40657032

Fraudulent Transfers According to Alden, Gross and Borowitz: A Tale of Two Circuits
Author(s): Robert M. Zinman, James A. Houle and Alan J. Weiss

Source: The Business Lawyer, Vol. 39, No. 3 (May 1984), pp. 977-1019
Published by: American Bar Association
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Fraudulent Transfers According to Alden,
Gross and Borowitz: A Tale of Two Circuits
By Robert M. Zinman* James A. Houle,** and Alan J. Weiss ***
As Madame Defarge sat knitting,1 she accepted with equanimity the swift
certain slash of the guillotine as it severed not only the heads of French no
but, with fine impartiality and little justice, the principles of liberty, equalit
and fraternity the executioners were seeking to protect. In a similar b
certainly less dramatic vein, Messrs. Alden, Gross and Borowitz, in a rec
article in The Business Lawyer2 (the Alden article), accepted with equanimit
and general approval the reasoning of the Fifth Circuit in Durrett v. Washi
ton National Insurance Company? which held, for the first time in the mor
than four hundred years since the Statute of 13 Elizabeth4 codified fraudul
conveyances, that a noncollusive, regularly conducted foreclosure sale w
fraudulent transfer.
The Alden article goes on to disapprove decisions contrary to Durre
including the Ninth Circuit bankruptcy appellate panel's holding in In
*Mr. Zinman is a member of the New York bar and vice-president and general counsel
Metropolitan Life Insurance Company.
**Mr. Houle is a member of the New York and Maine bars and practices law with Bernst
Shur, Sawyer & Nelson in Portland.
***Mr. Weiss is a member of the New York bar and practices law with Thacher, Proffitt & W
in New York City.
At the time this article was written, Messrs. Houle and Weiss were attorneys at Metropol
Life Insurance Company.
On Feb. 13, 1984, after this article had gone to print, the Ninth Circuit Court of App
affirmed the decision of the Bankruptcy Appellate Panel in Lawyers Title Ins. Corp. v. Madri
re Madrid), 21 Bankr. 424 (Bankr. 9th Cir. 1982), thus creating a conflict in the circuits and
possibility of Supreme Court determination of the issue. The Ninth Circuit's decision was base
the reasoning in Alsop v. Alaska (In re Alsop), 14 Bankr. 982 (Bankr. D. Alaska 1981), aff
Bankr. 1017 (D. Alaska 1982), that the transfer occurred at the time of perfection of the trust d
more than a year prior to the bankruptcy, and not at the time of foreclosure.
The authors gratefully acknowledge the research assistance provided by William W. Weisne
Editor's note: Herbert P. Minkel, Jr. of the New York bar and Paul P. Daley of t
Massachusetts bar served as reviewers for this article.
1. C. Dickens, A Tale of Two Cities 172 passim (Dodd, Mead ed. 1942).
2. Alden, Gross & Borowitz, Real Property Foreclosure as a Fraudulent Conveyance: Proposals
for Solving the Durrett Problem, 38 Bus. Law. 1605 (1983).
3. 621 F.2d 201 (5th Cir. 1980).
4. 13 Eliz. c. 5 (1570). See infra note 59.
977
978 The Business Lawyer; Vol. 39, May 1984
Madrid;5 to acknowledge the harmful uncertainty the Durrett rule will create in
the mortgage market; and to knit together a proposed new interpretation
designed to "harmonize [the] laws of foreclosure and fraudulent conveyance."6
This reply to the Alden article concludes that the Durrett court misinter-
preted the law of fraudulent transfers and section 67d7 of the former Bank-
ruptcy Act;8 that the solution proposed by the Alden article not only perpetuates
the Durrett court's misinterpretation but would result in even greater disruption
to the system of real estate financing than the Durrett rule itself; and that the
Durrett rule, if it were to become the generally accepted law, would cause
untold harm to the national economy and, in the end, like the rush of Dickens'
guillotine, hurt most those people and principles it was designed to protect.
STATUS AND SCOPE OF DURRETT

STATUS OF THE DURRETT RULE
Durrett involved a foreclosure sale pursuant to a power of sale in a

trust. The sale occurred approximately seven and one-half years
execution of the deed of trust and nine days before the borrow
bankruptcy. The purchaser at the foreclosure sale was an innocent t
who saw the sale advertised in a newspaper and bid the amount o
which was approximately fifty-eight percent of the estimated mark
the property.
In avoiding the sale, the Fifth Circuit Court of Appeals held that a
cial foreclosure sale is a transfer within the meaning of section
Bankruptcy Act and could be set aside as a fraudulent transfer if it
without fair consideration within one year prior to the filing of the
petition.10 In so holding, the court noted that it had "been unable to
decision of any district or appellate court dealing only with a transf
property as the subject of attack under section 67(d) of the Bankrup
which has approved the transfer for less than seventy percent of th
5. Lawyers Title Ins. Corp. v. Madrid (In re Madrid), 21 Bankr. 424 (Bankr. 9th
appeal pending, 9th Cir. USCA No. CC-82-4433.
6. Alden, supra note 2, at 1614.
7. Section 67d provided in pertinent part:
(2) Every transfer made and every obligation incurred by a debtor within one year
filing of a petition initiating a proceeding under this Act by or against him is frau
to creditors existing at the time of such transfer or obligation, if made or incurred
consideration by a debtor who is or will be thereby rendered insolvent, without re
actual intent. . . .
8. Act of July 1, 1898, ch. 541, 30 Stat. 544, as amended by Act of June 22, 1938, ch. 575, 52
Stat. 840, repealed by Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, tit. IV, 401 (a), 92
Stat. 2549, 2682 (codified as amended at 11 U.S.C. 101-151326).
9. The parties agreed that the purchaser at the sale "did not have any actual fraudulent intent
when making the purchase." 621 F.2d at 203.
10. Id. at 204.
Fraudulent Transfers 979
value of the property."11 As a result of this statement, the "Durrett rule" was
created. The Durrett rule now is commonly understood to mean that a prebank-
ruptcy foreclosure sale, resulting in a sales price of less than seventy percent of
the property's appraised value, may be avoided as a constructive fraudulent
transfer if the sale occurred within one year of the mortgagor's bankruptcy
filing, and the mortgagor was insolvent at the time of the sale or rendered
insolvent as a result of the sale.12
Most subsequent cases dealing with the Durrett rule have involved challenges
under section 548 of the Bankruptcy Code, rather than under its predecessor,
section 67d of the Bankruptcy Act. The constructive fraud provisions of sections
67d and 548 are substantially the same,13 however, and the same issues have
arisen in the various courts when a foreclosure sale has been challenged as a
fraudulent conveyance under section 548. 14
An alternative to Durrett was provided in the Ninth Circuit, where the
bankruptcy appellate panel in the case of In re Madrid reversed the bankruptcy
11. Id. at 203. The only case cited by the court to support its interpretation of the fair-
consideration requirement, however, involved an outright sale, not a foreclosure sale. See Schafer v.
Hammond, 456 F.2d 15 (10th Cir. 1972).
12. See Lawyers Title Ins. Corp. v. Madrid, 21 Bankr. at 427. Some courts have stated that
since Durrett dealt with a sale of foreclosed property for 57.7% of its appraised value, Durrett may
be viewed only as establishing a 57.7% rule. See, e.g., Gillman v. Preston Family Inv. Co. (In re
Richardson), 23 Bankr. 434, 448 (Bankr. D. Utah 1982). Since the Alden article associated Durrett
with a 70% rule, this article will follow suit. Alden, supra note 2, at 1613 n.22.
13. 11 U.S.C. 548 provides:
(a) 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 . . .
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or
obligation; and
(B)(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. . . .
14. The following cases have followed the reasoning of Durrett: Abramson v. Lakewood Bank
and Trust Co., 647 F.2d 547 (5th Cir. 1982) (Clark, J., dissenting), cert, denied, 454 U.S. 1164
(1982); Berge . Sweet (In re Berge), 33 Bankr. 642 (Bankr. W.D. Wis. 1983) (applies Durrett to a
land sale contract); In re Ewing, 112 Bankr. L. Rep. (CCH) If 69,460 (Bankr. W.D. Pa. Sept. 19,
1983) (applies Durrett to a pledge of stock under the Uniform Commercial Code); Bates v. Two
Rivers Constr. (In re Bates), 32 Bankr. 40 (Bankr. E.D. Cal. 1983) (case cites neither Durrett nor
any of the cases following Durrett); Richard v. Tempest (In re Richard), 26 Bankr. 560 (Bankr.
D.R.I. 1983) (execution sale); In re Richardson, 23 Bankr. 434 (Bankr. D. Utah 1982); Perdido
Bay Country Club Estates, Inc. v. Equitable Trust Co. (In re Perdido Bay Country Club Estates,
Inc.), 23 Bankr. 36 (Bankr. S.D. Fla. 1982) (court distinguished Durrett and found reasonably
equivalent value paid for one property, no value paid for the other); Coleman v. Home Sav. Ass'n.
(In re Coleman), 21 Bankr. 832 (Bankr. S.D. Tex. 1982); Smith v. American Consumer Fin. Corp.
(In re Georgia Mae Smith), 21 Bankr. 345 (Bankr. M.D. Fla. 1982) (execution sale); Cooper v.
Smith (In re Connie Dale Smith), 24 Bankr. 19 (Bankr. W.D.N.C. 1982) (court found reasonably
equivalent value paid); Home Life Ins. Co. v. Jones (In re Jones), 20 Bankr. 988 (Bankr. E.D. Pa.
1982); Wickham v. United Am. Bank (In re Thompson), 18 Bankr. 67 (Bankr. E.D. Tenn. 1982);
Marshall v. Spindale Sav. & Loan Ass'n (In re Marshall), 15 Bankr. 738 (Bankr. W.D.N.C.
1981).
court that had followed Durrett and held that the purchase price at a foreclosure
sale properly conducted without fraud or collusion should be deemed to be for
"reasonably equivalent value" within the meaning of section 548. 15 An appeal of
Madrid is presently pending in the Ninth Circuit Court of Appeals. If the
Ninth Circuit affirms Madrid, there will be two circuits (the Fifth and Ninth)
in conflict, possibly leading to a Supreme Court determination of the issue. If
Madrid is overruled by the Ninth Circuit, there will be two circuits in which
Durrett will be the law, unless a legislative solution to the Durrett problem is
achieved.16
Federal legislation has been suggested that would codify the rule of Madrid,
permitting an irrebuttable presumption that a purchaser at a foreclosure, power
of sale, or other sale of property which had been security for a debt, paid
reasonably equivalent value for purposes of section 548. 17 A resolution endors-
ing an amendment to section 548 along these lines was approved without any
objection by the House of Delegates of the American Bar Association at the
ABA's annual meeting on August 3, 1983.18
It has also been proposed that the Uniform Fraudulent Conveyance Act,
which is being revised by a committee of the National Conference of Commis-
sioners on Uniform State Laws, contain a provision codifying Madrid; a draft of
15. 21 Bankr. at 427. Madrid was followed by Moore v. Gilmore (In re Gilmore), 31 Bankr.
615 (Bankr. E.D. Wash. 1983). Because of the importance of the issues involved, amicus briefs
urging affirmance of bankruptcy appellate panel's decision in Madrid were filed by the American
Land Title Association, the Mortgage Brokers Institute, the American Council of Life Insurance,
the American College of Real Estate Lawyers, the California Bankers Association, and the
California Bank Clearing House Association.
16. Briefs in Madrid were filed in November 1982, and oral argument was heard on Feb. 18,
1983. As of this writing, the court's decision in Madrid has not been announced.
17. The proposed amendment to 548 provided that:
A secured party or third party purchaser who obtains title to an interest of the debtor in
property pursuant to a good faith pre-petition foreclosure, power of sale, or other proceeding or
provision of nonbankruptcy law permitting or providing for the realization of security upon
default of the borrower under a mortgage, deed of trust, or other security agreement takes for
reasonably equivalent value within the meaning of this section.
S. 445, 98th Cong., 1st Sess. 360 (Feb. 3, 1983). This section did not appear in the version of S.
445 that was approved by the Senate. After an objection was raised by Senator Metzenbaum (D.
Ohio) to the version of S. 445 containing this amendment, and after considerable effort to revise the
language failed to result in agreement, the proposed amendment was deleted from the bill before
submission to the Senate Judiciary Committee, and the bill, as amended, was approved by the
Senate on Apr. 27, 1983. See S. 445, 98th Cong., 1st Sess. 360 (May 5, 1983). In a discussion on
Nov. 28, 1983, with Charles L. King, Assistant General Counsel, American Council of Life
Insurance, Douglas Comer, Counsel to Sen. Dole (R. Kan.), reported that neither the Senate nor its
Committee on the Judiciary considered the merits of the proposed antiDurrett language. See also
Gold, Proposed Amendment to Clarify Status of Property Bought in Foreclosure, N.Y.L.J., Nov. 17,
1982, at 23, col. 1.
18. The resolution usupport[s] legislation to amend the fraudulent conveyance provisions of state
law and the federal Bankruptcy Code to make it clear that property purchased at a properly
conducted non-collusive foreclosure sale is to be considered transferred for reasonably equivalent
value." ABA, Summary of Action of the House of Delegates, Aug. 2-3, 1983, at 31.
the revised Act, containing such a provision, was presented to the annua
meeting of the Commissioners on July 28, 1983, for a first reading. It i
expected that the Durrett issue will be determined at the next annual meeting
in July of this year.19
A decidedly different approach to Durrett was taken by In re Alsop2
wherein an Alaska bankruptcy court held that since section 548(d)(l) provides
that a transfer is made when it becomes so far perfected that no bona fi
purchaser could acquire an interest superior to that of the transferee, t
transfer was deemed to take place when the mortgage was perfected, not whe
the mortgagee received title on foreclosure. Under this reasoning, a mortgage
perfected more than a year prior to the bankruptcy petition would be beyond t
scope of section 548(a)(2).21
SCOPE OF THE DURRETT RULE
Oliver Wendell Holmes once observed, "My keenest interest is exci

little decisions . . . which have in them the germ of some wider the
therefore of some profound interstitial change in the very tissue of
The implications of the Durrett rule are so great, and the scope of i
application so broad, that, if it is allowed to stand, Durrett could ve
candidate for the type of case that would have "excited" the fo
Justice. Some examples of Durretfs omnipresence follow.
Judicial Foreclosures
Durrett involved a foreclosure under a power of sale contained in th
documents pursuant to the provisions of state law.23 It is certainly ar
where the foreclosure is by a judicial action and the sale is ordered b
considerations of fraud, albeit constructive, should be inappropriate
at least one of the arguments that led the court in the case of In re P
Country Club Estates, Inc.24 to refuse to apply the Durrett rule to
foreclosure sale conducted by a court-appointed special master un
19. The drafting committee to revise the Uniform Fraudulent Conveyance Act
Morris W. Macey. Its reporter is Prof. Frank R. Kennedy. It is expected that
"Uniform Fraudulent Transfer Act" will be presented for final approval to the Nat
ence of Commissioners on Uniform State Laws at the Commissioners' meeting in J
proposed Act adopts the term "transfer" as opposed to "conveyance" to conform to the
the Bankruptcy Code and to distinguish the new act from the old; there is no substant
intended. This article uses the terms interchangeably.)
20. Alsop v. Alaska (In re Alsop), 14 Bankr. 982 (Bankr. D. Alaska 1981), affd
1017 (D. Alaska 1982).
21. See infra text accompanying note 108.
22. Oliver Wendell Holmes, "John Marshall" Speeches, 87 Coll. Leg. Pap. 269 (
23. Approximately half of the states permit foreclosure pursuant to a power of sale
the security documents. This procedure is less expensive and faster than judicial forecl
somewhat less protective of the borrower. See generally G. Osborne, G. Nelson &
Real Estate Finance Law 7.19 (1979).
24. 23 Bankr. 36 (Bankr. S.D. Fla. 1982).
law. Nevertheless, the reasoning in Durrett seems to leave little room for this
distinction, and at least one court has already applied the Durrett rule to a
judicial foreclosure sale.25
Payment of Differential in Value

While the Durrett court set aside, under section 548, a transfer it considered
fraudulent, a court also is permitted, under section 550, to order the transferee
or any subsequent transferee (other than one who acquired the property in good
faith, for value, and without knowledge of the voidability of the transfer), in lieu
of returning the property, to pay the trustee the difference between the sales
price and the court's estimate of the property's value.26 Section 550 permits this
judgment to be entered against the initial purchaser or any transferee of the
purchaser who did not act in good faith.
In the case of In re Coleman?1 the second mortgagee acquired the property at
the foreclosure sale for the mortgage balance (apparently subject to the first
mortgage) and later resold the property to a good-faith third party for the same
amount, a circumstance that apparently did not impress the court as good
evidence of value. The court indicated in its decision that if it could not order the
good-faith third party to return the property or pay the difference between the
sales price and the court's valuation, it could grant a judgment against the
mortgagee for such difference. If this were done, the mortgagee would be left
with no mortgage, no lien, no property, and a lighter wallet. The Alden article
discusses section 550 and this case in a footnote28 and acknowledges that the case
"demonstrates the out-of-pocket risk a purchaser runs if it buys property at
foreclosure and subsequently resells to another party."29
From the standpoint of the mortgagee, who is often the purchaser at the
foreclosure sale and the party most easily charged with lack of "good faith,"30
25. See In re Jones, 20 Bankr. 988 (Bankr. E.D. Pa. 1982).

