Add the Sixth Circuit to the courts holding that real estate tax foreclosures can be attacked as fraudulent transfers despite BFP v. Resolution Trust, 511 U.S. 531 (1994), where the Supreme Court ruled that mortgage foreclosures are immune from fraudulent transfer attack.
Although the appeals court’s decision was non-precedential, the opinion has equally important language about limitations on the Rooker-Feldman doctrine.
The Circuit Split
Regarding tax foreclosure, the Third, Sixth and Seventh Circuits now hold that they can be attacked as fraudulent transfers. Regarding the Third Circuit, see Hackler v. Arianna Holdings Co., LLC, 938 F.3d 473 (3d Cir. 2019). To read ABI’s report, click here. Regarding the Seventh Circuit, see Smith, infra.
The Fifth, Ninth and Tenth Circuits hold to the contrary, having extended BFP from immunizing mortgage foreclosures to protecting 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.
Delinquent Taxes
In the Sixth Circuit appeal, the debtor had been several years behind in paying real estate taxes on his home. The county obtained a final judgment of foreclosure. Because the debtor did not redeem the property by paying the taxes on time, the city exercised its statutory right to purchase the property for the amount of the unpaid taxes, about $14,500.
At the time, the property was assessed for $104,000. The debtor alleged that the fair market value was $152,000.
The debtor filed a chapter 13 petition and a complaint alleging that the tax sale could be avoided as a constructively fraudulent transfer under Section 548(a)(1)(B). The city filed a motion for summary judgment and won.
The bankruptcy court reasoned that the Rooker-Feldman doctrine barred relitigating the state court foreclosure. The bankruptcy court also said that the fraudulent transfer attack was precluded by BFP.
The debtor appealed. The district court affirmed, but based only on BFP. The debtor appealed again and won a remand.
By the way, the debtor remains in chapter 13, having confirmed a plan.
Rooker-Feldman
In his December 27 opinion, Circuit Judge John M. Rogers first dealt with Rooker-Feldman. Named for two Supreme Court decisions, the doctrine bars lower federal courts from engaging in appellate review of state court judgments.
Judge Rogers quoted the Supreme Court for saying that Rooker-Feldman is a narrow doctrine that should not be applied broadly. He cited the Third Circuit for holding that the court may decide whether foreclosure amounted to a fraudulent transfer under Section 548 while still assuming that the state court foreclosure was proper. See In re Philadelphia Ent. & Dev. Partners, 879 F.3d 492, 500-01 (3d Cir. 2018). To read ABI’s report, click here.
In the case on appeal, Judge Rogers ruled that Rooker-Feldman “does not apply here because this appeal does not involve a review of the merits of a state court judgment.” He said that the debtor’s “alleged injury in this case is not the state court foreclosure judgment, but instead is the fact that he could not use § 548 to avoid the foreclosure as a fraudulent transfer.”
The bankruptcy court therefore erred in barring the fraudulent transfer claim under Rooker-Feldman.
BFP
Next, Judge Rogers tackled the bankruptcy court’s second ground for dismissal, the expansion of BFP to cover real estate tax foreclosures.
Tersely, Judge Rogers said that the “Supreme Court’s rule in BFP does not apply to the facts of this case,” because the Supreme Court was ruling on mortgage foreclosure, not tax foreclosure.
Judge Rogers noted the differences between the two types of foreclosure. In tax foreclosure in Michigan, there is no public auction and no minimum bid. In the case on appeal, the sale price of $14,500 “had no apparent relation to the value of the property and was only about ten percent of the alleged fair-market value.”
Based on the same factual distinctions, Judge Rogers cited the Seventh Circuit for “persuasively” holding “that BFP did not extend to the state court tax foreclosure at issue.” See In re Smith, 811 F.3d 228, 234 (7th Cir. 2016). For ABI’s report, click here.
Judge Rogers held that the two grounds for upholding dismissal of the suit are “insufficient at this juncture.” However, he was unable to award judgment altogether to the debtor.
Remand
There were two undecided issues that precluded the Sixth Circuit from granting judgment in favor of the debtor. First, the lower courts had not decided whether the debtor was insolvent on filing and thus eligible to raise a claim for a constructively fraudulent transfer. Second, there was an unresolved question about the debtor’s ability to attack the sale once the redemption period had elapsed.
So, Judge Rogers reversed and remanded, saying that the “district court may in its discretion further remand the case to the bankruptcy court.”
Add the Sixth Circuit to the courts holding that real estate tax foreclosures can be attacked as fraudulent transfers despite BFP v. Resolution Trust, 511 U.S. 531 (1994), where the Supreme Court ruled that mortgage foreclosures are immune from fraudulent transfer attack.
Although the appeals court’s decision was non-precedential, the opinion has equally important language about limitations on the Rooker-Feldman doctrine.
The Circuit Split
Regarding tax foreclosure, the Third, Sixth and Seventh Circuits now hold that they can be attacked as fraudulent transfers. Regarding the Third Circuit, see Hackler v. Arianna Holdings Co., LLC, 938 F.3d 473 (3d Cir. 2019). To read ABI’s report, click here. Regarding the Seventh Circuit, see Smith, infra.
The Fifth, Ninth and Tenth Circuits hold to the contrary, having extended BFP from immunizing mortgage foreclosures to protecting 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).