.
Copies of these letters to co-owners Mr. and Mrs. Harris, III, were not introduced as trial exhibits. The court's finding the letters were sent to them is based on the unrebutted testimony of Mr. Harrell.
On December 17, 2001, debtor William T. Harris, Jr., filed a chapter 13 case in this court (Case No. 01-37478-T). The petition schedules for this case failed to list the Bank's loan or its deed of trust on the subject realty. Notice of the bankruptcy was subsequently given to the Bank after the co-owners were sent the letters mentioned in the preceding paragraph. In that case, this court entered a consent order on July 12, 2002, conditioning the automatic stay. See Pl. Ex. G. Copies of the consent order were mailed to all co-owners. Debtor failed to comply with the terms of this order, and the Bank was subsequently granted relief from the stay. On September 12, 2002, debtor's case was dismissed on motion of the chapter 13 trustee.
The order indicates that it was mailed to Mr. and Mrs. Harris, III, at the subject property, 3021 Hawthorne Avenue, the address contained in the consent order submitted by the parties. There was testimony at trial that these parties had moved from that location and did not receive copies of the order.
Harrell gave proper notice of foreclosure required by Virginia statute, including newspaper advertising. The foreclosure was scheduled for September 6, 2002, at 11:00 a.m. On that date the loan balance (pay-off) was approximately $52,000.00. On the morning of September 6, prior to the sale, debtor's wife Tomeseana contacted Harrell for information on the payment required by the Bank to reinstate the loan and cancel the foreclosure sale. Although the original reinstatement figure given to Mrs. Harris was inaccurate, by shortly after 9:00 a.m. Harrell advised her of the correct amount of approximately $6,900.00.
By 11:00 a.m. on September 6 Mrs. Harris had not appeared at the place of sale to reinstate the loan. Harrell proceeded to conduct the sale. He announced that the opening bid (by the Bank) was $57,000.00. There was just one other bidder present, defendant Victor M. Morrison, who bid $57,100.00. Although this was the highest and best bid, Harrell delayed completing the sale as he anticipated that Mrs. Harris would appear with sufficient funds to reinstate the loan. Mrs. Harris did finally appear, but she was approximately $700.00 short of the necessary reinstatement amount. Accordingly Harrell completed the foreclosure sale to Morrison for the bid amount of $57,100.00. This sale was subsequently concluded pursuant to Virginia law.
On September 11, 2002, debtor and his wife filed in the Circuit Court for the City of Richmond a bill of complaint for temporary injunction or in the alternative to set aside foreclosure sale. The complaint alleged the thirty-day notice of acceleration required by the deed of trust was not given, and therefore the foreclosure sale was invalid. On September 12, 2002, following a hearing, the circuit court entered an order stating that the requirements for a temporary injunction had not been met and denying the motions for restraining order or to set aside foreclosure.
Copies of the circuit court complaint and order are in the instant adversary proceeding file and were considered by this court at hearing on October 23, 2002. See court's October 24 letter to counsel. The circuit judge actually dated the order September 2, 2002, an apparent error.
Debtor filed the instant Chapter 13 case on September 12, 2002. He also filed his original complaint in this adversary proceeding on that date and the amended complaint on October 15, 2002.
Discussion and Conclusions of Law.
Debtor by his amended complaint seeks to set aside the foreclosure sale conducted by the Bank and its deed of trust trustee as a fraudulent transfer under Bankruptcy Code § 548(a)(1)(B). The parties stipulated at trial that debtor was made insolvent by the foreclosure, and the only issue is whether the sale was for less than reasonably equivalent value.
The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
11 U.S.C. § 548(a)(1).
The parties recognize that the opinion of the United States Supreme Court in BFP v. Resolution Trust Corp., 511 U.S. 531, 545 (1994), established that "reasonably equivalent value" in the context of a foreclosure sale is in fact the price received at foreclosure as long as the sale complies with all requirements of a state's foreclosure law. See Washington v. County of King William (In re Washington), 232 B.R. 340, 343 (Bankr.E.D.Va. 1999).
COMPLIANCE WITH VIRGINIA LAW
Debtor asserts here that the foreclosure sale did not comply with Virginia foreclosure law. He recognizes that the procedures followed by the substitute trustee in the foreclosure itself met the minimal requirements of Virginia's statutory foreclosure law. Debtor's argument that the sale failed to meet requirements of Virginia law is based on essentially one allegation: following the Bank receiving relief from stay under the order of July 12, 2002, the Bank failed to give a new thirty-day notice of acceleration of the deed of trust loan as required by paragraph 21 of the deed of trust.
The Bank argues in response that the notice was given by Harrell's letter of February 12, 2002, and that court order of July 12, 2002, also gave the co-owners any additional notice necessary under paragraph 21.