26. 11 U.S.C. 55O(a).
27. 21 Bankr. 832 (Bankr. S.D. Tex. 1982).
28. Alden, supra note 2, at 1618 n.39.
29. Id. If the sale is set aside, a good-faith transferee is given a lien on the returned property for
the amount the transferee paid. 1 1 U.S.C. 548(c). The transferee should, under 506(b), receive
interest on its involuntary "loan" (assuming the property is worth more than the bid and the
trustee's costs of preservation of the property) but may not be reimbursed for its attorneys' fees (In
re Richardson, 23 Bankr. at 449) and its foreclosure expenses, if the transferee is the mortgagor. In
addition, the transferee's recovery under 55O(d)(l) for improvements to the property may be
illusory, as discussed infra at text accompanying note 173.
30. There is no definition of "good faith" in the Bankruptcy Code. The Commission on the
Bankruptcy Laws of the United States concluded that it would leave the interpretation to the courts
on a case-by-case basis. This conclusion was apparently followed by the congressional staff drafters
of the Code. See Report of the Commission on the Bankruptcy Laws of the United States, Part II,
180 (1973). (The Commission was established by the Act of July 24, 1970, Pub. L. No. 91-354, 84
Stat. 468, to "study, analyze, evaluate, and recommend changes" in the Bankruptcy Act. Its report
was published as House Document No. 93-137 in July 1973). See also Ordin, The Good Faith
Principle in the Bankruptcy Code: A Case Study, .38 Bus. Law. 1795 (1983) and 4 Collier on
Bankruptcy If 550.03, at 550-58 n.3 (15th ed. 1983), where "good faith" revolves around whether
the prospect of the application of section 550 is somewhat bone-chilling, even

when the property has not been sold to a third party.
Uniform Fraudulent Conveyance Act

While the Durrett court considered fraudulent transfers in the context of
bankruptcy law, its rule might also be applicable under state fraudulent-
conveyance legislation. As will be discussed below,31 section 67d of the Bank-
ruptcy Act and section 548 of the Bankruptcy Code were intended to incorpo-
rate generally the fraudulent-conveyance law as codified in the Uniform Fraud-
ulent Conveyance Act (UFCA). While the UFCA definition of "conveyance"
does not contain reference to involuntary conveyances, as is found in the
definition of "transfers" under the Bankruptcy Act and Code, the discussion
below indicates that this difference did not reflect an intention to change the
state law relative to mortgage foreclosures.32 In any case, the drafting of a new
Uniform Fraudulent Transfers Act, now in progress, is expected to incorporate
the bankruptcy definition of transfer.33 Thus, it would follow that if Durrett
applies under section 548 of the Bankruptcy Code, it can be held to apply to
actions under state fraudulent-conveyance laws.
Under state fraudulent-conveyance legislation, there is no limitation to trans-
fers within one year of bankruptcy, since bankruptcy is not a necessary precon-
dition to the action. The only limitation is the applicable state statutes of
limitation, generally specifying a much longer period. In New York, for
example, the statute of limitations provides for a six-year period after transfer.34
Thus, in states like New York, a mortgagee could not be certain of its title for
at least six years after the foreclosure sale.35
The use of state fraudulent-conveyance laws to set aside transfers is not
limited to actions by creditors. Under section 544(b) of the Bankruptcy Code,
the trustee in bankruptcy stands in the shoes of any creditor against whom a lien
is invalid under state law.36 Thus, there is another string to the trustee's bow,
not subject to the one-year-prior-to-filing limitation of section 548.
the transferee knew or should have known of the fraudulent purpose of the transfer. See also
Phillips v. Latham, 523 S.W.2d 19, 24 (Tex. Civ. App. 1975) (party paying a grossly inadequate
price cannot be considered to be acting in good faith).
31. See infra text accompanying notes 75-80.
33. See supra note 19. Presently no specific language has been approved by the Commissioners.
34. N.Y. Civ. Prac. Law 213(9) (McKinney 1972).
35. This period could be extended for an additional period of up to two years, under the
appropriate circumstances, if 108(a) of the Bankruptcy Code were found to be applicable.
36. 1 1 U.S.C. 544(b). Section 544(b) incorporated the rule of Moore v. Bay, 284 U.S. 4
(1931), decided under 70e of the former Bankruptcy Act, which held that the trustee is not limited
in his recovery by the amount of the claim of an actual creditor into whose shoes the trustee has
stepped.
Personal Property Security Interests

The Alden article points out that the Durrett rule should be as applicable to
sales of collateral on default under article 9 of the Uniform Commercial Code as
it is to real property mortgage foreclosures,37 and, indeed, the Bankruptcy Court
for the Western District of Pennsylvania recently so held in In re Ewing
Except for a few provisions that cannot be modified by agreement,39 if the debtor
defaults, part 5 of article 9 of the Uniform Commercial Code permits the parties
to act in a commercially reasonable manner in accordance with the terms of
their agreement.40 Where both real and personal property are involved, the
secured party can act in accordance with real-property law for both the real and
personal property.41 Thus, it makes sense that the Durrett rule, if sustained,
would be applicable to security interests under article 9. The enormous conse-
quences to inventory, receivables, and equipment financing of applying Durrett
are considered later in this article.
Land Sale Contracts
In certain parts of the country42 real estate is often conveyed by the use of
long-term land sale contract. As in a conditional sale, in a land sale contract th
seller retains title to the property until the purchaser pays in installments t
full purchase price, which includes a time-price differential. The result
generally the same as a sale, with the seller taking back a purchase-mon
mortgage. With the land sale contract, if the purchaser defaults, the sell
"forecloses" by terminating the contract pursuant to law. Under the Durrett
reasoning, this is a transfer of the purchaser's property to the seller, and, if
court determines that the transfer was for less than reasonably equivalent valu
the ingredients of a fraudulent transfer are present. At least one bankruptcy
court has wasted little time reaching this conclusion, and in the recent case of I
re Berge ^ the court set aside as a fraudulent conveyance a foreclosure judgmen
obtained by the seller as a result of the purchaser's default under a land sale
contract.44
Termination of Leases
In 1977, Milton R. Friedman's Practicing Law Institute Panel on "Commer-
cial Real Estate Leases" discussed the case of In re Ferris45 and concluded that it

38. 112 Bankr. L. Rep. (CCH) f 69,460 (Bankr. W.D. Pa. Sept. 19, 1983).
39. See U.C.C. 9-501(3) (1978).
40. U.C.C. 9-501(1 H3) and 9-504 (1978).
41. U.C.C. 9-501(4) (1978).
42. See generally Osborne, Nelson & Whitman, supra note 23, at 3.25.
43. 33 Bankr. 642 (Bankr. W.D. Wis. 1983).
44. The foreclosure judgment was by strict foreclosure pursuant to state law. There was no sale,
and the alleged inadequacy of consideration was based upon the appreciation in value of the
property subsequent to the date of the land sale contract. Id. at 647, 649-50.
45. 415 F. Supp. 33 (W.D. Okla. 1976).
was a "lark."46 In Ferris, the District Court for the Western District of
Oklahoma held that the termination of a lease upon default by the tenant
constituted a fraudulent transfer within the meaning of section 67d of the
Bankruptcy Act. Maurice and Barbara Ferris had leased land on which they
had constructed a theater and restaurant at considerable expense. When the
lease was terminated for nonpayment of rent, they lost their entire investment.
The court found the termination to constitute a fraudulent transfer of the
leasehold estate to the landlord, because it was for less than fair consideration.
The panel concluded that the court undoubtedly was trying to find a way to
overcome a perceived inequity, and that the decision probably would not have
wider application. They were right - until Durrett. If the Durrett decision
becomes the generally accepted law, then the Ferris "lark" may well become a
bird of prey. It may even be easier to find a fraudulent transfer in a lease
termination than in a foreclosure sale. Foreclosure sales are designed to get the
highest price obtainable, albeit under the circumstances of a forced sale. There
is no sale, however, when a lease is terminated. The consequences of the
application of the fraudulent-conveyance provisions to leasehold investments,
including sale-leasebacks, ground leases, and other modern forms of real estate
investment and financing, are discussed later in this article.
Preferences
In a rather extreme extension of the Durrett rule, the court in In re
Fountain*1 applied the Durrett principle to find an unlawful preference under
section 547 of the Bankruptcy Code. While the reasoning of the court is not
entirely clear from the decision, the court may have felt that if a foreclosure sale
is a transfer for the purposes of section 548, it is also a transfer for the purposes
of section 547. Since the foreclosure occurs sometime after the debt is incurred,
the "transfer" will always be in consideration of an antecedent debt. When the
foreclosure occurs, the mortgagor will very likely be insolvent, or in many
situations will be presumed to be insolvent under section 547(f). Thus, in the
three months before bankruptcy, three of the most important elements of an
unlawful preference will be present for almost any foreclosure sale during that
period. What must have especially delighted the guillotine operators is that
there is no necessity to prove receipt of less than "reasonably equivalent value,"
for this is not an element of a voidable preference.
The Fountain case would seem to be the most bizarre extension of the Durrett
principle. One cannot but agree with the Alden article's conclusion that no
preference should be found in the Fountain situation because section 547(b)(5)
of the Bankruptcy Code permits avoidance of a transfer only if it enables the
creditor to receive more than would be received in a chapter 7 liquidation. Since,
46. One of the authors of this article was a member of the panel, which was held in New York
City, Minneapolis, and San Francisco in May and June 1977.
47. Morris Plan Co. v. Fountain (In re Fountain), 32 Bankr. 965 (Bankr. W.D. Mo. W.D.
1983).
at least theoretically, the mortgagee in chapter 7 should have eventual recourse

to the collateral, plus adequate protection under section 361, it would seem
difficult to argue that the prebankruptcy foreclosure gives the mortgagee a
greater recovery.48 Obviously, however, at least one bankruptcy court has not
found this argument persuasive.
Like the ripples spreading in concentric circles from the point where a rock is
dropped into water, so the ripples spread from the Durrett court's holding. The
foregoing are some of the areas the ripples have already begun to touch. There
may be others, such as license agreements, franchises, options, and contract
rights. Thus Durrett may become one of Justice Holmes' "little decisions" that
can affect the very tissue of secured financing.
THE DURRETT MISINTERPRETATION OF SECTIONS

67dAND548
THE EVOLUTION OF FRAUDULENT-CONVEYANCE
LAWS
Perhaps the most disturbing aspect of the Alden article is its conclus
"Durrett is properly sensitive to the policy underlying section 548
article claims that this underlying policy is "that the debtor not alien
equity in its property for less than reasonably equivalent value."50 Thi
sion is troublesome because it fails to answer why, prior to Durrett, non
foreclosure sales, properly conducted under law but resulting in a sale
below the property's appraised value, were never seen as violating any
underlying section 548 of the Bankruptcy Code, section 67d of the Ban
Act, or the fraudulent-conveyance laws on which sections 548 and
modeled.51 Considering the long history of fraudulent-conveyance laws
adoption in bankruptcy law, one must question the conclusion of t
article that the Durrett court was "properly sensitive" to some policy
ation that for centuries escaped the attention of both English and Am
courts, which have traditionally declined to apply the law of fraudulent
ances to properly conducted, noncollusive foreclosure sales.
If, as the Alden article states, the policy underlying section 548 is fo
primarily on preserving the debtor's equity in its property for the be
48. Alden, supra note 2, at 1612-13. If the reasoning of the Alsop case {see i
accompanying note 108) is accepted, there is a further argument against the Fountai
Under Alsop, the date of the transfer, assuming prompt recording (11 U.S.C. 547(e)(
be deemed to be the time of perfection of the mortgage, and thus for contemporaneous co
and not on account of an antecedent debt. 1 1 U.S.C. 547(c).
50. Id.
51. E.g., Reeves v. Miller, 121 Mich. 331 (1899) (noncollusive foreclosure sale resulting in le
than fair-market value not a fraudulent conveyance); Harris v. Wagshal, 343 A.2d 283 (D.C. 19
(noncollusive foreclosure of security under a pledge agreement not a fraudulent conveyance); Pier
v. Pierce, 16 Cal. App. 375 (1911) (regularly conducted, noncollusive mortgage foreclosure sale
a fraudulent conveyance).
general unsecured creditors, regardless of the circumstances under which the

prebankruptcy conveyance took place, then Durrett was indeed properly sensi-
tive to the policy underlying section 548. However, the historical development of
the fraudulent-conveyance laws and their incorporation in bankruptcy law
indicate that these laws were originally intended to address a different problem
- namely, to prevent the debtor's bankruptcy estate from being diminished as a
result of the debtor hiding property or indifferently, if not collusively, conveying
property to third parties beyond the reach of creditors.
It appears that the Durrett court reached its conclusion without considering
this primary reason for the existence of the fraudulent-conveyance provision in
the bankruptcy law, and instead based its holding on a narrow and technical
reading of section 67d. By interpreting section 67d divorced from its historical
context, the Durrett court created an unfortunate and unnecessary new rule that
has little relation to the central concerns that originally prompted the creation of
fraudulent-conveyance laws and led to their adoption in bankruptcy law. The
Alden article follows the Durrett court's approach by attempting to deal
"exclusively" with sections 548 and 67d - that is, without examining the fraud-
ulent-conveyance provisions from which these sections are derived.52 The fol-
lowing review of the history of fraudulent-conveyance law illustrates the short-
comings of this approach.
Section 548 is the most recent codification of a long line of fraudulent-
conveyance laws extending over two thousand years to early Roman law. Even
the creditors of antiquity were victimized by debtors who hid or transferred
their assets with the intent to hinder, delay, or defraud creditors of their lawful
debts. Under Roman law, a defrauded creditor could bring a tort action known
as a "Paulian action" to avoid a fraudulent conveyance by an insolvent debtor.53
Where the conveyance was in reckless disregard of creditors' rights, a Paulian
action also could be brought against the bad-faith transferee as an accessory.54
The policy underlying the Paulian action was to benefit the public at large by
facilitating and encouraging the payment of just debts.55
Fraudulent-conveyance laws later arose in England as an attempt to curtail
the abuse of ancient "sanctuary laws" as a means of defrauding creditors.
Under these sanctuary laws, the Crown's process could not reach areas recog-
nized as consecrated ground. Thus, debtors could sell or collusively transfer
their property and seek sanctuary beyond the reach of creditors. Creditors were
left without recourse and at best might receive a small payment from the debtor
52. "This article addresses fraudulent conveyance questions exclusively under 548 of the
Bankruptcy Code and its predecessor, 67d of the Bankruptcy Act. We have not presented a
separate analysis of the Uniform Fraudulent Conveyance Act and other state fraudulent conveyance
laws. . . ." Alden, supra note 2, at 1606 n.3.
53. M. Radin, Handbook of Roman Law 153 (1923).
54. "A suit was permitted - called the Paulian action - against any debtor who deliberately
stripped himself of his property while insolvent, and also against a mala fide purchaser from such a
debtor, who was treated as accessory to the fraud." Id. at 153.
55. See Radin, Fraudulent Conveyances in California and the Uniform Fraudulent Conveyance
Act, 27 Calif. L. Rev. 1 (1938).
in return for releasing the debtor from his obligations.56 Reacting to this abuse,
Parliament passed a statute in 137657 allowing creditors to execute upon land
and chattels collusively conveyed, and, in 1476, Parliament passed another
statute58 that avoided fraudulent gifts of chattels made in trust.
The Statute of 13 Elizabeth was enacted in 1570 and has since served as the
model for all modern American fraudulent-conveyance laws.59 Within the first
year of the Statute's enactment, English courts indicated that the Statute's
primary purpose was the protection of creditors from those actions of debtors
that would defraud creditors of their lawful debts.60 Soon the Statute of 13
Elizabeth was adopted in bankruptcy. In an amendment to the English Bank-
ruptcy Act of 1603,61 property that the debtor had previously transferred
without good consideration was included within the debtor's bankruptcy estate.
Parliament later completely revised the bankruptcy laws in the English Bank-
ruptcy Act of 1623,62 which incorporated the laws of the Statute of 13 Elizabeth
verbatim.63
Because the language of the Statute of 13 Elizabeth and its corresponding
provision in bankruptcy law indicated that a transfer could be avoided only if
the debtor acted with actual "intent ... to defraud," it became increasingly
56. The preamble of one of the early English fraudulent-conveyance laws describes in detail
how debtors used the sanctuary laws to defraud creditors:
Divers people ... do give their tenements and chattels to their friends, by collusion to have the
profits at their will, and after do flee to the franchise of Westminster, of St. Martin-le-Grand of
London, or such other privileged places, and there do live a great time with an high
countenance of another man's goods and profits of the said tenements and chattels, till the said
creditors shall be bound to take a small parcel of their debt, and release the remnant. . . .
50 Ed. Ill, c. 6 (1376), cited in 1 D. Moore, A Treatise on Fraudulent Conveyances and Creditors'
Remedies at Law and in Equity 11 (1908).
57. 50 Ed. Ill, c. 6(1376).
58. 3 Hen. VII, c. 4 (1476). See also M. Bigelow, The Law of Fraudulent Conveyances 11-12
(1911).
59. In pertinent part, the Statute of 13 Elizabeth provided that [CJovinous and fraudulent
feoffments, gifts, grants, alienations, conveyances, bonds, suits, judgments and executions . . . devised
and contrived of malice, fraud, covin, collusion or guile, to the end purpose and intent, to delay,
hinder or defraud creditors and others . . . shall be ... utterly void, frustrate and of none effect
13 Eliz. c. 5 (1570) cited in D. Epstein & J. Landers, Debtors and Cred

