Collusive Foreclosure Sales: The Forgotten Legacy of Northern Pacific v. Boyd

Abstract

In BFP v. Resolution Trust Corp. (1994), the Supreme Court ruled that mortgage foreclosures could not be fraudulent conveyances – unless the foreclosure was “collusive.” It gave no clue what made mortgage foreclosures collusive. But in 1913, the Supreme Court defined collusive mortgage foreclosures in a famous railroad receivership case – Northern Pacific R. Co. v. Boyd. Boyd is usually thought to be the origin of the absolute priority rule in bankruptcy reorganization. Actually, it was a mortgage foreclosure sale. What made the sale collusive is that some of the shareholders of the defaulting railroad were also the shareholders of the new corporation formed to buy the assets of the defaulting railroad. The case is usually thought to be a fraudulent conveyance case. (Justice Willam O. Douglas thought so.) But it’s not. It is a case of piercing the corporate veil between the defaulting railroad and the buying railroad. Piercing the veil is inconsistent with a fraudulent conveyance theory. Furthermore, the court in Boyd did not need to pierce the veil. The plaintiff in the case (Boyd) was a secured creditor with an equitable lien on the sold assets, and the buying railroad (along with its purchase money secured lender) were bad faith purchasers subject to the lien. This was so even though the mortgage foreclosure was no fraudulent conveyance. It seems to be the case that bankruptcy’s absolute priority rule was borne in a manger lined with judicial error. Boyd lives on in state law under the name of “mere continuation” of a corporate entity.