I conclude that the foreclosure complied with requirements of Virginia law as well as with paragraph 21 of the deed of trust. Harrell's letter of February 12, 2002, substantially complied with paragraph 21 and was sufficient notice of acceleration. Debtor has not argued otherwise. There is no evidence that the loan was ever reinstated after February 12, and it remained in default at all times after that date. Because of the continuing default, the Bank filed a motion for relief from stay in debtor's chapter 13 case naming as defendants all co-owners of the realty. The conditional relief from stay order effectively represented an agreement between the Bank and the co-owners. At most the order may be considered a modification of loan terms, but it was scarcely equivalent to a reinstatement of the loan, particularly given the fact that debtor failed to comply with the order's payment provisions. That failure put the parties back where they were on February 12. The court finds that debtor's argument that a new paragraph 21 notice was necessary after debtor breached the consent order represents an unreasonable interpretation of the provision under all the circumstances.
In addition to this evidence, the court considers the denial by the Circuit Court of the City of Richmond of relief sought by debtor in a similar complaint in that court on September 12, 2002. In my letter to counsel of October 24, 2002, I declined to grant defendants' motion to dismiss debtor's original complaint on grounds of res judicata. Although defendants failed to make a case for res judicata, the circuit court's dismissal of a similar law suit is persuasive evidence supporting the conclusion that the foreclosure complied with state law.
REASONABLY EQUIVALENT VALUE
Even if debtor could establish that a new notice of acceleration was required, he cannot prevail under § 548 unless he can meet the other statutory element that the transfer was for less than reasonably equivalent value. The court finds that debtor has also failed to prove this element.
Debtor's position that the foreclosure sale to defendant Morrison for a price of $57,100.00 represented a transfer of the property for less than reasonably equivalent value rests on the supposition that the fair market value of the property was in the approximate amount of the Richmond tax assessment, $115,750.00.
The best indication of fair market value would be an appraisal prepared by a qualified real estate appraiser. There is no appraisal in evidence here. Real estate assessment values are problematic at best. At trial, Harrell testified that City of Richmond assessments are generally higher than market value due to recent reassessments. He also testified that in Virginia, foreclosure sales are considered proper unless the disparity between sale price and fair market value is such as to "shock the conscience." The latter statement is an accurate description of Virginia law. See 13A Michie's Jurisprudence, Mortgages and Deeds of Trust, § 148 (1991).
The court allowed an appraisal to come in at trial but not as evidence of the truth of any value stated. The appraisal was hearsay.
Morrison, the purchaser at foreclosure, testified that the property, which consists of a duplex dwelling, has many outstanding city code violations and is in poor condition. Morrison, who invests in rental property and has about two dozen units, stated that after he fixes up this property, he expects to have "good equity." Debtor, who also is experienced in rental real estate, testified that he believed the subject property to be worth about $75,000.00.
Under the "Durrett rule," which was rejected by the Supreme Court in BFP v. Resolution Trust Corp, 511 U.S. at 542-43, "a foreclosure sale that yielded 57% of the property's fair market value could be set aside, and [the rule] indicated in dicta that any such sale for less than 70% of fair market value should be invalidated." Id. at 536; see Durrett v. Washington Nat'l Ins. Co., 621 F.2d 201 (5th Cir. 1980).
Debtor has failed to establish that the foreclosure transfer was fraudulent because it was for less than reasonably equivalent value. The evidence of the property's fair market value is just not adequate to support such a finding. At most, accepting debtor's testimony of a $75,000.00 value, the disparity is about $18,000.00. I find this is not sufficient for the court to invoke § 548 and set aside the foreclosure sale as fraudulent.
FAIR DEBT COLLECTION PRACTICES ACT, 15 U.S.C. § 1692.
As noted in the court's memorandum opinion and order entered November 8, 2002, at hearing on November 6, debtor's counsel for the first time presented argument that the Bank had failed to comply with the Fair Debt Collection Practices Act (FDCPA) in connection with the foreclosure. At trial debtor introduced evidence pertaining to the Bank's failure to comply with this statute, and his counsel argued that failure to comply with the Act had been proven. Counsel acknowledged to the court that debtor's remedy under FDCPA would be recovery of a monetary judgment. Neither debtor's evidence nor his argument was opposed by defendants.
At the conclusion of trial, I noted during my bench ruling that no pleadings before the court raise FDCPA. I note further that debtor made no apparent attempt at trial to demonstrate what damages might be available to him in accordance with the statute.
The court's bench ruling specifically stated that dismissal of the § 548 count would be without prejudice to any claim debtor might assert under FDCPA in the appropriate forum. It is not at all clear that a bankruptcy court has jurisdiction to hear this type of claim. 15 U.S.C. § 1692k(d); see Vogt v. Dynamic Recovery Servs. (In re Vogt), 257 B.R. 65 (Bankr.D.Colo. 2000) (finding that the court did not have jurisdiction to hear claims premised on the FDCPA even though the activities complained of involved debtors' discharge in bankruptcy).
This court declines to consider debtor's claim under FDCPA when the statute has not been raised by any pleading. Because there may be non-debtor parties who have similar claims, it is questionable that this court is the appropriate forum. However, this court makes no ruling on the issue of jurisdiction or whether debtor has a claim under FDCPA. It will be left to debtor and his counsel to decide whether to seek to amend the present complaint to assert such a claim or to file a new complaint in this or another court of competent jurisdiction.