O. Bump & J. Gray, A Treatise Upon Conveyances Made by Debtors to D
ed. 1896).
60. In Mannocke's Case, 3 Dyer 204b (1571), a judgment creditor was allowed to use the
Statute to avoid a fraudulent transfer made by a debtor and to levy execution on the property
conveyed. 1 G. Glenn, Fraudulent Conveyances and Preferences 61d, at 96 (rev. ed. 1940).
61. 1 lac. I, c. 15(1603).
62. 21 Jac. I, c. 19(1623).
63. Even prior to enactment of the Statute of 13 Elizabeth and its adoption in bankruptcy,
English bankruptcy law regarded as essential to the achievement of the main purpose of such
legislation that provision be made to recover property that a debtor had fraudulently transferred.
See, e.g., 34 & 35 Hen. VIII, c. 4 (1542-1543), cited in 4 Collier on Bankruptcy U 67.01, at 15 n.2
(14th ed. 1978). See also Hartman, A Survey of the Fraudulent Conveyance in Bankruptcy, 17
Vand. L. Rev. 381,382(1964).
more difficult to show such intent as debtors found subtler ways of transferring
their property and avoiding the payment of their debts. To give effect to the
Statute's purpose, the Statute was judicially expanded to include within its
prohibitions transactions where intent to defraud creditors was implied. If it
could not be shown that the debtor had an actual subjective intent to defraud
creditors when the property was transferred, a rebuttable presumption of actual
intent to defraud was established if, at the time of transfer, sufficient "badges of
fraud" existed. These badges included transfers of all the debtor's property,
including apparel and other necessities of life; excessive efforts to give an
appearance of fairness to a transaction; transfers without a change of possession;
a familial or confidential relationship between the grantor and grantee; and
grossly inadequate consideration received in exchange for property conveyed.64
Although the badges of fraud served as an aid to creditors in establishing the
necessary element of actual fraudulent intent, it did not shift the primary focus
of the court's inquiry. The central issue remained whether, at the time of
transfer, the debtor had actually intended to defraud creditors by means of the
transfer. A complaining creditor who could not show such actual intent could
still meet the burden of proof by showing that there were sufficient badges of
fraud to create a presumption of actual intent to defraud. Thus, even though the
effect of a conveyance of property by the debtor was to harm creditors, the
Statute of 1 3 Elizabeth offered no relief if it could not be shown that the debtor
acted with actual fraudulent intent.
Beginning in 1 800 with the first bankruptcy law of the United States,65 every
American bankruptcy act has followed the precedent of English bankruptcy law
by including a fraudulent-conveyance provision.66 These provisions in early
American bankruptcy acts included the essential features, as well as much of the
language, of English bankruptcy law. In the Bankruptcy Act of 1898,67 Con-
gress again adopted the language and law of the Statute of 13 Elizabeth.
By the turn of the twentieth century, American courts seemed confused and
inconsistent in their application of the doctrine of implied fraud under state laws
modeled on the Statute of 13 Elizabeth. This confusion stemmed primarily from
the attempts by creditors to expand the doctrine of implied fraud, through use of
the badges of fraud, and to characterize all conveyances that harmed creditors as
"fraudulent,"68 even though the debtor had no actual intent to defraud creditors.
Perceiving this abuse of the fraudulent-conveyance laws, the National Con-
ference of Commissioners on Uniform State Laws set about drafting a model
64. The first case to establish actual intent by employing badges of fraud was Twyne's Case, 3
Coke 80b, 76 Eng. Rep. 809 (1601), which listed the badges of fraud that came to be most
commonly recognized. See also Philco Finance Corp. v. Pearson, 335 F. Supp. 33, 40-41 (N.D.
Miss. E. D. 1971) (court mentioned extensive list of badges of fraud).
65. Bankruptcy Act of 1800, ch. 19, 17, 2 Stat. 19, 26 (repealed by Act of Dec. 19, 1803, ch. 6,
2 Stat. 248).
66. 4 Collier on Bankruptcy 1 67.01 at 15-17 (14th ed. 1978).
67. Bankruptcy Act of July 1, 1898, ch. 541, 67e, 30 Stat. 544.
68. See H. May & W. Edwards, The Law of Fraudulent and Voluntary Conveyances 4-5 (3rd
ed. 1908).
fraudulent-conveyance law based on the Statute of 13 Elizabeth, which, in

1918, the Commissioners approved as the UFCA.69 The UFCA attempted to
simplify the then-existing fraudulent-conveyance laws by eliminating the
badges of fraud; in their place, the Commissioners grouped together transfers
that had been characterized as "badges of fraud" into specific sections of the
UFCA.70 Conveyances that included such badges became voidable without
proving the debtor's actual intent.71 Perhaps the most important badge of fraud
incorporated into the UFCA is found in section 4, which states that "[e]very
conveyance made and every obligation incurred by a person who is or will be
thereby rendered insolvent is fraudulent as to creditors without regard to his
actual intent if the conveyance is made or the obligation is incurred without a
fair consideration."72
69. As revealed in the Commissioners' Prefatory Note to the UFCA:
The desirability of enacting the statute is much enhanced by existing confusion in the law.
There are few legal subjects where there is a greater lack of exact definition and clear
understanding of boundaries . . .
The confusions and uncertainties of the existing law which have been referred to are due
primarily to three things:
First, the absence of any well recognized, definite conception of insolvency.
Second, failure to make clear the persons legally injured by a given fraudulent conveyance.
Third, the attempt to make the Statute of Elizabeth cover all conveyances which wrong
creditors, even though the actual intent to defraud does not exist.
Unif. Fraudulent Conveyance Act, Commissioners' Prefatory Note, 7A U.L.A. 162 (1978). See also
May & Edwards, supra note 68, at 4-5.
70. The Statute of 13 Elizabeth, a part of the common law or statutory law of every American
jurisdiction, did not in terms condemn transfers which wronged the transferor's creditors in the
absence of an actual intent to defraud such creditors. Courts applying the statute, sensitive to
the needs of justice and commerce, struck many such transfers down, however, notwithstanding
lack of proof of an actual fraudulent intent, by invoking certain presumptions of law as to
intent. While the decisions under the Statute of 13 Elizabeth thus often achieved desirable
results, the resort to presumptions of varying and conflicting effect introduced a highly
confusing element into the law of fraudulent conveyances. In an attempt to avoid the pitfalls of
presumptions as to intent, the draftsmen of the Uniform Fraudulent Conveyance Act simply
shunned them. Under that Act certain conveyances are declared to be fraudulent regardless of
any actual intent to defraud. . . .
4 Collier on Bankruptcy t 548.02 at 548-26 (15th ed. 1983) (citations omitted).

71. The Commissioners stated:
The Statute of Elizabeth condemns conveyances as fraudulent only when made with the
"intent" to "hinder, delay or defraud." There are many conveyances which wrong creditors
where an intent to defraud on the part of the debtor does not in fact exist. In order to avoid
these conveyances, the courts have called to their assistance presumptions of law as to intent,
and in equity have pushed presumption of fraud as a fact to an unwarranted extent; with the
result that, while in the main the decisions under the facts do justice, the reasoning supporting
them leaves much to be desired.
In the Act as drafted all possibility of a presumption of law as to intent is avoided. . . .
Unif. Fraudulent Conveyance Act, Commissioners' Prefatory Note, 7A U.L.A. 162 (1978).
72. UFCA 4, 7A U.L.A. 4. Other similar conveyances seen as fraudulent under the UFCA
include: conveyances made without fair consideration when the person making the conveyance is
The Commissioners, as well as scholars, considered that this new approach

under the UFCA produced the same substantive results as the Statute of 13
Elizabeth.73 It was hoped that by eliminating the badges of fraud as a means of
creating a presumption of actual intent to defraud, the constructive fraud
provisions of the UFCA would result in a simpler and more uniform applica-
tion.74
When bankruptcy law was again revised by the Chandler Act,75 which
became the Bankruptcy Act of 1938, Congress followed the established tradition
of adopting into bankruptcy law the most recent statement of fraudulent-
conveyance law. Section 67d of the Bankruptcy Act incorporated the provisions
of the UFCA with only minor changes in wording.76 The drafters of the
Bankruptcy Act enacted the essential provisions of the UFCA into bankruptcy
law because the UFCA "was deemed to be declaratory of the better decisions of
American state courts construing the Statute of Elizabeth and because, as it was
engaged or is about to engage in a business or transaction for which the property remaining in his
hands after the conveyance is an unreasonably small capital; conveyances made and obligations
incurred without fair consideration when the person making the conveyance or incurring the
obligation intends or believes that he will incur debts beyond his ability to pay as they mature; and
conveyances made and obligations incurred with actual intent to hinder, delay, or defraud creditors.
Id. at 5-7.
73. In most states the bill if enacted will not so much change the law as clearly define what
heretofore has been indefinite. There is, indeed, on a few questions, a sharp conflict between
the law of different jurisdictions. ... In the main, however, the great benefit from the enact-
ment of the Statute will be to remove some confusion of legal thought, which now renders the
law on many points uncertain in all jurisdictions, and substitute for these uncertain rules both
certain and uniform ones.
UFCA, Commissioners' Prefatory Note, 7 A U.L.A. 162-63 (1978). One of the leading scholars of
fraudulent-conveyance laws stated that "[t]he use of the words of art, 'conveyance . . . with in-
tent ... to hinder, delay or defraud . . . creditors', gives the cue that . . . [the UFCA] is a modernized
Statute of Elizabeth and nothing else." J. McLaughlin, Application of the Uniform Fraudulent
Conveyance Act, 46 Harv. L. Rev. 404, 405 (1933).
74. Notwithstanding the intention of the drafters of the UFCA to eliminate the badges of fraud,
the badges continue to be utilized to establish intent under 4 of the UFCA, which applies "without
regard to [the] actual intent" of the debtor. E.g., United States v. West, 299 F. Supp. 661 (D. Del.
1969). The badges of fraud have been seen as even more applicable to 7 of the UFCA, which
provides that a conveyance is fraudulent if "made ... or incurred with actual intent, as distinguished
from intent presumed in law, to hinder, delay, or defraud" (emphasis added). One case goes so far
as to imply that the only real difference between the standards of intent in 4 and 7 is a difference
in the burden of proof. Sparkman & McLean Co. v. Derber, 4 Wash. App. 341, 481 P.2d 585
(1971).
75. The Chandler Act, June 22, 1938, c. 575, 52 Stat. 840.
76. "We have condensed the provisions of the Uniform Fraudulent Conveyance Act, retaining
its substance and, as far as possible, its language." Nat'l Bankruptcy Conference, Analysis of H.R.
12889, 74th Cong., 2d Sess. (1936) 214 (House Judiciary Comm. Print). See also In re Vanity Fair
Shoe Corp., 84 F. Supp. 533, 534 (S.D.N.Y. 1949), affd, 179 F.2d 766 (2nd Cir. 1950); In re
Quaker Room, 90 F. Supp. 758, 762 (S.D. Cal. 1950).
believed, it would promote uniformity under the Bankruptcy Act with respect to
the subject of fraudulent conveyances."77
In the most recent revision of bankruptcy law, the Bankruptcy Reform Act of
1978, which enacted the Bankruptcy Code, section 54878 replaced section 67d of
the Bankruptcy Act with only minor changes.79 Congress intended that section
548 incorporate the substantive provisions of section 67d of the Bankruptcy Act,
and, moreover, Congress clearly indicated that section 548 should be viewed as a
descendent of the Statute of 13 Elizabeth.80
THE PURPOSE OF FRAUDULENT-CONVEYANCE

LAWS
This survey of the history of fraudulent-conveyance laws demonstrates

traditionally these laws have been enacted primarily to prevent unfair con
by a debtor to creditors. As discussed previously, under early English laws
conveyance would not be avoided unless it could be shown that the debtor
undertaken the transfer with the actual intent to defraud creditors. The difficul-
ties of proving actual intent later gave rise to a presumption of such intent if
sufficient "badges of fraud" could be shown. In attempting to do away with
presumptions of intent established by the badges of fraud, sections 4, 5, and 6 of
the UFCA deemed conveyances to be constructively fraudulent, regardless of a
77. 4 Collier on Bankruptcy 1 67.29 at 482 (14th ed. 1978) (citations omitted); Nat'l Bank-
ruptcy Conference, Analysis of H.R. 12889, 74th Cong., 2d Sess. (1936) 205, 213 (House Judiciary
Comm. Print). In H.R. 12889, introduced May 28, 1936, and in H.R. 6439, introduced Apr. 15,
1937, 67d contained the following additional paragraph: "(8) The provisions of this subdivision
shall be interpreted and construed so far as possible in uniformity with the law wherever the
Uniform Fraudulent Conveyance Act is enacted." Although clause (8) was eliminated in H.R.
8046, introduced July 28, 1937, it was the opinion of at least one scholar that the expressed
legislative intent to adopt the principles of the UFCA in bankruptcy should serve as adequate reason
for federal courts to find previous state judicial construction of the UFCA persuasive:
Since the intention of legislatures in adopting the Uniform Fraudulent Conveyance Act is
presumably to make uniform the law of the jurisdictions wherein it is enacted, . . . the judicial
decisions construing it are generally regarded as highly authoritative, not only in the jurisdic-
tion where rendered, but in every jurisdiction in which the same law has been adopted.
Although the Congress refused to enact such a rule of statutory construction into law, and
although the Uniform Act has been subjected to some phraseological revision as it appears in
the Bankruptcy Code, it would seem that powerful considerations should be shown to justify a
federal court in departing from well reasoned interpretations of the Uniform Act.
4 Collier on Bankruptcy 1 548.01 at 548-14 n.25 (15th ed. 1983).

