On an issue dividing the lower courts, Bankruptcy Judge Christine M. Gravelle of Trenton, N.J., ruled that a tax foreclosure sale can be set aside as a preference under Section 547.
Judge Gravelle spent most of her opinion explaining why BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), was not controlling. In BFP, the Supreme Court held that a regularly conducted mortgage foreclosure cannot be avoided as a fraudulent transfer under Section 548.
In the case before Judge Gravelle, the city held a tax sale for unpaid municipal taxes on the debtors’ property. Two years later, the non-governmental entity that purchased the tax liens initiated a foreclosure action under New Jersey law. The property was purchased at the ensuing foreclosure sale by the entity that held the tax lien.
The debtors filed a chapter 13 petition less than 90 days after the foreclosure sale. They scheduled the property as being worth $335,000 and listed the tax lien creditor as being owed $45,000. There were no mortgages on the property, although there were about $90,000 in other judgment liens.
The debtors filed suit to set aside the tax lien foreclosure as a preference. They also filed a chapter 13 plan promising to pay all creditors in full.
In her Aug. 28 opinion, Judge Gravelle said that the tax lien creditor conceded in substance that all elements of a preference were present, in part because the creditor would take $335,000 in property in exchange for a $45,000 debt, thus realizing more than the $45,000 it would be paid in chapter 7.
Rather than challenge the elements of a preference, the creditor chiefly argued that the “federalism concerns” from BPF should apply as much to tax foreclosures as to mortgage foreclosures.
Judge Gravelle pointed out that the Supreme Court immunized mortgage foreclosures from attack as fraudulent transfers. The high court, she said, “recognized that ‘[t]he considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.’”
She also emphasized how the Supreme Court was construing “reasonably equivalent value,” a concept in fraudulent transfer law that has no bearing in preferences, where the primary concern is barring creditors from receiving more than they would in chapter 7.
The courts are divided on whether BFP immunizes tax sales from fraudulent transfer attack as it does mortgage foreclosures. The lower courts are also divided, Judge Gravelle said, on whether BFP should be extended to preferences.
In BFP, the Supreme Court was concerned that applying fraudulent transfer law to mortgage foreclosures would place foreclosures under a federally created cloud.
Setting aside the tax foreclosure under Section 547, Judge Gravelle said that the same considerations did not exist. In New Jersey, state law gives an owner three months to challenge a tax foreclosure. “There is no creation of an additional cloud on title,” since the preference power also looks back 90 days, Judge Gravelle said.
The Ninth, Fifth and Tenth Circuits have held that a tax sale conducted in accordance with state law cannot be set aside as a fraudulent transfer for less than reasonably equivalent value. To read ABI’s discussion of the Ninth Circuit’s Tracht Gut case opinion, click here.