Business Law

Gunsalus v. County of Ontario, New York (In re Gunsalus) (2nd Cir.)

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The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:


The Second Circuit Court of Appeals (the Court) recently ruled that a foreclosure of a tax lien under the strict foreclosure standard established by New York law may be set aside as a fraudulent transfer in a bankruptcy proceeding, rejecting the application of BFP v Resolution Trust Corp, 511 U.S. 531 (1994) to this procedure. Gunsalus v County of Ontario, New York (In re Gunsalus), 2022 WL 2296945 (2nd Cir. June 27, 2022).

To view the opinion, click here


Debtors Brian and Gliee Gunsalus (the Debtors) owned a modest home in the County of Ontario, New York (the Property) free and clear of mortgages. After a loss of employment, they defaulted on real estate taxes in the sum of $1,290, which resulted in a tax lien on the Property. After a few months of delinquency, the County of Ontario (the County) instituted proceedings pursuant to Article 11 of New York’s Real Property Tax Law (RPTL) to enforce the lien, which included first listing the Property on the List of Delinquent Taxes, then a petition for an in rem tax foreclosure action. After the Debtors answered, the County moved for summary judgment; the Debtors responded by admitting the debt but asking for more time to pay. The New York Supreme Court denied that request and entered a final judgment of foreclosure, awarding the County possession of and title to the Property.

Subsequent to the County taking title, it scheduled an auction of the Property and sold it to a third party for $22,000. Under New York law, the County was entitled to the full amount paid, minus its cure of the unpaid taxes of $1290, under the “strict foreclosure” authorized by Article 11 of the RPTL. The Debtors thereby lost their entire equity in the Property. About three weeks after the auction, the Debtors filed a Chapter 13 petition, asserting a homestead exemption in the Property and proposing a plan to pay the tax delinquency with interest while keeping the post-petition property taxes current. They then commenced an adversary proceeding against the County, alleging the tax lien foreclosure was a fraudulent conveyance under Section 548 of the Bankruptcy Code (the Code) because they did not receive reasonably equivalent value for the Property. The bankruptcy court felt bound by the holding in BFP and granted the County’s motion to dismiss. BFP was a mortgage foreclosure case which held that a duly conducted mortgage foreclosure resulted in a conclusive presumption that reasonably equivalent value had been paid. The district court reversed and remanded for a trial of the fraudulent conveyance action, where the Debtors prevailed. The County appealed to the Court, which affirmed the judgment for fraudulent conveyance.


The County argued first that the Debtors did not have standing because of the application of § 522(c)(2)(B) of the Code, which provides that certain exempted property remains liable for a tax lien. The Court rejected that argument because the Debtors had acknowledged the liability of the Property for the tax lien and were in fact paying the lien through the plan. Their intent was not to avoid paying the tax lien but instead to avoid the transfer of the Property, which they had standing to do.

The Court then addressed the application of the BFP holding to a strict foreclosure action such as allowed under Title 11 and concluded that it did not apply. The mortgage foreclosure procedure addressed in BFP resulted in a public sale with competitive bidding available to establish whether the sale produced a price that was the reasonably equivalent value of the home. The Supreme Court noted that the price was established by the market place for a distressed sale and any amount paid in excess of the mortgage debt would inure to the benefit of the debtors and their other creditors. As the Court observed, “[c]ritical to that conclusion was the existence of an auction or sale which would permit some degree of market forces to set the value of the property even in distressed circumstances.” The Supreme Court itself had restricted its holding to only mortgage foreclosures, not other forced sales. The Court then highlighted the differences in what happened here from the procedures followed in BFP. Title had transferred to the County merely because of the default on the $1290 of taxes. The subsequent sale provided no salve for the Debtors or their other creditors, because the sale to the third party resulted in a windfall kept by the County. This result was at odds with the purposes of bankruptcy because the estate in general took a hit while only the County profited; the result was not an equitable distribution of available assets to creditors.

In conclusion, because the tax lien foreclosure did not result in the estate receiving reasonably equivalent value for the Property, the Court affirmed the judgment avoiding the fraudulent transfer.


Some commentaries on this case have noted the “circuit split” on the application of BFP to tax lien foreclosures. I do not see a split in the reasoning of the various courts. Each circuit has looked at the applicable state tax lien procedures and tested them against the market place auction which the mortgage foreclosure in BFP compelled. If those procedures assured a public auction where the bid price was tested by competitive bidding, albeit in a distressed sale setting, and further prevented a windfall to the foreclosing creditor by paying any excess proceeds either to the debtors or their other creditors, then BFP applies to establish a presumptively reasonably equivalent value. However, if the state procedure calls for a strict foreclosure, where title passes to the taxing entity merely because of the default and excess proceeds from any sale benefit only the foreclosing entity, then no presumption applies and the transfer may be set aside as fraudulent.

Any practitioner who is contemplating setting aside a tax foreclosure in a bankruptcy should look first at the applicable state procedures to determine whether they achieve the market test and equitable distribution of proceeds that BFP requires.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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