78. See supra note 13.
79. The two most important changes are the substitution of the phrase "reasonably equivalent
value" for "fair consideration," and the removal of the requirement that the purchaser acquire the
property in "good faith."
80. "This section is derived in large part from section 67d of the Bankruptcy Act. It permits the
trustee to avoid transfers by the debtor in fraud of his creditors. Its history dates from the statute of
13 Eliz. c. 5 (1570)." H.R. Rep. No. 595, 95th Cong., 1st Sess. 375 (1977); S.Rep. No. 989, 95th
Cong., 2d Sess. 89-90 (1978), reprinted in Collier, Bankruptcy Code, Part 1, at 299 (pamphlet ed.
1983).
showing of actual intent of the debtor, if certain circumstances (such as insol-

vency and lack of fair consideration) could be shown to have existed at the time
of the conveyance.
Over the course of centuries, the difficult-to-prove subjective test necessary to
establish a fraudulent conveyance has evolved into the wholly objective tests
currently found in the UFCA and section 548. This development has been
actuated by the desire to make fraudulent-conveyance laws more useful and
efficient to creditors as tools to strike down a debtor's fraudulent transfers.
However, the primary purpose of such laws has remained constant: they have
always existed in order to prevent the inequitable manipulation or transfer of
the debtor's property to the disadvantage of creditors. It is this concept, of
inequitable acts committed by the debtor or arising from the debtor's indiffer-
ence, that forms the heart of fraudulent-conveyance laws.
When a lender takes a security interest in property and properly complies
with the state filing procedure, the lender gives notice to the world that upon the
borrower's default it will look to the secured property for satisfaction of the
debt, pursuant to state laws, such as mortgage foreclosure laws and part 5 of the
Uniform Commercial Code.
This special relationship between a secured lender and borrower gives rise to
obligations on both sides. If the lender forecloses, state law requires the
foreclosure to be conducted fairly and honestly.81 Likewise, if an inequitable act
of the borrower causes or threatens to cause serious harm to the secured
property, courts have generally recognized the right of the lender to prevent the
contemplated act or, if completed, to require the borrower to restore the status
quo.82 By viewing borrowers as having an obligation to refrain from harming
secured property, courts have attempted to reconcile the right of individuals to
dispose of their property freely with the societal concern that secured creditors
should be encouraged to lend with the knowledge that they can realize upon the
secured property on default.
At the heart of the fraudulent-conveyance laws lies the policy of preventing
inequitable transfers that would deny creditors the right to satisfy their claims
out of property that, under state law, creditors rightfully expect should be
available to satisfy such claims. A properly conducted, noncollusive foreclosure
sale does not violate this policy; these sales are not the result of inequitable acts
when they are not collusive and are properly conducted under laws formulated
to provide for the creation of security interests and the realization upon
collateral by secured creditors.
The policy considerations differ if the lender is unsecured. When an un-
secured lender makes a loan, the lender is on notice that any property of the
borrower subject to a security interest will be used first to satisfy secured
81. See text accompanying notes 123-56.

82. For example, courts have permitted a lender to enjoin a borrower from doing significant
damage to or transferring a part of the mortgaged property if the damage or transfer would bring
the value of the remaining property dangerously close to an amount inadequate to secure the debt.
G. Osborne, Handbook on the Law of Mortgages 328-31 (1951).
creditors. The unsecured lender knows it cannot look to specific property of the
borrower to satisfy the debt without obtaining a security interest or judgment
lien. Unsecured lenders are normally compensated for this risk with higher
interest rates or better loan terms, or unsecured lenders may loan only to
borrowers with substantial assets.
It is difficult therefore to give credence to the argument that unsecured
creditors are harmed by the foreclosure sale of property that was at the time of
their loan, or could become at some later date, subject to a security interest. In
making an unsecured loan, the lender realizes that, on default, the borrower's
property may be subject to prior liens and secured claims that equal or exceed
the value of the property. Even though the borrower may have held property
that was more than adequate to repay an unsecured loan when made, later
fluctuations in the property's value, or encumbrances later placed on the
property, could result in the unsecured creditor's being unable to satisfy its
claim by levying on the property. Thus an unsecured creditor cannot be seen as
having the same relationship to the borrower's property as a secured creditor.
Creditor and debtor laws, including fraudulent-conveyance laws, are aimed
largely at encouraging the extension of credit by allowing creditors to satisfy
their claims out of property they expected would be available to satisfy such
claims. Since unsecured creditors cannot rightfully argue that they expected any
interest of the borrower in specific property to be available to satisfy their
claims, they should not be given the right to avoid a noncollusive foreclosure by
a secured party who does have the right to expect that the collateral will be
available to satisfy the secured obligation. To use fraudulent-conveyance laws to
allow unsecured lenders to satisfy their claims at the expense of secured
creditors is to distort the policy underlying such laws.
In light of the expressed intentions of Congress,83 section 548 should be seen
as continuing the tradition of earlier fraudulent-conveyance laws enacted into
bankruptcy law. As was true with these earlier fraudulent-conveyance laws,
section 548 is not primarily concerned with the "preservation of the debtor's
estate," or with "ensuring] a fair return on the debtor's assets for the benefit of
all creditors," as contended in the Alden article.84 Rather, these fraudulent-
conveyance laws have always sought primarily to prevent transfers by the
debtor that place the debtor's property beyond the reach of creditors who are
entitled to realize upon that property.85 Noncollusive foreclosure sales are not
such transfers.
The decision of the Durrett court must thus be seen as an aberration from the
law of fraudulent conveyances as that law has developed under the Anglo-
83. See supra note 80.

85. Although some preDurrett cases avoided sales under the fraudulent-conveyance provisions of
state law without stating that the debtor acted with actual fraudulent intent, these cases generally
found that the sale involved suspicious circumstances tantamount to actual fraud. Moreover, these
cases do not involve mortgage foreclosure sales. See, e.g., Lefkowitz v. Finkelstein, 14 F. Supp. 898
(S.D.N.Y. 1936).
American legal system since the enactment of the Statute of 13 Elizabeth. That
the decision is a departure from well-established principles of fraudulent-
conveyance law is apparent from the court's failure to cite even one case in
which a noncollusive, regularly conducted mortgage foreclosure sale was invali-
dated as a fraudulent conveyance.86
Under the Durrett rule, there would be no inquiry as to whether the debtor
had acted inequitably or with indifference to the rights of creditors. Instead, the
sole question becomes whether a transfer has occurred that resulted in harm to
the creditors.87 It was this same sort of misapplication of the Statute of 13
Elizabeth that prompted the creation of the UFCA.88 Thus, rather than being
properly sensitive to the policy underlying section 548, the Durrett rule abuses
the historical reasons for which fraudulent-conveyance laws were enacted and
throws these laws back into the confusing morass from which the drafters of the
UFCA and section 67d tried to rescue them.
DEFINITIONS OF "TRANSFER"
Section 67d of the former Bankruptcy Act and section 548 of the B
Code allow prebankruptcy fraudulent "transfers" to be avoided.89 D
refusal of earlier bankruptcy courts to see noncollusive foreclosure s
transfers, the Durrett court looked at the definition of "transfer" in
of the Bankruptcy Act90 and concluded otherwise.91 The court
concurred with Durrett likewise have found that noncollusive foreclosure sales
may be seen as "transfers" under section 101(41) of the Bankruptcy Code,92
which closely tracks the language of section 1(30) of the Bankruptcy Act.
86. Judge Clark, dissenting in Abramson v. Lakewood Bank & Trust Co., 647 F. 2d 547 (5th
Cir. 1981), recognized this flaw in the Durrett holding: "It is interesting to me that Durrett is the
first case to treat this problem after 90 years of bankruptcy law and mortgages of a time greater than
the memory of man. It establishes what an imaginative lawyer can do when he adds persuasion." Id.
at 550.

88. See supra text accompanying notes 69-74.
89. See supra notes 7 and 1 3.
90. "[T]ransfer" shall include the sale and every other and different mode, direct or indirect, of
disposing of or of parting with property or with an interest therein or with the possession
thereof or of fixing a lien upon property or upon an interest therein, absolutely or condition-
ally, voluntarily or involuntarily, by or without judicial proceedings, as a conveyance, sale,
assignment, payment, pledge, mortgage lien, encumbrance, gift, security, or otherwise.
Act of June 22, 1938, ch. 575, 1(30), 52 Stat. 840, 842, amending Act of July 1, 1898, ch. 541,
1(25), 30 Stat. 544, 545, repealed by Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92
Stat. 2549.
91. The comprehensive character of this definition leads us to conclude that the transfer of title
to the real property of the debtor in possession pursuant to an arrangement under Chapter XI
of the Act, by a trustee on foreclosure of a deed of trust, to a purchaser at the sale constitutes a
"transfer" by debtor in possession within the purview of section 67(d).
Durrett, 621 F.2d at 204.

92. "(41) 'transfer' means every mode, direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with property or with an interest in property, including
The predecessor of section 1(30), s

1898,93 did not expressly include "inv
tion of "transfer." Section 1(30) define
section 1(25) of the Bankruptcy Ac
includes within its definition "involun
Courts following Durrett have read in
the transfer definition include such "
foreclosure sales.94 Thus, more than f
enacted into law, the Durrett court be
meaning and construe the transfer def
sales.
It is unfortunate that the Durrett court arrived at its conclusion without
undertaking a more thorough examination of the legislative history of section

1(30). Such an examination would reveal no hint of an intention to overturn
centuries of legal precedent.
The legislative history of the Bankruptcy Act indicates that "transfer" was
broadly defined in that Act, not in order to make substantive changes that would
permit a foreclosure sale to be included in the definition, but in order to
facilitate the use of a single term that would be applicable to the bulk of those
sections that the Bankruptcy Act of 1938 adopted from the Bankruptcy Act of
1898. As explained by two of the key contributors to the drafting of the
Bankruptcy Act of 1938.
The present definition promotes uniformity and brevity in sections 60

(preferences), 67 (liens and fraudulent transfers), and 70e (avoidance of
transfers) through the use of the term "transfer" only, wherever possible.
Accordingly the phraseology of this definition has been expanded. In its
original form, the text stated: " 'transfer5 shall include the sale and every
other and different mode of disposing of or parting with property, or the
possession of property, absolutely or conditionally, as a payment, pledge,
mortgage, gift or security." The final phrase, beginning with "as," which
appeared in the old Act, is unnecessary in view of the inclusiveness of the
preceding portion of the revised definition.95
Congress itself explained the changes as follows:
The reason for the changes in this definition are that section 60, dealing
with preferences, speaks of transfers and judgments; section 67, dealing
retention of title as a security interest." 11 U.S.C. 101(41) (Supp. 1983) (101(40) was
redesignated as 101(41) by Public Law 97-222, 1, July 27, 1982, 96 Stat. 235).
93. "(25) 'transfer' shall include the sale and every other and different mode of disposing of or
parting with property, or the possession of property, absolutely or conditionally, as a payment,
pledge, mortgage, gift, or security. . . ." Bankruptcy Act of July 1, 1898, ch. 541, 1(34), 30 Stat.
544, 545.
94. See, e.g., Abramson v. Lakewood Bank & Trust Co., 547 F.2d at 549.
95. J. Hanna & J. McLaughlin (annotators), The Bankruptcy Act of 1898 as Amended
Including the Chandler Act of 1938 at 5 (1939).
with liens and fraudulent transfers, speaks of liens, conveyances, transfers,

assignments, encumbrances, levies, judgments and attachments; and section
70(e) dealing with the avoidance by the trustee of transfers, uses merely the
term "transfer."
In order to achieve uniformity, the revised terminology of these sections,
whenever possible, is restricted to the latter term. Therefore becomes
necessary to expand the phraseology of this definition, in order to make
certain that it shall include the full scope of all of the terms presently
employed in the sections cited . . . 96
Both Congress and the drafters of the Chandler Act included the word "invol-
untary" in section 1(30) in order to "achieve uniformity" rather than to include
in the fraudulent-conveyance provision those conveyances, such as noncollusive
mortgage foreclosure sales, never intended to be in that section.
The language of section 101(41) of the Bankruptcy Code closely tracks
section 1(30) of the Bankruptcy Act. While Congress stated that the transfer
definition of section 101(41) should be interpreted broadly,97 it gave no indica-
tion that the section 101(41) definition included broad language in order to
accomplish a purpose different from that of former section 1(30). In light of the
absence of an express change in congressional intent, and of the similarity in
language between section 101(41) and former section 1(30), it should be
assumed that Congress broadly defined "transfer" in section 101(41) for the
same reason former section 1(30) was broadly defined - namely, to achieve
uniformity.
A collusive foreclosure sale, that is, one intended to hinder, delay, or defraud
creditors, has always been subject to avoidance as a fraudulent transfer.98 Actual
fraud in connection with involuntary execution sales or partition sales and other
transfers that may be considered involuntary, such as marital property, alimony,
and property settlements approved by the courts, may also be subject to
avoidance as fraudulent transfers.99 The inclusion of the word "involuntary" in
96. House Report No. 1409 on H.R. 8046, 75th Cong., 1st Sess. (1937) 5, quoted in 1 Collier on
Bankruptcy f 1.30.28(2) (14th ed. 1974).
97. A transfer is a disposition of an interest in property. The definition of transfer is as broad as
possible. Many of the potentially limiting words in current law are deleted, and the language is
simplified. . . . Under this definition, any transfer of an interest in property is a transfer,
including a transfer of possession, custody or control even if there is no transfer of title, because
possession, custody, and control are interests in property.
H.R. Rep. No. 595, 95th Cong., 1st Sess. 314 (1977), cited in Alden, supra note 2, at 1608.
98. See generally Moore, supra note 56, at 50-51. Of course, if collusion exists between the
debtor and the creditor or a third party, the transfer would be seen as involving actual fraud. See,
e.g., Heath v. Helmick, 173 F.2d 157 (9th Cir. 1949) (fraudulently obtained judgment where actual
sale is collusively conducted by debtor, debtor's attorney, and purchaser). See Glenn, supra note 60,
at 367; Bump & Gray, supra note 59, at 275-76; Alden, supra note 2, at 1606 n.3.
99. See e.g., Lefkowitz v. Finkelstein Trading Corp., 14 F. Supp. 898 (S.D.N.Y. 1936)
(execution sale); Kittleberger v. Flaharty, 108 Pa. Super 264, 164A 821 (Sup. Ct. Pa. 1933)
(ejectment action); and Moore, supra note 56, at 41, 52-56.
the definition of "transfer" helps to make this clear.100 These is no basis for
construing it to affect noncollusive foreclosure sales.
Since there is an obvious contradiction between the underlying purpose of
section 548 and the results obtained from applying the general transfer defini-
tion to section 548 without limitation, the general definition should, in its
application to section 548, be read in light of the statutory purpose and history
of section 548.
A similar position was taken by the United States Supreme Court when it
refused to apply the general definition of "transfer" found in section 1(30) of the
Bankruptcy Act to section 70a(5)101 because its application would produce a
result contrary to the underlying purpose of section 70a(5). In Segal .
Rochelle2 the Supreme Court dealt with the question of whether a debtor's tax
loss carryback refund claims were property which the debtor could have
transferred as of the filing of the bankruptcy petition and, thus, includable in
the bankruptcy estate under section 70a(5). The Court held that although the
broad general definition of "transfer" in section 1(30) could be deemed to
include transfers by operation of law, this definition nevertheless would not be
applied to section 70a(5). The Court examined the predecessors to section
70a(5) in earlier bankruptcy acts and concluded that both the historical develop-
ment and the language of section 70a(5) require that only property transferable
by voluntary acts of the debtor is subject to section 70a(5).103 Thus the Court
100. While noncollusive foreclosure sales should not be avoided under the constructive fraud
provisions of 548 and the UFCA, execution sales and some of the other involuntary transfers
mentioned above arguably could fall within the policies that the constructive fraud provisions seek to
enforce. Although a noncollusive foreclosure sale should not be seen as depriving unsecured creditors
of property from which they rightfully expect to satisfy their claims, transfers as a result of
execution sales and partition sales directly affect the competition among unsecured creditors, all of
whom may have had an equal right to expect that they could share in the debtor's unencumbered
assets. Therefore, in such sales, different policy considerations could come into play in determining
whether such transfers should be subject to constructive fraud provisions. See, e.g., Lefkowitz v.
Finkelstein, 14 F. Supp. 898 (S.D.N.Y. 1936).
101. Section 70a(5) provided generally that the trustee was vested, as of the date of the petition,
with title to all of the property that could have been transferred by the debtor prior to the petition.
102. 382 U.S. 375(1966).
103. Admittedly, the Bankruptcy Act defines the word "transfer" in its general definitional
section to include at least certain transfers that are "involuntary," but legislative history
indicates that the introduction of this latter term into the Act 40 years after its framing was not
aimed at 70(a)(5) at all.
Id. at 382-83 (citations omitted).

