Texas Commercial Law Firm

As an example of the impact of Durrett on Texas foreclosure practice, consider the situation where a defaulting borrower has a loan to value ratio of fifty percent. (While it would seem having so much equity in property would make it easy to obtain refinancing, such properties do occasionally end up in foreclosure, especially in Texas, where homestead laws bar home equity loans). Under Texas law, if there are no other lienholders, any sums paid over and above the total indebtedness must be paid to the borrower. Because most lenders are only interested in recovering the balance owed and would rather not purchase the property, they usually will not bid more than the total balance owed. When the total owed was less than 70% of the property's fair market value, and the lender purchases the property at foreclosure, Durrett would cause the property to be uninsurable and for all intents and purposes, unsalable for one year after the foreclosure sale. The Supreme Court decided there was no basis for imposing an arbitrary standard such as 70% when states have laws controlling what is and is not a fair and valid foreclosure sale. Rather than usurp powers traditionally held by the states, the Supreme Court ruled that a foreclosure sale conducted in accordance with state law is a sale for “reasonably equivalent value” as that term is used in Section 548 of the Bankruptcy Code. The Court reasoned that:

to specify a federal minimum sale price beyond what state foreclosure law requires would extend the bankruptcy law well beyond the traditional field of fraudulent transfers and upset the co-existence that fraudulent transfer law and foreclosure have enjoyed for over 400 years. While, under fraudulent transfer law, a “grossly inadequate price” raises a rebuttable presumption of actual fraudulent intent, it is black letter foreclosure law that, when a state's procedures are followed, the mere inadequacy of a foreclosure sale price is no basis for setting the sale aside. Absent clearer textual guidance than the phrase “reasonably equivalent value” - a phrase entirely compatible with pre-existing practice - the Court will not presume that Congress intended to displace traditional state regulation with an interpretation that would profoundly affect the important state interest in the security and stability of title to real property.

Id. One argument posed to the court was that the borrower and the bankruptcy estate would be unfairly affected by a foreclosure sale because they are “distress sales” and will usually bring far less than if the property is sold through normal means. In essence, the argument is that a foreclosure sale needs a standard minimum acceptable value to assure that an amount close to fair market value is received. In response, the Supreme Court stated:

Foreclosure has the effect of completely redefining the market in which the property is offered for sale; normal free-market rules of exchange are replaced by the far more restrictive rules governing forced sales. Given this altered reality, and the concomitant in utility of the normal tool for determining what property is worth (fair market value), the only legitimate evidence of the property's value at the time it is sold is the foreclosure sale price itself.

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