A tax foreclosure sale in New York can be a fraudulent transfer, according to Chief District Judge Frank P. Geraci, Jr., of Rochester, N.Y.
Judge Geraci ruled in two substantially identical appeals. In both, the debtors owned their homes free and clear of mortgages. Having lost their jobs, both debtors stopped paying real estate taxes.
After waiting the prescribed time under New York law, Ontario County initiated tax foreclosure actions and later obtained judgments entitling the county to possession of and all equity in the properties.
Before the county sold the properties at auction, both debtors filed chapter 13 petitions and submitted plans promising to pay the real estate taxes in full. Despite the debtors’ bankruptcy filing, the county conducted auctions. In addition to paying the tax arrears, the auction prices would generate surpluses of some $21,000 in one case and $22,000 in the other. Under state law, the surpluses would go to the county, not to the debtors.
The debtors filed adversary proceedings to declare that the tax foreclosures were constructively fraudulent transfers under Section 548(a)(1)(B). The county agreed by stipulation not to transfer the titles until resolution of the adversary proceedings.
The bankruptcy court dismissed both adversary proceedings, largely on the authority of the Supreme Court’s decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). In BFP, the late Justice Antonin Scalia ruled that a regularly conducted mortgage foreclosure sale cannot be avoided as a fraudulent transfer under Section 548. He was concerned that applying fraudulent transfer law to mortgage foreclosures would place foreclosures under a federally created cloud.
In his July 18 opinion, Judge Geraci reversed and remanded, saying that the “facts supporting BFP’s holding do not exist here.”
Judge Geraci noted how BFP specifically limited its holding to mortgage foreclosures and said that the holding had no “bearing” on other forced sales, such as tax liens.
Judge Geraci quoted BFP’s reference to the evolution of mortgage foreclosures so they now “‘avoid the draconian consequences of strict foreclosure,’” where any surplus would go to the lender but not to the owner. He said that the market is different and commands lower prices in tax foreclosure sales, compared to mortgage foreclosures. As a result, he cited a New York bankruptcy judge for the proposition that the amount of a tax lien is no evidence of a property’s worth, unlike the amount of a mortgage.
In substance, Judge Geraci equated tax foreclosure to strict foreclosure. Although he said “[r]easonable minds may differ over the applicability of BFP,” he reinstated the fraudulent transfer suits “given BFP’s express reluctance to extend its holding to tax foreclosures and the compelling reasons that other courts in this circuit have given for refusing to do so.”
Judge Geraci only held that the complaints stated a claim and did not rule on the merits. Still, his opinion seems to imply that the foreclosures would be set aside for lack of reasonably equivalent value, assuming the debtors were insolvent.
Judge Geraci’s opinion lines up with Arianna Holding Co. LLC v. Hackler (In re Hackler), 17-6589, 2018 BL 99026 (D.N.J. March 22, 2018), where District Judge Peter G. Sheridan of Trenton, N.J., held in March that a tax foreclosure sale in New Jersey can be set aside as a preference under Section 547. Judge Sheridan was upholding Bankruptcy Judge Christine M. Gravelle. To read ABI’s discussion of Arianna, click here.