As stated in Judge Clark's dissent in Abramson, "A foreclosure sale by a mortgagee or trustee is
not a transfer by the debtor, although done in his name pursuant to a power of sale in the mortgage
or deed of trust. ... It is not a voluntary conveyance on his part." 647 F.2d at 549. Moreover, Judge
Clark's statement finds support in those courts that have held that only a voluntary conveyance can
be fraudulent under state law. See Alden, supra note 2, at 1608 n.3; see also In re Richardson, 23
Bankr. at 440-41 (court declines to decide applicability of Utah's UFCA in a Durrett situation).
Section 4 of the U.S.C.A., which applies only to conveyances "made . . . by a person who is or
will be thereby rendered insolvent" (emphasis added), also appears by its express language to have
been extended to apply only to voluntary conveyances. UFCA 4, 7A U.L.A. 4. Congress, in
refused to apply the general definition of transfer to section 70a(5) because

applying it would produce a result inconsistent with the purpose for which
section 70a(5) was enacted.
Further support for the preceding interpretation is offered by a recent article
in Banking Law Journal (the Coppel article).104 Messrs. Coppel and Kann
analyzed what transfer is contemplated by sections 547 and 548 and found that,
since the enactment of the Bankruptcy Act of 1898, a prepetition foreclosure has
never been seen as a transfer, and that the original creation of the lien was the
only transfer contemplated by those sections.
The article cites as an example Thompson v. Fairbanks0 which construed
the preference and fraudulent-conveyance sections of the 1898 Act in the context
of a trustee's attempt to set aside the repossession of collateral by a mortgagee.
There, the Supreme Court stated that "[i]t can scarcely be said that the
enforcement of a lien by the taking possession ... is a conveyance or transfer
within the bankrupt act."106 More recently, in Gordon v. Eaton Corporation (In
re Wilco Forest Machinery, Inc.),101 the Fifth Circuit Court of Appeals applied
this same principle, in a fraudulent-transfer context, to a repossession under a
validly perfected financing statement. The article demonstrates that this princi-
ple has been affirmed repeatedly, in the Supreme Court and in all circuits,
including the Fifth Circuit prior to Durrett. Its argument is persuasive.
DATE OF TRANSFER
The Coppel article's extensive research is persuasive that the enforcem

a lien is not a transfer within the meaning of sections 548 and 101(41).
us assume for argument's sake that the article's conclusion is incorrect a
the definition of transfer as applied to section 548 is broad enough to en
all sorts of finance-related transfers, that is, the transfer of the security i
the transfer of title on foreclosure, the transfer of the debtor's "equi
with title on foreclosure, and the transfer of possession of the pro
confirmation of the sale or after any applicable redemption period.
The Alsop case held that even if section 548 is this broad, under
548(d)(l) the date of all of these transfers would be deemed to relate back
date of the perfection of the mortgage.108 Section 548(d)(l) provid
transfer is made "when such transfer becomes so far perfected that a bo
purchaser from the debtor against whom such transfer could have bee
fected cannot acquire an interest in the property transferred that is sup
stating that 548 "permits the trustee to avoid transfers by the debtor" (emphasis a
Rep. No. 595, 95th Cong., 1st Sess. 375 (1977), supra note 80), also could be seen as inte
the constructive fraud provision of 548 apply only to voluntary transfers.
104. Coppel and Kann, Defanging Durrett: The Established Law of "Transfer", 10
L.J. 676(1983).
105. 196 U.S. 516(1905).
106. Id. at 523.
107. 491 F.2d 1041 (5th Cir. 1974).

108. 14 Bankr. 982, 986.
the interest in such property of the transferee. . . ."109 Since once the mortgage is
perfected no bona fide purchaser can obtain rights superior to those of the
purchaser at the foreclosure sale, it follows that the date of transfer for the
purpose of section 548 must be deemed to be the date of the perfection of the
mortgage.
The Alden article criticizes this reasoning on several grounds. First, it
contends that in order to prevent secret conveyances, section 548(d)(l) requires
that "the grant of security be tested only after it has been perfected and made
known to the world."110 Since "perfection of the mortgage has in no way alerted
creditors to the possibility that their recourse to ... [the debtor's] equity may
... be in jeopardy," and "[cjreditors first become aware of their precarious
position only upon the foreclosure sale of the mortgaged property for less than
reasonably equivalent value," the fraudulent-conveyance provisions of section
548 "must operate at ... the date of foreclosure, not the date of mortgage."111 As
discussed earlier, it is difficult to conceive how unsecured creditors could believe
that they have a right to recourse to any particular equity in property of the
debtor, or why even the recording of a mortgage on the property would not alert
them to the risks inherent in unsecured financing. Secured transactions were
designed specifically to overcome those risks. Those who have chosen to be
unsecured creditors must be presumed to know that secured claims on collateral
are superior to unsecured claims, and that the secured creditor has a right to
realize upon the collateral pursuant to the laws applicable to the extension of
the secured credit.
Second, the Alden article argues that section 548(d)(l) does not require that
the date of transfer be the date of perfection because "from the date of execution
of the mortgage deed up to the very date of foreclosure on the mortgaged
property, the debtor could convey to any bona fide purchaser its equity in the
property."112 This is correct. Any conveyance of the property, however, includ-
ing the equity, will always be subject to the mortgage and the right of the
purchaser at a foreclosure sale to realize upon the security. No sale by the
mortgagor can cut off that right once the mortgage has been properly perfected.
Third, the Alden article distinguishes most of the cases cited by Alsop as
being cases under section 547 dealing with preferences. Section 547, according
to Alden, deals with priority among creditors, not the preservation of the
debtor's estate, and this means that the language in section 548 should be given
different meaning from the language in section 547. 113
It is not clear that the purposes of the two sections are so different. If a
fraudulent transfer is set aside, the assets recovered go to the estate for the
benefit of the creditors; if a preference is set aside, the assets recovered go to the
estate for the benefit of the creditors. The bottom line is the same. Even if there
109. 11 U.S.C. 548(d)(l).

111. Id.
112. Id. at 1611.

113. Id. at 1611-13.
were a distinction, it is difficult to believe that the distinction is so significant as

to justify such a dramatic modification of the express language of the section.114
Furthermore, Alsop did not only cite section 547 cases. The Alden article
makes reference to Menear . Morgantown Community Association,110 cited in
Alsop, which Alden agrees was a fraudulent-transfer case. In that case the
Fourth Circuit held that a conveyance of real estate within a year of bankruptcy
could not be a fraudulent transfer because the date of transfer was deemed to be
the date the contract of sale was signed and recorded, after which no bona fide
purchaser could take priority over the rights of the purchaser.116
Although this article concludes that a court should never reach the question of
the date of transfer because a properly conducted, noncollusive foreclosure sale
should not be subject to attack as a fraudulent conveyance, the Alsop reasoning
makes sense.
REASONABLY EQUIVALENT VALUE STANDARD

The Madrid Presumption
The Alden article argues that it is only after the foreclosure sale that the
mortgagor discovers the sale will cut off its equity in the property, and it is this
sudden discovery and loss that section 548 was "designed to prevent."117 In
reality, events of default rarely occur unexpectedly. The mortgagor ordinarily
will be well aware for some time prior to default that its ability to carry the
114. The Alden article's statement that the "central concern" of the fraudulent-conveyance
provisions is "preservation of the debtor's estate" is not entirely accurate. Id. at 1612. In fact, the
central concern of these provisions is to preserve the debtor's estate to the extent it can be diminished
by the debtor's inequitable conduct. It has long been recognized that the preferential-transfer
section, not the fraudulent-conveyance section, is the provision in bankruptcy that protects creditors
from transfers that were not necessarily inequitable but which nevertheless resulted in harm to the
creditors by diminishing the debtor's estate. For example, in the case of Irving Trust Co. v.
Kaminsky, the court stated:
Under the Statute of Elizabeth a transfer by an insolvent debtor to pay or to secure an

antecedent debt has never been treated as a transfer to hinder, delay or defraud creditors,
although it is self-evident that other creditors are necessarily hindered and delayed by such a
transfer. Lehren-krauss v. Bonnell, 199 N.Y. 240, 92 N.E. 637; Huntley v. Kingman & Co.',
152 U.S. 527, 532, 14 S. Gt. 688, 38 L. Ed. 540; Davis v. Schwartz, 155 U.S. 631, 15 S. Ct.
237, 39 L. Ed. 289; Giddings v. Sears, 115 Mass. 505; Bigelow on Fraudulent Conveyances,
pp. 73, 74. Such transfers are preferences and may be successfully assailed only under section
60b of the Bankruptcy Act (as amended, 1 1 U.S.C.A. 96(b)) or under state legislation relative
to preferences. Davis v. Schwartz, supra. As pointed out in Glenn on Fraudulent Conveyances,
289, a sound practical reason why preferences are held not to be conveyances to hinder, delay
or defraud creditors is that the rule against fraudulent conveyances may be availed of by a
single creditor. To allow such a creditor, acting in his own interest alone, to set aside a
preferential transfer as one in fraud of creditors would amount to substituting that creditor as
the person preferred in place of the creditor chosen by the debtor.
19 F. Supp. 816, 818 (S.D.N.Y. 1937).

115. 235 F.2d 354 (4th Cir. 1956), affg 136 F. Supp. 292 (N.D.W.Va. 1955).
116. 136 F. Supp. at 296.
mortgage is tenuous. In such situations, if there is significant equity in the

property the mortgagor is free to go to the marketplace to sell the property to
preserve its equity.
After default, a considerable period of time usually elapses before foreclosure
proceedings are commenced; in addition, state statutes often require a hiatus
between default and foreclosure.118 During this period the mortgagor is free to
conclude a private sale and pay off the debt. The advertisement of the foreclo-
sure sale itself is calculated to attract members of the public who may offer
larger bids. Debtors can, and some do, enhance the advertisement of the sale
with further efforts to locate potential buyers.119
After all this opportunity to conclude a private sale, plus the public-auction
nature of the foreclosure sale, if there is no buyer who is willing to pay more
than the amount that is bid, this should be reasonable evidence that there is no
substantial equity in the property and that a significantly better price cannot be
obtained within a suitable time.120 That is the foundation of the long-recognized
principle of law stated in Madrid: that the fair value of the property is the price
obtained at a noncollusive, regularly conducted public sale,121 and not the
amount that a bankruptcy judge, with the perfect vision afforded by hindsight,
feels ought to have been bid.122

119. See, e.g., In re Perdido Bay Country Club Estates, Inc., 23 Bankr. at 40.
120. The Alden article accepts this principle with respect to the redemption period but is
unaccountably silent with respect to the often longer, preforeclosure notice and waiting period
during which the borrower's troubled financial condition may not be known, making it easier for the
borrower to sell the property at a price close to the property's value. See Alden, supra note 2, at
1623 n.54: u[T]he mortgagor's failure over an extended period of time to find a better offer for the
property may provide substantial evidence that the foreclosure price constitutes reasonably equiva-
lent value."
121. In re Madrid, 21 Bankr. at 426-27; see, e.g., In re Perdido Bay Country Club Estates, Inc.,
23 Bankr. at 40; In re White's Estate, 322 Pa. 185 A 589 (1936).
122. While not accepting the Madrid presumption, even the Alden article acknowledges that:
any court that follows either the case-by-case approach espoused by Judge Volinn [the
dissenting judge in Madrid] or the seventy percent test suggested by Durrett will have to come
to grips at the outset with the question whether a discounted standard of liquidation value
should be applied in determining what is reasonably equivalent to the mortgaged property.
Alden, supra note 2, at 1615-16. Assuming, arguendo, that the Alden article is correct in its position
that a court should scrutinize the amount bid to determine if it is "reasonably equivalent," it seems
appropriate that a court must measure reasonable equivalence against the value that the property
would bring at a properly conducted forced sale, and not the value that an appraisal determines
could be paid under ideal circumstances. It is rare to find ideal circumstances; it is irrational for a
court to find a "fraudulent conveyance" because the amount obtained at the foreclosure sale is not
reasonably equivalent to the value that could be obtained under ideal circumstances.
This argument is supported by a recent Note citing sections of the Code that provide specific
direction as to how value is to be measured and contrasting them with section 548. For example,
506(a) requires value to "be determined in light of the purpose for the valuation and of the
proposed disposition or use of such property, and in conjunction with any hearing on such
disposition or use or on a plan affecting such creditor's interest." Section 522(a) measures value in
terms of "fair market value as of the date of the filing of the petition." Section 548 does not state that
Effecting a Fair Balance

Over the centuries, legislatures and courts have attempted to effect a fair
balance between the rights of borrowers and lenders.123 Originally, the default-
ing borrower had no rights. The mortgage constituted a conveyance of the
property from the borrower to the lender subject to a condition subsequent that
if the borrower paid the amount owed under the note when due, title would
revert to the borrower. If the borrower failed to pay when due, the property
would become vested indefeasibly in the lender, no matter how compelling the
borrower's excuse for not paying on time and no matter how much more
valuable the property was than the remaining amount due under the note.124
With no remedy at law, gradually borrowers turned to the King's Chancellor,
and later the equity courts, for assistance. If the Chancellor felt that the
borrower had been wronged, the borrower would be allowed to buy back, or
"redeem," the property for an amount equal to the mortgage balance. This right
to buy back the property became known as the "equity of redemption," which
could not be cut off or "clogged" except by the lender coming to the equity court
and asking that it be cut off, or "foreclosed."125 This early foreclosure took the
form now generally known as "strict foreclosure."
Notwithstanding the intervention of the equity court, strict foreclosure was
still perceived as unfair to the borrower who, it was feared, might lose property
worth much more than the mortgage balance. As a result, the courts and
legislatures provided for a public "foreclosure sale," with a view to obtaining
the best price possible for the mortgaged property, considering the forced nature
of the sale.126 As time passed, courts and legislatures developed rules designed to
provide further protections for the rights of borrowers, while not inhibiting the
right of mortgagees to realize upon the collateral.
a voidable transfer need be for less than reasonably equivalent fair market value, and it is only
reasonable to assume that what is intended by the term "value" in 548 is the value of the property
at the time, place, and circumstances of the sale, namely, liquidation value. See Note, Regularly
Conducted, Non-Collusive Mortgage Foreclosure Sales: Inapplicability of Section 548(a)(2) of the
Bankruptcy Code, 52 Fordham L. Rev
123. It may be an overstatement to say that these

the rights of borrowers and lenders." Some commen
laws, initially intended to protect unsophisticated m
mortgagees, are biased against lenders where the pa
of sophistication is more or less equal. See, e.g., Li
Need an Overhaul, 31 Bus. Law. 1927, 1930, 194
states distinguish between consumer and commercia
A comprehensive review of the protections and lim
(and an argument that foreclosure law is biased in
The Judicial and Legislative Response to Price Ina
Cal. L. Rev. 843 (1980). See also R. Kratovil & R.
619-29 (2d ed. 1981); Osborne, Nelson & Whitman
124. See generally G. Glenn, Mortgages 3-10, 3
125. Id. at 11-18, 358-62, 612-13.
126. Id. at 618-22.
Mortgage-foreclosure law and fraudulent-conveyance law developed along

separate, parallel paths, never meeting until their collision in the bankruptcy
court in Durrett. Consider the irony. If mortgage- foreclosure law had not
developed to protect the borrower - if mortgages had remained conveyances as
they were originally, if equity courts had not intervened to create the equity of
redemption, if courts and legislatures had not provided the borrower with a sale
as a means of increasing the funds available to the borrower - then there might
not have been a Durrett decision, since the transfer outright to the lender when
the loan was made would likely be the only transfer available for a bankruptcy
court to avoid, and that transfer would ordinarily be too remote in time to
permit avoidance.
Over the years, courts and legislatures built in further protections for the
borrower, reflecting the varied approaches and policies of different states. A
brief review of some of the statutory and judicial safeguards follows.
Statutory Protections
As mentioned earlier, the requirement that a foreclosure sale be conducted to
preserve the mortgagor's equity in the property was a major change from the
strict foreclosure that had existed previously. While strict foreclosure is still
used in a few states,127 protections have been incorporated into the strict-
foreclosure process to avoid some of the former harsh results.128
Foreclosure by judicial sale, available in every state, and foreclosure by power
of sale contained in the mortgage documents, permitted in about half of the
states,129 differ as to the degree of court supervision of the sale process. Judicial
foreclosure generally requires court review of the notice to the borrower and
other affected parties, a presale hearing, and judicial conduct or confirmation of
the sale.130 Power-of-sale foreclosure, despite not requiring judicial review, is
subject, nevertheless, to the inherent power of the equity courts to review the
127. Connecticut, Vermont and Illinois. The other New England states, Maine, Massachusetts,
New Hampshire, and Rhode Island, permit certain forms of strict foreclosure under limited
circumstances. See Osborne, Nelson & Whitman, supra note 23, 7.10 at 443-44. Strict foreclosure
is available in other states in special situations, as where a mortgagee has foreclosed by judicial sale
but failed to join some party with an interest in the property, or where legal title has passed and
there is a need to cut off certain redemption rights. Id. at 444-46.
128. The Connecticut statute permits any party with an interest in the property to request that
the strict foreclosure judgment be opened and modified at the court's discretion. Conn. Gen. Stat.
Ann. 49-15 (Supp. 1983). Strict foreclosure is permitted by Illinois common law upon a showing
that the mortgagor is insolvent, the value of the mortgaged property is less than the mortgage
indebtedness and taxes on the property, and the mortgagee accepts title in satisfaction of the
mortgage balance. See Great Lakes Mortgage Corp. v. Collymore, 14 111. App. 3d 68, 302 NE 2d
248(1973).
129. Report, Committee on Mortgage Law and Practice, Cost and Time Factors in Foreclosure
of Mortgages, 3 Real Prop., Prob. & Tr. J. 413, 414 (1968).
130. Osborne, Nelson & Whitman, supra note 23, 7.11.
sale to prevent injustice.131 Both foreclosure methods are extensively regulated

by statute.
For both types of sales, statutory preforeclosure notice periods generally
require the foreclosing mortgagee to wait a substantial period of time, up to one
year, before foreclosing on a defaulting mortgagor.132 Notice periods give a
borrower the opportunity to raise the necessary funds to cure the default or find
a purchaser for the property.133
After notice is given to the mortgagor, many statutes also require that notice
of the sale be published in a prescribed manner134 and that the sale be
undertaken under the court's supervision, either by a sheriff or other court-
appointed official.135 They also require, or permit, at the request of the debtor,
the confirmation of the sale by the court before the sale is final.136
In connection with the foreclosure proceeding, the court or the official
conducting the sale is often required to obtain an appraisal of the value of the
property. These appraisal statutes often enjoin the establishment of an upset
price that must be obtained at the sale, irrespective of the amount of the
mortgage debt. These statutes typically require a bid of two-thirds of the
appraised value of the property.137 Antideficiency judgment statutes may be used
in conjunction with an appraisal statute to prevent a judgment against the
mortgagor if the upset price is not reached, to require that the upset price, and
not the bid, be credited against the debt, or to provide for some other form of
131. Id. at 7.19.

