The Ninth Circuit joined the Fifth and Tenth by holding that a tax sale conducted in accordance with state law cannot be set aside as a fraudulent transfer for less than reasonably equivalent value.
A company owned real property but did not pay real estate taxes for years. The company filed a chapter 11 petition a month after the county sold the property in a tax sale. The newly minted debtor in possession immediately sued the county and the buyer to set aside the tax sale as a fraudulent transfer under the Bankruptcy Code and California law.
The bankruptcy court dismissed the complaint and was upheld by the Bankruptcy Appellate Panel. Circuit Judge Richard R. Clifton agreed with the BAP that the debtor could not state a claim for relief since there was no allegation that procedures followed in the tax sale failed to comply with state law.
In 1994, the Supreme Court held in BFP v. Resolution Trust Corp. that a regularly conducted foreclosure sale cannot result in a fraudulent transfer. Judge Clifton said that the “rationale and policy considerations” underlying BFP are “just as relevant in the California tax sale context.”
Even though the price realized at the sale might be low, Judge Clifton upheld the lower courts and extended the holding in BFP to cover tax sales conducted in accordance with state law.
The complaint initially did not allege the amount of the inadequacy of the price. The debtor argued that the bankruptcy judge should have given leave to amend the complaint rather than dismiss the suit outright.
In his Sept. 8 opinion, Judge Clifton found no error in refusing to allow an amendment because the price was irrelevant since the complaint did not allege any procedural defect in the sale.
Judge Clifton distinguished several bankruptcy court decisions not extending BFP to tax sales because those cases entailed procedural deficiencies.
Judge Clifton added spice to the opinion by explaining that the debtor’s name, Tracht Gut LLC, derives from the Yiddish phrase “Tracht gut, vet zein gut,” meaning, “Think good, and it will be good.”