In Tyler v. Hennepin County, 598 U.S. 631 (2023), the Supreme Court decided in May 2023 that a real estate tax foreclosure can violate the Takings Clause of the Fifth Amendment when a municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property. To read ABI’s report, click here.

In a chapter 13 case that was pending when Tyler came down, Bankruptcy Judge Andrew B. Altenburg, Jr., of Camden, N.J., decided in his June 18 opinion that the debtor could rely on Tyler to set aside a final judgment foreclosing a tax lien.

The debtor had filed a chapter 13 petition in March 2023, five months after entry of a final tax foreclosure judgment in a New Jersey state court. The taxes being foreclosed were about $8,500. With interest, the debtor could have (but did not) redeem the property for some $24,000. In the chapter 13 bankruptcy that came later, the debtor scheduled the home as worth $124,000. There were no other liens on the home.

Roberto in the New Jersey Appellate Court

In a lawsuit with different parties, an intermediate appellate court in New Jersey held after Tyler “that the retention of the excess value (or surplus) above the tax lien in a tax sale foreclosed property by a municipality or a third-party purchaser of tax sale certificate . . . violated the Takings Clauses of the United States and New Jersey constitutions,” as Judge Altenburg said in his June 18 opinion. See 257-261 20TH Avenue Realty, LLC v. Roberto, 477 N.J. Super. 339, 307 A.3d 19 (N.J. Super. Ct. App. Div. 2023).

Judge Altenburg noted how “the Roberto court ruled that its new principle of law is limited, and it is only ‘accorded pipeline retroactivity to pending tax sale foreclosures involving a property owner’s surplus equity.’ 477 N.J. Super. at 366.” Judge Altenburg said he was charged with deciding “whether the Debtor’s cases, state court and/or current bankruptcy case, satisfy the ‘pipeline’ requirement (i.e., are they in the pipeline) to afford the Debtor with the relief he seeks.”

Dismissal Without Prejudice in State Court

The debtor had counsel for the bankruptcy case but was proceeding pro se in state court. In state court, he was unable to set aside the foreclosure judgment even after Tyler came down, given procedural mistakes he had made as a pro se litigant. However, his suit in state court was dismissed without prejudice because dismissal resulted from procedural shortcomings, not the applicability of Tyler.

In chapter 13, the debtor began taking the necessary steps to recover title to his home. Among other things, he filed a chapter 13 plan to pay the tax claim in full. The debtor also filed an adversary proceeding in bankruptcy court with a claim for recovery of a fraudulent transfer and a second claim under the Takings Clause of the Constitution. In the adversary proceeding, the debtor sought a preliminary injunction to enjoin the holder of the judgment from enforcing rights or remedies against the home.

Abstention

Judge Altenburg decided against permissive abstention under 28 U.S.C. § 1334(c) for several reasons.

First, setting aside the judgment would have “a positive effect on the administration of the case” and was a goal that the debtor had been “unable to achieve . . . on his own” in state court. “Indeed,” he said, “equity weighs in favor of the court protecting the Debtor’s interest in the Property in this forum rather than the state court where he lacks counsel to explain the applicability of Tyler and Roberto.”

Second, state law predominates, Judge Altenburg said, but “only . . . through the Roberto court’s interpretation of federal law.” Third, the law was “neither difficult or unsettled,” and “comity is achieved through this court’s reliance on and application of the Roberto case thereby showing the court’s mutual respect and courtesy to the state court.”

Having decided not to abstain, Judge Altenburg turned to the question of whether the case was “in the pipeline,” even though there was a final judgment in state court.

In the Pipeline?

Judge Altenburg said that the state court judgment might “seem to be final,” but he noted that the state court had “never considered the merits of any motion Debtor filed regarding the tax foreclosure sale.”

Even if there were nothing still pending in state court, Judge Altenburg said that “the Debtor has pursued the return of the Property since the inception of his bankruptcy case.” He saw Tyler as having “established a new cause of action to void a property transfer.” Given that the debtor had pleaded “plausible” claims under Section 548 and the Takings Clause, he held that “this bankruptcy case and its related adversary proceeding constitute a pending matter sufficient to satisfy pipeline retroactivity.”

Finality

The holder of the judgment argued that the state court judgment was final. Pointing to Sections 544, 545, 547, 548 and 549, Judge Altenburg said that they “offer[] debtors and trustees several ways to seemingly reverse final judgments under state law.” He said there was “a plethora of cases demonstrat[ing] that bankruptcy courts are empowered to void property transfers effected by state tax sale foreclosures and state court proceedings.”

Similarly, Judge Altenburg said that the Rooker/Feldman doctrine did not apply because the debtor was “alleging independent federal claims — which he could not allege in the state court action — under Section 548 to avoid the foreclosure as a fraudulent transfer and the Takings Clause to show equity theft.” He also cited a New Jersey state court rule allowing the vacatur of a judgment resulting from “a substantive change in law.”

Deciding that the debtor was entitled to “pipeline retroactivity,” Judge Altenburg granted the debtor’s motion for a preliminary injunction barring the judgment-holder from enforcing rights and remedies against the property.

Remedy

The remedies afforded debtors for violations of constitutional rights are at the forefront following the Supreme Court’s decision in June that chapter 11 debtors are not entitled to refunds for overpayment of fees for the U.S. Trustee System. Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 44 S. Ct. 1588, 219 L. Ed. 2d 210 (Sup. Ct. June 14, 2024). To read ABI’s report, click here.

Judge Altenburg took the better approach by identifying a remedy under state law that entails none of the complexities raised by Hammons Fall that came down just four days earlier. Even so, what would the result have been under Hammons Fall? Was the recovery by the debtor too “small” to warrant a retroactive, monetary remedy for violation of a constitutional right?

Did the Supreme Court announce a rule denying remedies only in a narrow class of constitutional cases under the Bankruptcy Code? Was the debtor only entitled to remedies under state law, or could the debtor have obtained a remedy under federal law for violation of the federal Constitution if the New Jersey courts had not already handed down Roberto?