132. See, e.g., Cal. Civ. Code 2924, 2924c (West 1974 & Supp. 1983); Idaho Code 45-
1506 (1977); Ind. Code Ann. 32-8-16-1 (Burns 1980); Neb. Rev. Stat. 25-1506 (1979); Okla.
Stat. Ann. tit. 12, 760; tit. 46, 4 (West 1979); Wis. Stat. Ann. 846.10, 846.101, 846,102
(West 1977 & Supp. 1983-1984).
133. See Breeding Freight Lines, Inc. v. Reconstruction Fin. Corp., 172 F.2d 416, 422 (10th
Cir.), cert, denied, 338 U.S. 814 (1949); Smith v. Allen, 68 Cal. App. 2d 93, 95, 65 Cal. Rptr. 153,
155, 436 P.2d 65, 67 (1968); Cromer v. Dejarnette, 188 Va. 680, 688, 51 S.E. 2d 201, 204-07
(1949) (Miller J., dissenting). See generally Osborne, Nelson & Whitman, supra note 23, at 7.16.
1 34. Literal compliance with the statutory notice provisions had been considered by most courts
to adequately protect mortgagors' rights {see Washburn, supra note 123, at 896), but these decisions
have been criticized. Id. In the case of Mennonite Bd. of Missions v. Adams, 462 U.S
S. Ct. 2706 (1983), in which a mortgagee's lien was cut off

that compliance with the notice statute does not, by itself, sa
clause of the fourteenth amendment. See Gold, The Effec
N.Y.L.J., Nov. 16, 1983, at 23, col. 1. See also Osborne,
7.24.
135. See, e.g., Alaska Stat. 9.45.180 (1983); Ariz. Rev. Stat. Ann. 33-725 (1974); Ind. Code
Ann. 32-8-16-1 (Burns 1980), 34-1-53-3, 34-1-53-6 (Burns 1973); Iowa Code Ann. 654.5
(West 1950); N.J. Stat. Ann. 2A:50-19 (West 1952); N.D. Cent Code 32-19-08 (1976); S.D.
Codified Laws Ann. 21-47-14 (1979).
136. See, e.g., Kan. Stat. Ann. 60-241 5(b) (1976); Minn. Stat. Ann. ch. 582, app. 2, pt. 1, 3
(West 1947); Neb. Rev. Stat. 25-1531 (1979); N.C. Gen. Stat. 45-21-34 (1976).
137. See, e.g., Ark. Stat. Ann. 51-1112 (1971), Ind. Code Ann. 34-1-37-1 (Burns 1980); La.
Code Civ. Proc. Ann. art. 2336 (West 1961); Mich. Stat. Ann. 27A.3155 (Callaghan 1980); Ohio
Rev. Code Ann. 2329.20 (Page 1953); Okla. Stat. Ann. tit. 12, 759, 762 (West 1960); Wash.
Rev. Code 61.12.060 (1961); W.Va. Code 38-4-23 (1966). In Kentucky, a sale for less than the
upset price imposes a statutory right of redemption. Ky. Rev. Stat. 426-530 (1970).
protection against a deficiency judgment.138 Some statutes bar deficiency judg-

ments involving certain types of mortgages, such as purchase-money mortgages,
or mortgages on certain types of property, such as residences.139
"One-action" statutes protect the mortgagor from multiple suits, either by
requiring the mortgagee to claim the deficiency in connection with the foreclo-
sure proceeding140 or by requiring the mortgagee either to elect to foreclose
against the security or sue on the note.141
Finally, statutory rights of redemption have been enacted in over half the
states to afford additional protection142 by allowing the mortgagor between two
and one-half months and two years (depending on the statute) after the sale to
138. See, e.g., Conn. Gen. Stat. Ann. 49-14 (West 1978); Ohio Rev. Code Ann. 2329.19
(Page 1953); Okla. Stat. Ann. tit. 12, 762 (West 1960); S.C. Code Ann. 29-3-740 (Law. Co-op
1976). An alternative to an appraisal statute is a fair market value statute, pursuant to which the
fair market value of the property is determined and used to establish a credit against the debt before
a deficiency judgment is permitted. See, e.g., Ariz. Rev. Stat. Ann. 33-814(A) (1974); Cal. Civ.
Proc. Code 580a (West 1976), 726 (West 1980); Conn. Gen. Stat. Ann. 49-14 (West 1979);
Ga. Code Ann. 44-14-161 (1982); Idaho Code 6-108, 45-1512 (1977); Mich. Stat. Ann.
27A-3280 (Callaghan 1980); Neb. Rev. Stat. 76-1013 (1976); Nev. Rev. Stat. 40.459 (1967);
N.J. Stat. Ann. 2A:50-3 (West 1952); N.Y. Real Prop. Acts. Law 1371.2 (McKinney 1979);
N.C. Gen. Stat. 45-21-36 (1976); N.D. Cent. Code 32-19-06 (1976); Okla. Stat. Ann. tit. 12,
686 (West 1968); S.D. Codified Laws Ann. 21-47-16, 21-48-14; Utah Code Ann. 57-1-32
(1953); Wash. Rev. Code 61.12.060 (1961); Wis. Stat. Ann. 846.165 (West 1977).
139. See e.g., Ariz. Rev. Stat. Ann. 33-729A (1974); Cal. Civ. Prac. Code 580(b), 580(d)
(West 1976); Mont. Code Ann. 71-1-232 (1983); N.C. Gen. Stat. 45-21.38 (1976); Or. Rev.
Stat. 88.070, 88.075 (1981); S.D. Codified Laws Ann. 44-8-20, 44-8-22, 44-8-24 (1967 &
Supp. 1982).
140. Osborne, Nelson & Whitman, supra note 23, 8.2 at 526. See, e.g., Cal. Civ. Proc. Code
726 (West Supp. 1983); Idaho Code 6-101 (1979); Mont. Code Ann. 71-1-222 (1978); Nev.
Rev. Stat. 40.430, 40.455 (1967); Utah Code Ann. 78-37-1, 78-37-2 (1953).
141. Osborne, Nelson & Whitman, supra note 23, 8.2 at 527. See, e.g., Alaska Stat.
09.45.200 (1962); Ariz. Rev. Stat. Ann. 33-722 (1974); Conn. Gen. Stat. Ann. 49-28 (West
Supp. 1980); Fla. Stat. Ann. 702.06 (West 1969); Idaho Code 45-1505(4) (1977); Iowa Code
Ann. 654.4 (West 1950); Mich. Stat. Ann. 27A.3105(l), 27A.3105(2), 27A.3204(2) (Callag-
han 1980); Minn. Stat. Ann. 580.02 (West 1947); Neb. Rev. Stat. 25-2140, 25-2143 (1979);
N.Y. Real Prop. Acts. Law 1301, 1401(2) (McKinney 1979); N.D. Cent. Code 32-19-05
(1976); Or. Rev. Stat. 86.735(4), 88.040 (1981); S.D. Codified Laws Ann. 21-47-6, 21-48-4
(1979); Wash. Rev. Code 61.12.120 (1961); Wyo. Stat. 34-4-103(a) (ii) (1977).
142. The point has been made often that the redemption period, while intended to protect
mortgagors from sacrificing their equity in the property {see Lifton, supra note 123, at 1940), may
be, in fact, a double-edged blade, harming borrowers by reducing the amount bid at the foreclosure
sale. As the Ninth Circuit Court of Appeals noted:
What third party would bid and pay the full market value, knowing that he cannot have the
property to do with as he wishes until a set period has gone by, and that at the end of the period
he may not get it, but instead may be forced to accept a payment which may or may not fully
reimburse him for his outlays? In some states he cannot get possession. In some states if he does
get possession and collects rents, they will be deducted from his reimbursement. In some states,
if he makes repairs, he will not be repaid for his outlays.
United States v. Stadium Apartments, Inc., 425 F.2d 358, 365-66 (9th Cir.) (citations omitted), cert,
denied, 400 U.S. 926 (1970). See also Alden, supra note 2, at 1615; Washburn, supra note 123, at
854; Kratovil & Werner, supra note 123, at 630.
buy back the property by paying approximately the amount of the bid and any
sums expended to maintain the property.143 These statutes often permit the
mortgagor to stay in possession during the redemption period.144
Judicial Protections
Courts of equity, exercising their inherent power to review foreclosure sales,
have developed a number of protections for borrowers, and, of course, their
creditors. Although the courts generally will not upset or refuse to confirm a sale
solely on the basis of insufficiency of price,145 courts can and do set aside or
refuse to confirm sales where the price insufficiency is great enough to "shock
the conscience or raise a presumption of fraud or unfairness."146
Some courts have adopted what appears to be a sliding scale, so that where
the inadequacy of price is great, only slight additional irregularities will be
necessary to upset the sale.147 And, on rare occasions, during the confirmation
143. Colo. Rev. Stat. 38-38-102; 38-39-102, 38-39-103 (1982) (75 days); Tenn. Code Ann.
66-8-102 (1982) (2 years). See also Ala. Code 6-5-230 (1977); Alaska Stat. 09.35.210,
09.35.220, 09.35.250 (1962); Ark. Stat. Ann. 51-1111 (1971); Cal. Civ. Proc. Code 700a, 701,
702 (West 1980); Idaho Code 11-310, 11-401 to 11-405 (1979); 111. Ann. Stat. ch. 77, 18, 18c
(Smith-Hurd Supp. 1983-1984); Iowa Code Ann. 628.2, 628.3 (West 1950); Kan. Stat. Ann.
60-2414 (1976); Ky. Rev. Stat. 426.530 (1972); Mich. Stat. Ann. 27A.3140, 27A.3240
(Callaghan 1980); Minn. Stat. Ann. 580.23, 581.10 (West 1947); Mo. Ann. Stat. 443.410
(Vernon 1952); Mont. Code Ann. 71-1-228 to 71-1-231 (1983); Nev. Rev. Stat. 21.190 to
21.210 (1967); N.J. Stat. 2A:50-4 (1952); N.D. Cent. Code 32-19-18 (1976), 35-22-20
(1972); Or. Rev. Stat. 23.520 to 23.600 (1981); R.I. Gen. Laws 34-26-1 (1969); S.D. Codified
Laws Ann. 21-52-1 to 21-52-32, (1979); Vt. Stat. Ann. tit. 12, 4528 (1973); Wyo. Stat. 1-
18-103, 1-18-105 (1977); cf. Miss. Code Ann. 15-1-19 (1972) (ten-year redemption period for
mortgagee in possession). See Report, Committee on Mortgage Law and Practice, Cost and Time
Factors in Foreclosure of Mortgages, 3 Real Prop., Prob. & Tr. J. 413, 414 (1968).
144. See, e.g., Cal. Civ. Proc. Code 700 n.17, 702 (West 1980); Iowa Code Ann. 628.3
(West 1950); Kan. Stat. Ann. 60-2414 (1976); Ky. Rev. Stat. 426.530(3) (1979); Mont. Code
Ann. 71-1-229 (1983). See Osborne, Nelson & Whitman, supra note 23, 8.4, at 537.
145. See, e.g., 55 Am. Jur. 2d Mortgages 674 (1971):
The general rule, in the absence of mistake, fraud, or unfairness, is that mere inadequacy of
price does not furnish sufficient ground to invalidate a foreclosure sale unless the price is so
grossly inadequate and unconscionable as to shock the moral sense, or unless there are
additional circumstances which militate against the fairness of the price or the regularity of the
sale.
See also Osborne, Nelson & Whitman, supra note 23, 7.16, at 469 (judicial foreclosures); 7.21,
at 479 (power of sale foreclosures) (1979): "All jurisdictions adhere to the recognized rule that mere
inadequacy of the foreclosure sale price will not invalidate a sale, absent fraud, unfairness, or other
irregularity." Id. See also Washburn, supra note 123, at 859-60.
It has been said that the purpose of this rule is to encourage active competitive bidding since, if the
sale could be easily avoided, few third-party bidders would participate. Id. at 860.
146. Osborne, Nelson & Whitman, supra note 23, 7.16, at 469. See, e.g., Ballentyne v. Smith,
205 U.S. 285(1907).
147. Ballentine v. Smith, 205 U.S. 285 (1907): Gaskill v. Neal, 77 Idaho 428, 293 P.2d 957
(1956); Suring State Bank v. Giese, 210 Wis. 489, 246 N.W. 556 (1933), where the court stated
that it had the right to reject the sale if the price were inadequate, or to set a minimum upset price
hearing courts have established an upset price for the sale,148 or have ordered a
new sale,149 often when a third party tenders a bid significantly higher than that
of the highest bid during the foreclosure sale.150 A court could also order the sale
of the property in parcels or en masse, to obtain the highest price or permit the
mortgagor to retain some of its property.151 Courts have also permitted redemp-
tion after the expiration of the statutory period or have set aside sales for various
other reasons, where justified by the equities.152
In the vast majority of cases, the courts have refused to establish a specific
numerical standard, such as that in Durrett.153 One commentator discovered
only two jurisdictions that had established such standards prior to Durrett, the
Fourth Circuit and Delaware, and in both cases the standards are fifty percent,
not seventy percent.154 On the other hand, several courts refuse to set aside the
sale, no matter how small the price obtained, unless fraud or some other
irregularity is proved.155
However, the remedy least desirable and rarely seen, at least prior to Durrett,
is the setting aside of a confirmed sale because after the sale the equities have
changed. At that point, state policies of promoting certainty and confidence in
the sale, and of protecting the rights of the purchaser, become paramount,
or credit the fair market value of the property to the debt, at its discretion. See also First Wis. Nat'l
Bank v. KSW Inv., Inc., 71 Wis. 2d 359, 238 N.W.2d 123 (1976).
148. Manhattan Ry. v. Central Hanover Bank & Trust Co., 99 F.2d 789, 792-93 (2d Cir.
1938); Wilson v. Fouke, 188 Ark. 811, 67 S.W.2d 1030 (1934); Suring State Bank v. Giese, 210
Wis. at 493, 246 N.W. at 557-58.
149. American Trading & Prod. Corp. v. Connor, 109 F.2d 871 (4th Cir. 1940); Bovay v.
Townsend, 78 F.2d 343, 346 (8th Cir. 1935); Blanks v. Farmers' Loan & Trust Co., 122 F. 849,
852-53 (5th Cir. 1903); Parker v. Owen, 96 Cal. App. 2d 78, 79, 214 P.2d 417, 418 (1950); cf.
Criswell v. Criswell, 230 Iowa 27, 30-32, 300 N.W. 533, 534-35 (1941) (partition sale); Continen-
tal Oil Co. v. McNair Realty Co., 137 Mont. 410, 422, 353 P.2d 100, 106 (1960) (partition sale).
150. American Trading & Prod. Corp. v. Connor, 109 F.2d at 873-74 (4th Cir. 1940); cf.
Speers Sand & Clay Works, Inc. v. American Trust Co., 52 F.2d 831, 834 (4th Cir. 1931), cert,
denied, 286 U.S. 548(1932).
151. Breeding Motor Freight Lines, Inc. v. Reconstruction Fin. Corp., 172 F.2d 416, 421-22
(10th Cir.), cert, denied, 338 U.S. 814 (1949); Wilson v. Fouke, 188 Ark. 811, 814, 67 S.W.2d
1030, 1032 (1934). See generally Annot., 61 A.L.R. 2d 505 (1958); Osborne, Nelson & Whitman,
supra note 23, 7.16, at 468-69, 7.21, at 482.
152. Farmers State Bank v. Anton, 199 N.W. 582 (N.D. 1924); Malvaney v. Yager, 101 Mont.
331, 54 P.2d 135 (1936); Rosner v. Worcester (In re Worcester), 28 Bankr. 910 (Bankr. CD. Cal.
1983) (property sold at foreclosure included a parcel not encumbered by mortgagee's lien).
153. See Washburn, supra note 123, at 855-69.
154. Id. at 869-70.
155. Foge . Schmidt, 101 Cal. App. 2d 681, 683, 226 P.2d 73 (1951); Golden v. Tomiyasu, 7
Nev. 503, 514-17, 387 P.2d 989, 994-96 (1963), cert, denied, 382 U.S. 844 (1965); Rosenham v
Pottinger, 22 Ky. 264, 60 S.W. 370 (1901); American Sav. & Loan Ass'n v. Musick, 531 S.W.2
581, 587 (Tex. 1975); Purnell v. Follett, 555 S.W.2d 761, 763-64 (Tex. Civ. App. 1977) (sale a
three percent of market value); Delley v. Unknown Stockholders, 509 S.W.2d 709, 718 (Tex. Ci
App. 1974).
overriding the court's desire to obtain the best price for the property. And,
unless the sale is tainted, it should not be upset.156
Appraisal Uncertainties
The Alden article seems to place great reliance on the ability of bankruptcy
courts to determine the value of real property. It is almost as if real estate were
sold like stock on an exchange, with quotes available from the newspaper. But
between the Alden idea and reality falls the shadow of an imperfect world.157
Real estate is not fungible. Real estate is unique. That is why specific perfor-
mance is granted for contracts of sale of real estate.158 Because real estate is
unique, appraisals can only be very subjective judgments. This is especially true
of commercial real estate.
In appraising commercial real estate the "income method" is most often
employed.159 Under this approach, the appra^r reaches today's value by
determining what a person would pay today for the stream of income the
property is expected to produce in the future, "his is accomplished by dividing
the expected annual net income by an appropriate "capitalization rate" or going
percentage rate of return for that type of investment, adjusted by risk factors
associated with the particular property, such as location, condition of the
property, terms of leases, and projected inflationary pressures.160 Under this
income method of valuation, a building that is expected to produce an income
stream of $100,000 per year would be valued at $1 million if a ten percent
capitalization rate is used. It is not unusual for appraisers to differ on both the
projected stream of income and the capitalization rate, and changes in these
variables can dramatically affect the projected value. For example, if in the
above hypothetical case the stream of income were estimated to be $150,000,
and a five percent capitalization rate were used, the value would be $3 million,
not $1 million.
156. See, e.g., Weinberger v. Wallace (In re Wallace), 31 Bankr. 64 (Bankr. D. Md. 1983)
(Maryland foreclosure law prevents the bankruptcy court from staying the completed foreclosure
sale); Fisher v. Olah (In re Olah), 31 Bankr. 396 (Bankr. S.D. Ohio W.D. 1983) (bankruptcy court
should not vacate completed foreclosure sale). Compare RufF v. Guaranty Title & Trust Co., 99
Fla. 197, 126 So. 383 (1930); Walton v. Washington County Hosp. Ass'n, 178 Md. 446, 451, 13
A.2d 627, 629 (1940) with Southern Realty & Utils. Corp. v. Belmont Mortgage Corp., 186 So. 2d
24, 25 (Fla. 1966); Straus v. Anderson, 366 111. 426, 431-32, 9 N.E.2d 205, 208 (1937); Penn. Fed.
Sav. & Loan Ass'n v. Joyce, 75 N.J. Super. 275, 183 A.2d 114 (App. Div. 1962); cf. Smith v.
Juhan, 311 F.2d 670, 672 (10th Cir. 1962) (bankruptcy sale); Martin v. Jones, 268 Ala. 286, 289,
105 So.2d 860, 863 (1958) (partition sale); German Village Prods., Inc. v. Miller, 32 Ohio App. 2d
288, 289-90, 290 N.E.2d 855, 857-58 (1972) (execution sale).
157. Cf. T.S. Eliot. "The Hollow Men," in The Complete Poems and Plays 1909-1950, at 56
(1952).
158. See generally 5 A A. Corbin, Contracts 1143 (1964).
1 59. See generally American Institute of Real Estate Appraisers, The Appraisal of Real Estate
chs. 14-17 (8th ed. 1983).
160. Id. See also C. Blackadar, Dynamic Capitalization (1981) (available from Metropolitan
Life Insurance Company).
In the Perdido Bay decision, the appraisals considered by the court ran from
$7.8 million to $13.4 million, the lower appraisal equal to fifty-eight percent of
the higher, and the higher equal to 171 percent of the lower.161 In Coleman v.
Home Savings Association2 where the second mortgagee acquired the property
(still subject to the first mortgage) at a foreclosure sale for an amount equal to
the balance of the second mortgage and later sold the property to a good-faith
purchaser at the same price, the court held that the sale price was only twenty-
eight percent of the fair market value of the debtor's "equity" and avoided the
sale under Durrett.163
Perhaps one of the greatest appraisal achievements was accomplished in State
Mutual Life Assurance Company v. KRO Associates (In re KR0).Ui This case,
decided under chapter XII of the Bankruptcy Act, held the courts could "cram
down" a plan of reorganization against a dissenting nonrecourse mortgagee by
paying the mortgagee the depressed market value of the property, under section
461(1 l)(c) of chapter XII. Even if the market value were far less than the
amount of the debt, KRO held that the mortgagee could be denied the right to
take the property in full satisfaction of the debt.165 Here, unlike the Durrett
situation, it is to the debtor's advantage to find that the property had little value.
In this case the property had mortgages on it totaling $16 million. The court,
projecting a relatively low stream of income and using a twenty percent
capitalization rate (the higher the rate the lower the value - and twenty percent
is out of sight in normal appraisals), concluded the value of the property to be
$895,000.166
Thus, when courts discuss the question of whether property is sold for less
than seventy percent of its "value," it is necessary to understand that "value"
may vary depending on who is appraising the property and for what purpose.
In this context, a public sale, with all of the safeguards that statutes, courts, and
the marketplace have developed, would seem the best indication of reasonably
equivalent value, not an appraisal by a bankruptcy judge whose objective may
be to obtain the greatest amount of assets for the bankruptcy estate.
161. 23 Bankr. at 40.

