CORNELIA G. KENNEDY, Circuit Judge.
This is an appeal from the District Court's affirmance of the Bankruptcy
The purpose of Chapter 11 reorganization is to assist financially distressed business enterprises by providing them with breathing space in which to return to a viable state. See In re Dolton Lodge Trust No. 35188, 22 B.R. 918, 922 (Bankr.N.D.Ill.1982). "[I]f there is not a potentially viable business in place worthy of protection and rehabilitation, the Chapter 11 effort has lost its raison d'etre...." In re Ironsides, Inc., 34 B.R. 337, 339 (Bankr.W.D.Ky.1983). Although appellant contends that there is no explicit "ongoing business" requirement to Chapter 11 reorganization, such a requirement is inherent in the statute and clearly implied in 11 U.S.C. § 1112(b). That section permits the court after notice and hearing to "convert a case under this chapter to a case under chapter 7 ... or ... dismiss a case under this chapter, ... for cause, including — ... (2) inability to effectuate a plan...." To be confirmed, a plan must "provide adequate means for the plan's execution," 11 U.S.C. § 1123(a)(5), which necessarily requires some means by which the debtor may repay its debts. More generally, an implicit prerequisite to the right to file is "good faith" on the part of the debtor, the absence of which may constitute cause for dismissal under § 1112(b). See Dolton Lodge, 22 B.R. at 922. Factors relevant in examining whether a Chapter 11 petition has been filed in good faith include whether the debtor had any assets, whether the debtor had an ongoing business to reorganize, and whether there was a reasonable probability of a plan being proposed and confirmed. Id. at 923; see In re Eden Associates, 13 B.R. 578, 585 (Bankr.S.D.N.Y.1981) ("The debtor, with no assets, no bona fide creditors and no business, cannot effectively rehabilitate its enterprise...."); see also In re Tinkoff, 141 F.2d 731 (7th Cir.1944) (mortgage foreclosure proceedings in state court were valid and equity of redemption expired; debtor had no interest in property for which it sought to provide arrangement and dismissal of petition was proper). Dismissal of the Trust's Chapter 11 petition on the grounds stated by the District Court was proper.
Nor did the District Court err in refusing to amend its judgment to permit the Trust to convert its petition to one under Chapter 7. The court has the option, in the best interests of the creditors, either to convert or dismiss under § 1112(b). The only significant assets of the Trust are contingent — a chose in action against the vendee in breach on the land contract, and the possibility of setting aside the foreclosure sale as a fraudulent conveyance.
The Trust does contend, however, that it would be in a better position in bankruptcy court than it would be in state court (and thereby unsatisfied creditors as well as the Trust's beneficiaries would be better off) with respect to setting aside the foreclosure sale.
In Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir.1980), on which the Trust relies, the court held that a foreclosure sale was a "transfer of an interest of the debtor" for purposes of § 548; and that a sale of property for 57.7% of its fair market value was not "fair equivalence" as a matter of law. 621 F.2d at 203-04; see also Abramson v. Lakewood Bank & Trust Co., 647 F.2d 547 (5th Cir.), cert. denied, 454 U.S. 1164, 102 S.Ct. 1038, 71 L.Ed.2d 320 (1981); In re Richardson, 23 B.R. 434, 444-48 (Bankr.Utah 1982). That decision, however, has come under heavy criticism on both points, and justifiably so.
In holding that a foreclosure sale was a transfer, the Durrett court relied on the broad definition set out in 11 U.S.C. § 1(30) of the old Bankruptcy Act. The court in In re Madrid, 725 F.2d 1197 (9th Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 125, 83 L.Ed.2d 66 (1984), rejected that view, reasoning that the proper definition to apply was that in § 548(d)(1),
Even if the sale in question were a transfer subject to § 548, the better view is that reasonable equivalence for the purposes of a foreclosure sale under § 548(a)(2)(A) should be consonant with the state law of fraudulent conveyances. The Bankruptcy Appellate Panel in In re Madrid, 21 B.R. 424 (Bankr. 9th Cir.1982), aff'd on other grounds, 725 F.2d 1197 (9th Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 125, 83 L.Ed.2d 66 (1984), noting the well-nigh universal rule that mere inadequacy of price alone does not justify setting aside an execution sale and that generally there must be in addition proof of some element of fraud, unfairness, or oppression accounting for the inadequacy in price, concluded that following the Durrett holding would radically alter these rules. 21 B.R. at 427; accord William, 39 B.R., at 680-81; Strauser, 40 B.R. at 870;
"The cloud created over mortgages and trust deeds by making foreclosure sales subject to being voided by a bankruptcy trustee will naturally inhibit a purchaser other than the mortgagee from buying at foreclosure. This tends to depress further the prices of foreclosure sales and thus increase the potential size of the deficiency in each foreclosure...." Abramson, 647 F.2d at 550 (Clark, J., dissenting); see also Madrid, 725 F.2d at 1202; In re Alsop, 14
11 U.S.C. § 548(d)(1) (as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, § 463(c)(1), 98 Stat. 333, 379 (deleting bracketed language and adding italicized language)).
Section 548(a) was also amended by § 463(a) of the Bankruptcy Act of 1984 to insert the following italicized language: "The trustee may avoid any transfer of an interest of the debtor in property ... if the debtor voluntarily or involuntarily — ... (2)(A) received less than a reasonably equivalent value...." One commentator has suggested that by this language Congress sided with the view in Durrett on the question of transfer. See Jackson, Avoiding Powers in Bankruptcy, 36 Stan.L.Rev. 725, 780 n. 175 (1984).
There is no reference whatsoever to the amendments of § 548 of the Code in the scant legislative history of the 1984 Bankruptcy Amendments. Contrary to the commentator's suggestion, however, focusing on § 548(a), the amended wording does not weaken the interpretation of the Madrid court, which regarded § 548(d)(1) as determinative of when a transfer of a secured interest occurred.
While the power of the trustee to avoid certain preferential transfers was clearly intended to assure the equitable distribution of a debtor's assets among unsecured creditors, it can hardly be argued that Congress intended the rights of such creditors necessarily to override those of good faith purchasers at state foreclosure sales or the policy judgments of states in balancing the interests of parties thereto. Cf. Kapela v. Newman, 649 F.2d 887, 890-91 (1st Cir.1981) (Where Bankruptcy Act preference rules conflict with Article 9 of U.C.C. relating to secured transactions, "it is important to interpret the two statutes in a way that minimizes such conflicts and harmonizes the policies that underlie them."). Moreover, in another context in which federal law has been held to override state law governing the setting aside of foreclosure sales for inadequacy of price, the federal rule is much more strict than that applied by Durrett in defining what constitutes "fair equivalence." In Gottlieb v. McArdle, 580 F.Supp. 1523 (E.D.Mich.1984), the court observed that federal law governed in determining the remedies available to the United States upon default of a federally held mortgage, in order "to promote the security of federal investments and to facilitate the building of homes by the use of federal funds." 580 F.Supp. at 1525 (citations omitted). The court stated that under federal law, a foreclosure sale may be set aside only "if the inadequacy of the price obtained on foreclosure is `so gross as to shock the conscience.'" Id. (citations omitted). It cannot be said that the sale in the instant case to a bona fide third party for $400,000 against an indebtedness of $225,000, in a period admittedly of declining market values and high interest rates "shocks the conscience."