The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A district court in New Jersey has held that the transfer of title to real property to a tax sale certificate holder constituted an avoidable preferential transfer, and the Supreme Court’s holding in BFP was distinguishable because it dealt with fraudulent transfers, rather than preferences. [In re Hackler, 2018 Westlaw 1440326 (D. N.J.).]
FACTS: Two individual property owners were delinquent on their real estate taxes.The municipality held a tax sale; the certificate was sold to an investor. The investor sent a foreclosure notice to the property owners and then assigned its tax sale certificate to an assignee.
After the property owners failed to redeem the tax sale certificate, a final judgment of foreclosure was entered, vesting title in the assignee that had purchased the tax sale certificate. The value of the property greatly exceeded the amount of money that the assignee had paid for the tax sale certificate.
Less than three months after title had been transferred to the assignee, the property owners filed a Chapter 13 petition. They then filed an adversary proceeding against the assignee, claiming both that the tax sale was a fraudulent transfer and that it was an avoidable preference.
The bankruptcy court granted summary judgment in favor of the debtors, holding that the transfer of title was preferential under 11 U.S.C.A. §547(b). The district court affirmed.
REASONING: The assignee, as the putative titleholder, claimed that the result below was precluded by BFP v. Resolution Trust Corporation, 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), which had held that a regularly-conducted mortgage foreclosure does not constitute a fraudulent transfer. The district court reasoned, however, that BFP was distinguishable because this case involved preferences, rather than fraudulent transfers. Also, under New Jersey law, there were significant procedural differences between mortgage foreclosures and tax sale certificate foreclosures.
AUTHOR’S COMMENT: Very clever! Note that the debtors in this case filed their Chapter 13 petition within 90 days of the transfer of title to the tax sale certificate holder, thus bringing the matter into the realm of §547. This was not a classic preference case, since it involved far more than the mere repayment of an antecedent debt; here, the tax sale certificate holder would have reaped a windfall if the debtors had not been able to unring the bell.
The tax sale certificate holder in this case has appealed to the Third Circuit. Assuming that this case is upheld on appeal and that the Third Circuit rules that BFP is indeed distinguishable, we can expect other tax defaulters (and their alert counsel) to emulate this novel strategy.
For discussions of cases involving tax sales as fraudulent transfers, see 2016-43 Comm. Fin. News. NL 86, Tax Sale Conducted in Accordance with State Law Conclusively Established that Sale Was For “Reasonably Equivalent Value,” and 2014-45 Comm. Fin. News. NL 90, Property Sold at Regularly-Conducted Tax Sale is Deemed to Have Been Transferred for Reasonably Equivalent Value.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.