On a question where the circuits are split, another district judge in Rochester, N.Y., has held that an in rem tax foreclosure of real property can be set aside as a fraudulent transfer for lack of reasonably equivalent value under Section 548(a)(1)(B).
In technical terms, District Judge David G. Larimer held that BFP v. Resolution Trust, 511 U.S. 531 (1994), does not apply to tax foreclosures. BFP held that mortgage foreclosures are immune from fraudulent transfer attack.
As it now stands, the Third Circuit allows tax foreclosures to be avoided as fraudulent transfers. See Hackler v. Arianna Holdings Co., LLC, 938 F.3d 473 (3d Cir. 2019). To read ABI’s report, click here.
The Fifth, Ninth and Tenth Circuits hold to the contrary, having extended BFP from mortgage foreclosures to protect tax foreclosures. The most recent of those decisions came from the Ninth Circuit. See Tracht Gut, LLC v. Los Angeles County Treasurer, 836 F.3d 1146 (9th Cir. 2016). To read ABI’s report on Tracht Gut, click here.
In the appeal before Judge Larimer, the debtor owed about $22,500 in real estate taxes. More than two years before bankruptcy, the county issued a tax foreclosure petition giving the debtor the ability to redeem the property before a date in January 2017. When the debtor did not redeem, the county obtained a default judgment of foreclosure in March 2017.
The debtor unsuccessfully attempted to set aside foreclosure in state court, but the state appellate court affirmed. While the litigation in state court was pending, the county sold the property to a third party in May 2017. However, title was not transferred while the litigation remained pending.
The debtor filed a chapter 13 petition on March 1, 2019, alongside a plan to pay the real estate taxes in full, together with all unsecured claims. The debtor also commenced an adversary proceeding to avoid the tax foreclosure as a constructive fraudulent transfer.
After trial, Bankruptcy Judge Paul R. Warren avoided the tax sale as a constructively fraudulent transfer, and the county appealed. Judge Larimer upheld Judge Warren in a November 9 opinion.
Judge Larimer acknowledged the split of authorities. Another district judge in Rochester, District Judge Frank P. Geraci, Jr., had ruled in Hampton v. County of Ontario, 588 B.R. 671 (W.D.N.Y. 2018), that BFP did not apply to tax foreclosures. To read ABI’s report on Hampton, click here.
Judge Larimer was persuaded by Judge Geraci’s analysis. He noted how the Supreme Court in BFP “explicitly limited” its holding to mortgage foreclosures.
Like Judge Geraci, Judge Larimer said that tax foreclosure “was precisely the kind of ‘draconian’ strict foreclosure regime that the Supreme Court had characterized in BFP as a relic of the unenlightened past.” [Emphasis in original.]
Unlike mortgage foreclosures, counties in New York take title in tax foreclosure before a sale and deprive the owner of all equity. In a subsequent sale, there are no bidding rules or procedures to ensure receipt of reasonably equivalent value.
In the case on appeal, Judge Larimer noted that the $22,500 in taxes “bore no resemblance” to the $91,000 value of the property.
In sum, Judge Larimer affirmed Judge Warren by holding that “BFP’s holding does not operate to shield the County from the debtor’s claim of fraudulent conveyance, in light of the competing interests and the particular forced sale scheme presented here.”
On a question where the circuits are split, another district judge in Rochester, N.Y., has held that an in rem tax foreclosure of real property can be set aside as a fraudulent transfer for lack of reasonably equivalent value under Section 548(a)(1)(B).
In technical terms, District Judge David G. Larimer held that BFP v. Resolution Trust, 511 U.S. 531 (1994), does not apply to tax foreclosures. BFP held that mortgage foreclosures are immune from fraudulent transfer attack.
As it now stands, the Third Circuit allows tax foreclosures to be avoided as fraudulent transfers.