613 B.R. 1
Bankr. W.D.N.Y.2020Background:
- Debtors Gliee and Brian Gunsalus owned a home in Phelps, NY; unpaid 2014 real estate taxes totaled $1,290.29, triggering an Article 11 tax foreclosure.
- Ontario County obtained a foreclosure judgment on June 9, 2016 and, by operation of RPTL §1136, title transferred to the County; there were no mortgages or other encumbrances.
- Court-found fair market value of the property at the time of transfer was $28,000 (appraisals) and a post-foreclosure auction produced a $22,000 bid; County retained any surplus under state law.
- The Gunsaluses were insolvent on the transfer date; their liabilities exceeded assets under the Bankruptcy Code formula.
- Debtors filed Chapter 13 and an adversary action under 11 U.S.C. §§522(h) and 548(a)(1)(B) to avoid the transfer; trial was held and the Court granted avoidance, ordered reconveyance under §550(a), and overruled the County’s objection to the federal homestead exemption.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the tax-foreclosure transfer was constructively fraudulent because debtors received less than reasonably equivalent value | Gunsalus: Title worth ~$28,000 was lost in exchange for satisfaction of a $1,290.29 lien; this is not reasonably equivalent. | County: Tax-foreclosure creates a presumption of reasonably equivalent value; the lien satisfied was not disproportionately small; any surplus is exempt so avoidance aids only debtor. | Court: FMV $28,000; consideration equaled ~4.6–5.9% of FMV which is not reasonably equivalent; transfer avoidable under §§522(h) and 548(a)(1)(B). |
| Whether the Gunsaluses were insolvent at the time of transfer | Gunsalus: Under §101(32)(A) formula, assets were essentially $0 and liabilities exceeded $20,000. | County: Largely conceded insolvency but challenged some asset calculations (included exempt assets). | Court: Debtors were insolvent on June 9, 2016. |
| Availability of the federal homestead exemption and whether avoidance would only benefit the debtor | Gunsalus: Claimed federal homestead exemption under §522(b); avoiding transfer preserves fully exempt surplus and supports fresh start while lien remains enforceable under §522(c)(2)(B). | County: §522(c)(2)(B) renders exemption unavailable; cites Murphy to argue any recovery should be limited so creditors, not debtor, get surplus. | Court: Overruled County; federal exemption properly claimed, §522(c)(2)(B) leaves lien intact but does not bar the exemption or §522(h) avoidance; Murphy distinguishable. |
| Appropriate remedy under §550(a) — reconveyance vs monetary recovery | Gunsalus: Seek reconveyance of title and possession to preserve modest housing and enable Chapter 13 plan performance. | County: Argued for limits on recovery (e.g., allow County retain surplus or money judgment). | Court: Ordered cancellation of any Treasurer’s deed, voided auction transfer, directed County to reconvey title to Gunsaluses under §550(a); County may reinstate the tax lien to be repaid through the Chapter 13 plan. |
Key Cases Cited
- Barber v. Golden Seed Co., 129 F.3d 382 (7th Cir. 1997) (sets out comparing value transferred to value received for reasonably equivalent value analysis)
- Matter of Fairchild Aircraft Corp., 6 F.3d 1119 (5th Cir. 1993) (discusses valuation in fraudulent conveyance context)
- In re Smith, 811 F.3d 228 (7th Cir. 2016) (addresses purchaser percentage of FMV and scope of relief under §550)
- In re Bundles, 856 F.2d 815 (7th Cir. 1988) (reasonably equivalent value depends on case-specific facts including FMV)
- In re Murphy, 331 B.R. 107 (Bankr. S.D.N.Y. 2005) (limited recovery-cap where debtor had no exemption rights under state law)
- Clinton Cty. Treasurer v. Wolinsky, 511 B.R. 34 (N.D.N.Y. 2014) (setting aside tax-foreclosure transfer where lien greatly understated FMV)
- Wisotzke v. Ontario Cnty., 409 B.R. 20 (W.D.N.Y. 2009) (discusses county as initial transferee under RPTL §1136)
- In re Tronox Inc., 464 B.R. 606 (Bankr. S.D.N.Y. 2012) (broad construction of "benefit of the estate" under §550)
- In re Messina, 687 F.3d 74 (3d Cir. 2012) (addresses debtors’ ability to benefit from avoidance powers)
- In re Johnson, 449 B.R. 7 (Bankr. W.D.N.Y. 2011) (New York homestead exemption subordinated to tax liens for certain §522(g) purposes)
- County of Clinton v. Warehouse at Van Buren St., Inc., 496 B.R. 278 (N.D.N.Y. 2013) (tax-foreclosure avoidance where lien satisfied was small relative to FMV)
- In re Wentworth, 221 B.R. 316 (Bankr. D. Conn. 1998) (setting aside transfer of property to satisfy a modest tax lien)