High Court Backs Lenders in Ruling on Foreclosure Sales

The U.S. Supreme Court, in a victory for mortgage lenders, on Monday made it harder for debtors to have courts set aside foreclosure sales of property.

The issue arises when a property owner is forced to sell the property at a foreclosure sale and files for bankruptcy within a year of the sale.

If the foreclosure sale generated a price that was well below the fair market value of the property, some courts set aside the sale, reasoning that the low price violates the Bankruptcy Code by harming creditors.

The justices rejected that practice, ruling 5-4 that a sale can’t be set aside unless it violated state foreclosure law.

Monday’s decision is a victory for mortgage lenders, who argue that courts shouldn’t be able to set aside foreclosure sales if they were conducted in an open manner and didn’t involve collusion.

The case grew out of a savings and loan’s foreclosure on a parcel of land in Newport Beach, Calif., owned by a real estate partnership. The thrift sold the foreclosed property for $433,000 in July, 1989.

The real estate partnership, called BFP, filed for bankruptcy court protection less than four months later. The partnership asked the Bankruptcy Court to set aside the sale, arguing that the property was in fact worth more than $725,000.

A district court rejected BFP’s request, and the U.S. Court of Appeals for the Ninth Circuit, in San Francisco, affirmed that decision.

The appeals court ruled that the price obtained at a non-collusive foreclosure sale was a “reasonably equivalent” value that was valid under the bankruptcy laws.

The Supreme Court affirmed that decision.

“A fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the state’s foreclosure law have been complied,” Justice Antonin Scalia wrote for the majority.