162. 21 Bankr. 832 (Bankr. S.D. Tex. 1982).
163. Id. at 834.
164. 4 B.C.D. 462 (Bankr. S.D. N.Y. 1978). This case followed In re Pine Gate Assoc, Ltd., 3
B.C.D. 301 (Bankr. N.D. Ga. 1977).
165. Id. at 470-71. Foreclosure would have activated the recapture provisions of the Internal
Revenue Code, 1245 and 1250, and for that reason the debtor's limited partners were loathe to
permit a foreclosure. The court held that tax avoidance is not evidence of bad faith and not
repugnant to the spirit and purpose of chapter XII, saying "KRO, with laudable candor, admits
that the avoidance of the imposition of this tax is the impetus for this chapter XII case." 4 B.C.D. at
471.
1 66. In defense of the court, it should be pointed out that the property was a commercial office
building in downtown Newark, New Jersey.
PROPOSED SOLUTIONS OF THE ALDEN ARTICLE
The Alden article proposed a "solution" to the problems created by D

Under this proposal, bankruptcy courts, in determining whether to s
foreclosure sale, would "take into account such factual considerat
whether ... the mortgagee or a third-party purchaser acquires the mo
property at foreclosure. . . ."167 The article proposes that a third par
the foreclosure sale should be irrebuttably presumed to be the re
equivalent value of the property, while the mortgagee's bid should be
only a rebuttable presumption of reasonably equivalent value.
This proposal would not only perpetuate Durrett's misinterpret
section 548 but could effectively discourage mortgagees from bidding a
sure sales. The Alden article itself recognizes this possibility but s
dismisses it from consideration:
[sjince the mortgagee, as a practical matter, is unlikely either to permit the

mortgaged property to be sold for a price substantially below its secured
claim or to submit a bid substantially in excess of such claim, any
discrimination under 548 in favor of the third-party purchaser should not
in most cases significantly influence the course of the bidding.168
This conclusion seems unwarranted, considering the substantial disincentive

mortgagees would have to bid even the amount of the outstanding mortgage loan
if the Alden proposal were adopted. For example, consider the effect of the
Alden proposal on a mortgage foreclosure sale where it may be possible for a
court to find a fair market value for the property of $1 million, and where the
outstanding debt is $650,000. If the mortgagee bids in the amount of the debt, it
risks having the sale later avoided under the Durrett rule, because there would
be only a rebuttable presumption that satisfaction of the $650,000 mortgage
constitutes a reasonably equivalent value for the property. However, if the
mortgagee lets stand a third party's $500,000 bid, there would be an irrebut-
table presumption of reasonably equivalent value and no possibility of a later
avoidance in bankruptcy. Thus, even if the mortgagee had been willing to bid
the full amount of the debt, if the debtor is shaky and the mortgagee is not
confident of the property's resale value, the mortgagee may well conclude that it
would be wiser to accept the third party's bid rather than risk the possibility of
incurring the delays and costs that would arise if the sale were later avoided by
a trustee in bankruptcy under Durrett. If the mortgage were a recourse loan,
then undoubtedly the mortgagee would seek a deficiency judgment for $150,000,
if state law permits. The mortgagor's estate would then be diminished by any
portion of the $150,000 deficiency judgment paid, or, if the mortgagor files in
bankruptcy before the deficiency is paid, the judgment would be paid prorata,

168. Id. at 1620 n.45. Ironically, a court following the Alden approach would have left the
foreclosure sale in Durrett intact, despite the fact that the sale was for 58% of the property's value,
since the successful bidder was a third party and not the holder of the deed of trust.
along with other unsecured creditors out of the estate. In either case, the estate
of the debtor available for unsecured creditors would be diminished.
Similar problems arise even if the fair market value of the property is less
than the amount of the outstanding mortgage at the time of the sale. For
example, assume in the above hypothetical case that the property might still be
valued by a court at $1 million, but the amount of the outstanding mortgage
debt is $1.25 million. The mortgagee may again prefer to accept a third-party
bid equal to or less than the mortgage balance rather than bid the $1 million.
Again, if the third-party bid is less than the mortgage balance, the mortgagee
would seek a deficiency judgment if allowed to under state law.
In both of the preceding examples, the debtor or the debtor's estate would
suffer the greatest harm under the Alden proposal. Furthermore, the Alden
proposal actually tends to frustrate the objectives of the Durrett court. Consider,
for example, the first hypothetical case, where the outstanding mortgage is for
$650,000 and a third party bids $500,000 for property a court might value as
worth $1 million. Under the Durrett rule, the mortgagee would be encouraged
to bid in at least the amount of the debt, hoping that, if the sale were later
challenged by a trustee, the bankruptcy court would conclude that $650,000
(sixty-five percent of the appraised value) is sufficient to constitute reasonably
equivalent value. However, under the Alden proposal, the mortgagee is in a
more secure position if it accepts the third party's $500,000 bid and seeks a
deficiency judgment. Thus, the Alden proposal may result in a lower sales price
realized and greater harm to the borrower's unsecured creditors than would
occur under the Durrett rule as it now exists.
Although in fact it creates confusion for mortgagees bidding at foreclosure
sales, the Alden article at first appears to propose a clear rule governing the
bidding of third parties. Unfortunately, the article goes on to propose that, in
determining whether to avoid the sale, a court should also consider whether the
mortgagor prior to foreclosure used the mortgaged property for residential or
commercial purposes, and whether applicable state foreclosure law affords
satisfactory protections for mortgagors.169 These suggestions are intended both to
give the court more latitude in avoiding the sale if the property sold would be
exempt under section 522170 and to permit the court to read section 548 in the
context of state policies and the protections available to mortgagors under state
foreclosure law. Thus, where state foreclosure laws provide substantial protec-
tion for the mortgagor, the Alden article suggests that the courts should be less
willing to avoid the sale by applying Durrett', conversely, where state laws
provide fewer protections, the courts should be less reluctant to avoid the sale.
These suggestions, while well-meaning, will leave third-party bidders as con-
fused as the mortgagee as to whether a successful bid would be subject to
169. Id. at 1617.
170. 11 U.S.C. 522. Under this section, a debtor may elect to take certain federal exemptions
enumerated in 522(d), or exemptions provided by other Federal statutes and state law.
avoidance,171 and this confusion will lead potential bidders to avoid involvement
in the sale altogether or to submit a bid low enough so that the loss will not be
overwhelming if the sale is avoided.
ECONOMIC CONSEQUENCES OF THE DURRETT

RULE
They say there's no such thing as a free lunch. Durrett is no exceptio

Alden article's conclusion that Durrett "is properly sensitive to th
underlying Section 548" at first may appear attractive as a basis for ob
more assets for the bankruptcy estate, but it is appropriate to consider
approving Durrett, the price that society must pay to achieve this resu
article has already discussed the broad application of the Durrett rule b
the areas originally contemplated by the Durrett court. The following
of the economic consequences that the broad application of this ru
produce.
IMPACT ON FORECLOSURE SALES AND REAL

ESTATE
The immediate effect of the acceptance of the Durrett rule wou

bidding at foreclosure sales. Third parties will be unlikely to bid f
knowing that the application of fraudulent-conveyance laws could
sale at a later date. The absence of competitive bidding will in
reduce prices at foreclosure sales and increase the likelihood o
judgments in those states where they are permitted.172
171. Adding to this confusion are those courts that have concluded that a number
addition to the sale price, must be considered in scrutinizing a sale and tha
circumstances, even if the sales price is 70% or more of the property's value, the sa
as a fraudulent transfer. The Alden article discusses the cases of In re Connie M
Bankr. 19; In re Richardson, 23 Bankr. 434; and In re Jones, 20 Bankr. 988, wh
conclusion that 70% was insufficient. In Connie Mae Smith, the court stated that
be insufficient where the property had a high value: "[W]here $700,000.00 is p
valued at $1,000,000.00 this Court does not believe there would be 'reasonably e
24 Bankr. at 23. Richardson may have carried this concept a step further: "In so
than 100 percent of fair market value may be a reasonable price." 23 Bankr. at 4
172. A recent case following the holding of Madrid, In re Gilmore, 31 Bankr.
Wash. 1983), noted this problem:
A bidder at a forced sale, knowing that the judgment debtor would have a y
redeem, and then potentially an additional year in which to avoid the sale if
file bankruptcy, would adjust his bid accordingly to reflect the risks. In so doin
would invariably be even more disparate from the FMV obtainable in an
transaction. This in turn would place the trustee in an even stronger position
The bidder, recognizing the specter of interminable delay and legal costs in
investments during possible bankruptcy proceedings, would thus be inclined to
short, we would be faced with an ever-spiraling dilemma feeding upon itself to t
both the parties immediately concerned and the interests of society in promotin
scheme of satisfying judgments and ascertaining title to real property.
Once the property is acquired at foreclosure, rehabilitation, repairs, and

improvements will be discouraged. While section 55O(d)(l) gives a "good faith"
transferee a lien for the lesser of the cost of any improvements to the property
made after the transfer and the increase in value resulting from such improve-
ments, it does not ease the mortgagee's concern. A mortgagee purchaser would
be the one most likely to be considered as not acting in good faith, and thus
section 550(d)(l) may not allow any relief. Even if the purchaser is held to have
acted in good faith, recovering the cost of improvements may be illusory since it
is limited to the court's judgment of how much the improvement increased the
value of the property.173 The result will be further deferral of maintenance and
repairs, reducing the value not only of the foreclosed property but also of
surrounding properties.
IMPACT OF MORTGAGE FINANCING
The entire concept of secured transactions was designed to permit th

