Legal Definitions - Durrett rule

The Durrett rule is a principle that originated in U.S. bankruptcy law, stemming from the 1980 Fifth Circuit Court of Appeals case, Durrett v. Washington Nat'l Ins. Co.

At its core, the rule suggested that if a debtor transferred property in exchange for less than 70% of its fair market value, particularly shortly before filing for bankruptcy, a bankruptcy court could invalidate that transfer. The purpose was to prevent debtors from unfairly disposing of assets at bargain prices, which would reduce the pool of funds available to repay creditors in a bankruptcy proceeding. This concept was often applied in the context of determining whether a debtor received "reasonably equivalent value" for an asset, a key consideration in preventing fraudulent transfers.

It is important to note that while historically significant, the Durrett rule has largely been superseded by subsequent rulings from the U.S. Supreme Court. Specifically, for mortgage foreclosure sales that are conducted regularly and without collusion, the Supreme Court has held that the price received at such a sale generally represents a "reasonably equivalent value" for the property, regardless of whether it meets the 70% threshold. This means the Durrett rule's strict percentage-based invalidation is no longer widely applied to properly conducted foreclosure sales.

Here are some examples illustrating the original intent and historical application of the Durrett rule:

• Pre-Bankruptcy Asset Sale: Imagine a small business owner, facing severe financial distress and anticipating bankruptcy, sells a valuable piece of machinery worth $150,000 to a close friend for only $60,000. Under the original interpretation of the Durrett rule, a bankruptcy trustee could have challenged this transaction. Since $60,000 is less than 70% of the machinery's market value ($105,000), the trustee might have successfully argued that the sale should be invalidated, allowing the bankruptcy estate to recover the machinery or its full value for the benefit of all creditors.

• Historical Foreclosure Challenge: Consider a scenario in the mid-1980s, after the Durrett decision but before the Supreme Court's clarifying rulings. A homeowner's property, appraised at $400,000, was foreclosed upon due to unpaid mortgage debts and sold at a public auction for $250,000 (62.5% of its value). If the homeowner subsequently filed for bankruptcy, a bankruptcy trustee, relying on the Durrett rule, might have sought to invalidate the foreclosure sale. The argument would be that the sale price fell below the 70% threshold, meaning the bankruptcy estate did not receive "reasonably equivalent value," and thus the property should be returned to the estate for a potentially higher sale to benefit creditors. This type of challenge was common until later Supreme Court decisions provided a different standard for properly conducted foreclosure sales.