37 F.4th 859
2d Cir.2022Background:
- Brian and Gliee Gunsalus owned a home free of mortgage but fell behind $1,290 in real property taxes. New York’s RPTL Article 11 strict-foreclosure process was used.
- Ontario County obtained a foreclosure judgment transferring title to the County; the County later sold the house at auction for $22,000 and retained the $20,710 surplus.
- The Gunsaluses filed Chapter 13, proposed a plan to pay the delinquent taxes (plus interest) over time, and claimed the federal homestead exemption.
- They sued in Bankruptcy Court to avoid the transfer as a fraudulent conveyance under 11 U.S.C. § 548(a), arguing they received less than reasonably equivalent value.
- Bankruptcy Court originally dismissed relying on BFP; the district court reversed and remanded; on remand the Bankruptcy Court found the transfer was a fraudulent conveyance. Ontario County appealed to the Second Circuit.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to bring avoidance action under §522(h) despite §522(c)(2)(B) | Gunsaluses: §522(c)(2)(B) only preserves tax lien on exempted property; it does not bar a debtor from avoiding a transfer of title and thus they have standing. | County: §522(c)(2)(B) prevents exempted property from escaping tax liability and thus deprives debtor of standing to avoid the transfer. | Held: Gunsaluses have standing; §522(c)(2)(B) does not bar their avoidance claim because they seek to avoid transfer while remaining liable for the tax lien under their Chapter 13 plan. |
| Whether BFP presumption (foreclosure sale price = reasonably equivalent value) applies to RPTL Article 11 strict tax foreclosure | Gunsaluses: Article 11 strict-foreclosure lacks the sale-based protections BFP relied on, so the transfer is not entitled to the BFP presumption and can be avoided as constructively fraudulent. | County: RPTL provides notice, cure opportunity, and judicial oversight, so BFP’s presumption should extend to tax foreclosures conducted under state law. | Held: BFP does not extend to Article 11 strict tax foreclosure; the transfer was not presumptively for reasonably equivalent value and the Bankruptcy Court correctly set aside the transfer. |
Key Cases Cited
- BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) (foreclosure-by-sale price conducted in conformity with state law is conclusively presumed to be reasonably equivalent value under § 548(a)).
- In re Smith, 811 F.3d 228 (7th Cir. 2016) (tax-foreclosure regimes must compare favorably to mortgage-foreclosure protections in BFP to receive the presumption).
- In re Hackler & Stelzel, 938 F.3d 473 (3d Cir. 2019) (same principle applying BFP distinctions to tax foreclosures).
- In re Harris, 464 F.3d 263 (2d Cir. 2006) (strong presumption against allowing secured creditor to take more than its interest under bankruptcy avoidance principles).
- Bank Brussels Lambert v. Coan (In re AROChem Corp.), 176 F.3d 610 (2d Cir. 1999) (review of legal issues de novo).