could not otherwise obtain unsecured credit to borrow on the security
property.174 From the lender's viewpoint, adoption of the Durrett rule w
mortgages a less reliable form of security, because that rule reduces th
tiveness of the lender's primary remedy. When prudent lenders realize
may not be able to rely on being paid out of the collateral, there is on
thing that they can do, considering their obligation to their depositor
policyholders and their shareholders - that is, cease making secured
those people most in need of credit and make loans, if at all, only to th
the highest credit rating.175
In the last few decades, much of the real estate development in the c
has been through the real estate limited partnership. In order for the
partners to obtain the tax advantages associated with real estate investm
necessary in most cases for the lender to exculpate the general partne
liability under the mortgage note and rely solely on the real estate as sec
Under Durrett, it is unlikely that lenders will look kindly upon such e
tions, and this vehicle, which has made possible much of the infusion
into real estate development, will be in jeopardy.
Id. at 618.
173. For example, suppose the purchaser replaces the roof, but the court feels that repairs to the
roof would have been sufficient. Or suppose that the purchaser redecorates the lobby to increase
rentals, and the court feels that the lobby is now garish and unsightly. These improvements may be
viewed by the court as not having increased the value of the property or, worse, as having
diminished the value of the property, despite the fact that they were made by purchaser, in good
faith, to increase the value of the property.
174. See P. Coogan, W. Hogan, D. Vagts & J. McDonnell, 1 Secured Transactions under the
Uniform Commercial Code ch. 1 (1983).
175. This is equally true for sales pursuant to land sale contracts, leasehold investments, and the
other forms of transaction touched by the rule of Durrett.
176. See W. McKee, W. Nelson & R. Whitmire, 2 Federal Taxation of Partnerships and
Partners ch. 8 passim (1977).
The Alden article contends that Durrett should not inhibit mortgage financ-
ing because the lender who purchases property at a foreclosure sale is in no
worse position under Durrett than the lender whose borrower has gone into
bankruptcy before foreclosure.177 Specifically, the Alden article finds that there
is not much difference between setting aside the sale as a fraudulent transfer
under section 548 and staying a foreclosure under section 362. While it is true
that upon filing of a petition in bankruptcy by a borrower the mortgagee is
stayed from foreclosing, the stay is of only temporary duration. Because of past
abuses of the stay, the drafters of the Bankruptcy Code went out of their way to
provide for adequate protection of the mortgagee if the value of the mortgagee's
interest in the debtor's interest in the collateral is reduced.178 The "cram-down"
provisions were written with a view to making certain that lenders could realize
upon their security, and much of the language of sections 1111 and 1129179 was
designed to overcome pre-Code decisions such as In re Pine Gate Associates,
Ltd.1S0 and KR03 where courts cast doubt on the mortgagee's right to realize
upon the collateral. Thus, similarities between the automatic stay and the risks
under Durrett are, at best, remote. With so much of the Bankruptcy Code
written for the purpose of protecting the mortgagee's right to realize upon the
collateral, it is indeed difficult to consider, as the Alden article supposes, that the
drafters of the Bankruptcy Code intended to expand the fraudulent-transfer
provisions to restrict the rights they were protecting elsewhere.
IMPACT ON INVENTORY, RECEIVABLES, AND

EQUIPMENT FINANCING
Before article 9 of the Uniform Commercial Code became law, many institu-
tions hesitated to lend on the security of inventory, receivables, and equipment
because of the difficulty of realizing upon the security under the then-chattel
security laws.181 As a result, small businesses were relegated to financing from a
small group of private lenders at generally exorbitant interest rates. Article 9,
with its validation of the floating lien and its notice filing system, has succeeded
in making such investments attractive to institutions and in bringing those
institutions into inventory, receivables, and equipment financing.182 Looking
backward at the reticence of lenders to engage in these sorts of financing before
article 9 of the Uniform Commercial Code, one can see what happens when
lenders find they cannot look to the security they bargained for. Looking
forward, if Durrett should be generally adopted, it may be a case of de ja vu.

178. See 11 U.S.C. 361; 2 Collier on Bankruptcy % 361.01 (15th ed. 1983).
179. Section llll(b) inter alia converts a nonrecourse claim into a recourse claim, and
1129(a)(8) and (b) apply absolute priority to both secured and unsecured claims of an impaired
class against whom a plan is imposed by the court.
180. 3 B.C.D. 301 (Bankr. N.D. Ga. 1977).
181. See generally Cooean, Hoean, Vaets & McDonnell, supra note 174, chs. 1, 3B, 5.
182. Id.
IMPACT ON TITLE INSURANCE
A substantial number of title insurers are excepting properties acqu

foreclosure sales from coverage against avoidance as fraudulent conve
because they cannot be certain that the bid price would exceed wh
later determines is seventy percent of the value of the property. As no
amicus curiae brief filed by the American Land Title Association in M
Durrett were to become the law:
it will become exceedingly difficult, if not virtually impossible, for members

of the Association to determine with the requisite degree of certainty the
status of the title of purchasers at non-judicial foreclosure sales. . . . The
combination of the uncertainty caused by the position advocated by [the
debtor] and the resulting inability of the members of the Association to
provide unqualified insurance coverage on titles to real estate purchased at
non-judicial foreclosure sales is likely to make real estate purchased at such
sales virtually unmarketable for the period of time that a challenge to the
sale under section 548 remains possible.183
IMPACT ON LEASEHOLD INVESTMENTS
The post-World War II real estate boom sparked a revoluti

structure of real estate investments, leading to increasingly complex
tions.184 A major element in this revolution has been the imagi
innovative use of the leasehold estate, and the "terms ground lease, s
lease, and space lease have become almost commonplace as seeming
layers of real estate interests have been created in individual properti
One leasehold investment approach, pioneered by William Zeckendo
his "Hawaiian technique," which involved the division of real estate e
cally into layers of leasehold interests, almost as a corporation w
securities into common stock, preferred stock, debentures, mortgage
the like, each carrying a different return and producing leverage fo
leasehold interest.186
183. American Land Title Ass'n, Motion for Leave to File Brief as Amicus Curiae 2, Madrid v.
Lawyers Title Ins. Corp.
184. See Gunning & Roegge, Contemporary Real Estate Financing Techniques: A Dialogue on
Vanishing Simplicity, 3 Real Prop. Prob. & Tr. J. 325 (1968).
185. Creedon & Zinman, Landlords Bankruptcy: Laissez Les Lessees, 26 Bus. Law. 1391
(1971). See generally Riordan & Duffy, Lease Financing, 24 Bus. Law. 763 (1969); Hyde, The
Real Estate Lease as a Credit Instrument, 20 Bus. Law. 359 (1965); and Thomas, The Mortgaging
of Long-Term Leases, 150 N.Y.L.J. Aug. 19, 1963, at 4, col. 1; Aug. 20, 1963, at 4, col. 1; Aug. 21,
1963, at 4, col. 1.
186. See J. McCord, ed., Sale and Leasehold Financing, PLI Real Estate Transcript Series No.
6, at 18 (1969). In Creedon & Zinman, supra note 185, the authors describe the then-layered
leasehold status of the Graybar Building in New York City as follows:
The land and building is owned by the Penn Central Transportation Company. Despatch
Shops, Inc., a subsidiary of Penn Central Transportation, is holder of a "grant of term" from
its parent of the land and building. Despatch leases the land and building to Metropolitan Life
The sale-leaseback, another form of leasehold investment involving a prear-

ranged agreement whereby a lease relationship is created upon acquisition of
title by an investor or upon completion of improvements on the property, has
maximized tax benefits associated with real estate and thus has proved attractive
to pension funds and other low tax entities.187 The sale-leaseback has often been
likened to a form of real estate financing.188 In the sale-leaseback, the rent paid
by the tenant is often simply a function of the purchase price paid by the lessor,
and the rent represents a recapture of the purchase price plus a return on that
investment. As a result, if the purchase price is low, the lease rent is low. In
these situations, the obligation owed by the tenant may be far less than the value
of the tenant's leasehold estate, a ripe condition for finding a fraudulent transfer
when the tenant defaults in the payment of rent.
In so-called high credit lease transactions, a lender makes a loan to an owner
of real estate secured primarily by the assignment of a lease to a substantial
tenant. If there should be an adverse change in the financial condition of the
tenant, the lender would expect that the owner could recover the property and
lease it to another tenant, or, if the tenant's default causes the owner's default,
that the lender could obtain the property through foreclosure and lease it out
itself if, as is normally the case, the lender also has a mortgage on the property.
An essential element for the owner in agreeing to invest in transactions
involving leasehold estates is the ability to recover the real estate upon default by
the tenant. If Durrett should cause the Ferris doctrine discussed above189 to be
revived, so that the termination of a leasehold estate on the tenant's default
could be considered a fraudulent transfer if a court determines that the value of
the estate returned is unreasonably high in relation to the obligation owed, the
resulting hardship would have a very damaging effect on the use of leaseholds in
real estate investments.
Insurance Company under a long-term net "ground lease." Metropolitan Life subleases the
land and building under a long-term net "sandwich lease" to Graybar Building Associates, a
partnership headed by Lawrence A. Wien. Graybar sub-sub-leases the land and building
under a long-term net "sandwich lease" to Precision Dynamics Corporation. Precision Dy-
namics sub-sub-sub-leases the land and building under a long-term net "operating lease" to
Harry B. Helmsley d/b/a Graybar Building Company. Mr. Helmsley operates the building
and sub-sub-sub-sub-leases space therein to tenants for their own use and occupancy. Ground
leases, sandwich leases and operating leases are often bought and sold just as fee title is bought
and sold. For example, in the Graybar Building, Metropolitan Life purchased its position from
Webb & Knapp, Inc.; Graybar Building Associates acquired its interest by assignment from
Lawrence A. Wien, and Precision Dynamics Corporation bought its lease from Webb &
Knapp, Inc. with numerous mesne assignments.
Mat 1391-92 n.3.
187. See Heath, Sale- Leasebacks and Leasehold Mortgages 141, 142, and Abramson, Tax T
for Structuring Real Estate Investments in the Inflationary 80s 291, 306, in America
Association Section of Real Property, Probate and Trust Law, Financing Real Estate During
Inflationary 80s (Strum, ed. 1981).
188. Id.
Madame Defarge had little difficulty accepting with sang-froid the necessity
of decapitation and armed revolt. After all, she thought, if liberty, equality, and
fraternity, the expressed goals of the common folk, demand such acts, then they
must be justified despite their seemingly incongruous and painful results. Thus
Charles Dickens exposes the grotesque irony resulting from the use of a
virtuous sentiment to justify the very sort of thing it arose to prevent. It would
seem, from this brief summary of the economic consequences, that the Durrett
court has not heeded Dickens' lesson.
CONCLUSION
An examination of the purposes for which fraudulent-conveyance law

been enacted in the past reveals that characterizing properly conducted f
sure sales as fraudulent transfers under section 548 is no more appropr
those purposes now than it has been for the over four hundred years s
Statute of 13 Elizabeth was enacted. The Durrett rule rests on a narrow and
technical interpretation of the language of section 548, resulting in an abuse of
the purpose for which fraudulent-conveyance provisions have traditionally been
adopted into bankruptcy law. The speculative benefits that may accrue to the
unsecured creditors of a bankrupt mortgagor by granting the trustee the power
to avoid prebankruptcy foreclosures are small in comparison to the harm the
Durrett rule will have on secured financing by disrupting the system of state
laws creating a balance between the rights of creditors and debtors.
The Alden article is well written and obviously the result of considerable and
sincere thought. Its proposed solution, however, will produce even greater
complexity, confusion, and inequity in some situations than that already result-
ing from the Durrett rule.
The basic flaw in the Alden proposal is that it attempts to improve on a rule
that it thinks is correct in policy but defective in application. By failing to
recognize that the Durrett court created an aberrant rule bearing little, if any,
relation to the policies underlying the doctrine of constructive fraud, the Alden
article suggests a remedy to the Durrett rule that does not strike at the heart of
the problem.
It is unfortunate that a suggestion as deft as that proposed by the Alden
article cannot solve the problems created by Durrett. Perhaps the time has come
to realize that no amendment to a wrong rule can make it right. The only
lasting and proper solution to the problems created by Durrett is to recognize
that Durrett is an incorrect interpretation of section 548 and to overrule it. The
balances that existed before Durrett will then again prevail, producing a far
more certain equilibrium between creditors and debtors than that which now
exists under Durrett or could exist under a modified Durrett rule.
Fortunately, as of this writing the only circuit court in which the sharp blade
of the Durrett rule has come to rest as established law is the Fifth Circuit. In
avoiding the foreclosure sale and returning the property to the debtor's estate,
the Fifth Circuit seems to have been benignly confident that it was equitably
implementing the policy underlying the fraudulent-conveyance law. The early

French revolutionists, after severing the first few heads of the most notorious
and despised members of the aristocracy, undoubtedly were also confident that
the equity and righteousness of their acts were apparent to the world. Unfortu-
nately, the revolution that set out to establish a new social order implementing
the ideals of western civilization instead ended in the ransacking and ruination
of its own economy and in the disillusionment of even its most ardent propo-
nents.
The Durrett court, although well-meaning, also sought to topple an estab-

lished regime of foreclosure laws it thought unfair. Let us hope that the Ninth
Circuit and the other circuit courts that may consider this question will
recognize the destructive nature of the Durrett rule and do the far, far better
thing of refusing to follow the Durrett decision.

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Fraudulent Transfers According to Alden, Gross and Borowitz: A Tale of Two Circuits

Author(s): Robert M. Zinman, James A. Houle and Alan J. Weiss

By Robert M. Zinman* James A. Houle,** and Alan J. Weiss ***

STATUS AND SCOPE OF DURRETT

Durrett involved a foreclosure sale pursuant to a power of sale in a

SCOPE OF THE DURRETT RULE

Oliver Wendell Holmes once observed, "My keenest interest is exci

Payment of Differential in Value

25. See In re Jones, 20 Bankr. 988 (Bankr. E.D. Pa. 1982).

the prospect of the application of section 550 is somewhat bone-chilling, even

Uniform Fraudulent Conveyance Act

Personal Property Security Interests

Land Sale Contracts

37. Alden, supra note 2, at 1623.

at least theoretically, the mortgagee in chapter 7 should have eventual recourse

THE DURRETT MISINTERPRETATION OF SECTIONS

general unsecured creditors, regardless of the circumstances under which the

13 Eliz. c. 5 (1570) cited in D. Epstein & J. Landers, Debtors and Cred

fraudulent-conveyance law based on the Statute of 13 Elizabeth, which, in

69. As revealed in the Commissioners' Prefatory Note to the UFCA:

4 Collier on Bankruptcy t 548.02 at 548-26 (15th ed. 1983) (citations omitted).

In the Act as drafted all possibility of a presumption of law as to intent is avoided. . . .

The Commissioners, as well as scholars, considered that this new approach

THE PURPOSE OF FRAUDULENT-CONVEYANCE

This survey of the history of fraudulent-conveyance laws demonstrates

4 Collier on Bankruptcy 1 548.01 at 548-14 n.25 (15th ed. 1983).

showing of actual intent of the debtor, if certain circumstances (such as insol-

81. See text accompanying notes 123-56.

83. See supra note 80.

87. Alden, supra note 2, at 1612.

Durrett, 621 F.2d at 204.

The predecessor of section 1(30), s

undertaking a more thorough examination of the legislative history of section

The present definition promotes uniformity and brevity in sections 60

Congress itself explained the changes as follows:

with liens and fraudulent transfers, speaks of liens, conveyances, transfers,

Id. at 382-83 (citations omitted).

refused to apply the general definition of transfer to section 70a(5) because

The Coppel article's extensive research is persuasive that the enforcem

107. 491 F.2d 1041 (5th Cir. 1974).

109. 11 U.S.C. 548(d)(l).

112. Id. at 1611.

were a distinction, it is difficult to believe that the distinction is so significant as

REASONABLY EQUIVALENT VALUE STANDARD

Under the Statute of Elizabeth a transfer by an insolvent debtor to pay or to secure an

19 F. Supp. 816, 818 (S.D.N.Y. 1937).

mortgage is tenuous. In such situations, if there is significant equity in the

118. See infra text accompanying notes 132-33.

Effecting a Fair Balance

123. It may be an overstatement to say that these

Mortgage-foreclosure law and fraudulent-conveyance law developed along

sale to prevent injustice.131 Both foreclosure methods are extensively regulated

131. Id. at 7.19.

S. Ct. 2706 (1983), in which a mortgagee's lien was cut off

protection against a deficiency judgment.138 Some statutes bar deficiency judg-

161. 23 Bankr. at 40.

PROPOSED SOLUTIONS OF THE ALDEN ARTICLE

The Alden article proposed a "solution" to the problems created by D

[sjince the mortgagee, as a practical matter, is unlikely either to permit the

This conclusion seems unwarranted, considering the substantial disincentive

167. Alden, supra note 2, at 1617.

169. Id. at 1617.

ECONOMIC CONSEQUENCES OF THE DURRETT

They say there's no such thing as a free lunch. Durrett is no exceptio

By Robert M. Zinman* James A. Houle, and Alan J. Weiss *