New York Federal Court Upholds Bankruptcy Court Fraudulent Conveyance Finding for Tax Sale Foreclosure – Insolvency/Bankruptcy/Restructuring

The United States District Court for the Western District of New York recently upheld a bankruptcy court’s findings that the in rem tax seizure of the subject property was a fraudulent conveyance. To see Duvall v. Cty. of Ont., 2021 US Dist. LEXIS 216970 (WDNY 2021). The case arose out of the tax foreclosure of the property (the “Property”) for non-payment of taxes that occurred in 2015. In October 2016, the County issued a motion and notices of foreclosure, advising that interested parties had the right to redeem the property. on or before January 13, 2017. The debtor did not redeem the property or respond to the foreclosure petition, and a foreclosure default judgment on the property was entered on March 7, 2017. The property was sold at auction on May 17, 2017, but the title was not actually transferred pending final legal resolution of the case. The debtor filed for bankruptcy on or about March 1, 2019 and submitted a plan on March 13, 2019. The debtor then sued the county, claiming the seizure was a fraudulent conveyance. The bankruptcy court accepted and reversed the tax seizure as a fraudulent conveyance.

The county appealed. Regarding the fraudulent conveyance, the county argued that the court should extend the holding of
BFP c. Trust Resolution 511 US 531 (1994) to this action for tax foreclosure in rem. In that case, the U.S. Supreme Court held that a mortgage foreclosure action that was brought pursuant to state law is, in the absence of a “clear statutory requirement to the contrary”, based on the presumption that the debtor received “reasonably equivalent value” for his property under the Bankruptcy Code. The bankruptcy court here, however, relied on another case from the Western District of New York, Hampton v. Ontario County, 588 BR 671 (WDNY 2018). the
Hampton The court found that New York’s property tax law was precisely the type of “draconian” strict foreclosure regime that the Supreme Court had characterized in BFP as a “relic of the unenlightened past”, as it did not guarantee receipt by the debtor of reasonably equivalent value in circumstances of forced sale. The Court therefore concluded that the proceeds of the forced sale of the Property resulted in a substantial windfall to the County at the expense of all other creditors, thereby rendering the sale a fraudulent conveyance. Accordingly, the district court sided with the bankruptcy court, finding that a state’s interests must be balanced against the firm policy of the Bankruptcy Code favoring equal treatment of creditors, and upheld the annulment by the bankruptcy court of the tax seizure in rem.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.