On an issue where the courts are divided, District Judge Peter G. Sheridan of Trenton, N.J., upheld Bankruptcy Judge Christine M. Gravelle and ruled that a tax foreclosure sale can be set aside as a preference under Section 547.
Judges Sheridan and Gravelle agreed that 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 sale cannot be avoided as a fraudulent transfer under Section 548. Writing for the high court, the late Justice Antonin Scalia was concerned that applying fraudulent transfer law to mortgage foreclosures would place foreclosures under a federally created cloud.
In the New Jersey case, the city held a tax certificate 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 sued to set aside the tax lien foreclosure as a preference. They also filed a chapter 13 plan promising to pay all creditors in full.
Granting the debtors’ motion for summary judgment in August 2017, Judge Gravelle said that the tax lien creditor in substance conceded 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 that it would be paid in chapter 7.
On appeal, Judge Sheridan adopted Judge Gravelle’s findings of fact. Like Judge Gravelle, he also focused on BFP, the primary issue that the tax-lien creditor raised on appeal.
In his March 22 opinion, Judge Sheridan gave several reasons why BFP was distinguishable. BFP dealt with a fraudulent transfer claim, when the New Jersey case turned on preference law. In addition, the concern in BFP “that established state foreclosure laws may be undermined by conflicting federal law is not at issue here,” the judge said.
Quoting another New Jersey bankruptcy judge, Judge Sheridan said that foreclosure sales entail public bidding based on the value of the property, while bidding for tax certificates focuses on “‘the accrued taxes and interest thereon, not the value of the property.’”
Furthermore, a New Jersey tax certificate sale is akin to strict foreclosure, which does “not result in a public sale, but a ‘straight transfer of title,’” Judge Sheridan said.
Finally, Judge Sheridan found no prejudice to the purchaser, who would nonetheless recover “the initial lien (including 18% interest).”
Judge Sheridan also ruled that the Tax Injunction Act, 28 U.S.C. § 1341, did not apply because the taxes were paid when the purchaser bought the tax certificate.
The purchaser of the tax sale certificate is appealing to the Third Circuit.
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 opinion, click here.
To read ABI’s discussion of Judge Gravelle’s decision, click here.