588 B.R. 671
W.D.N.Y.2018Background
- Gunsaluses and Hamptons each owned unencumbered homes but defaulted on real property taxes; counties commenced in rem tax foreclosures under New York RPTL and obtained judgments entitling the county to possession and all equity.
- Each debtor filed Chapter 13 plans and adversary proceedings under 11 U.S.C. §§ 548(a)(1)(B) and 522(h) to avoid the tax-foreclosure transfers as constructively fraudulent; auctions were held but bidders were notified of pending litigation.
- Sales produced large surpluses (approx. $20k each) to which Ontario County claimed entitlement under RPTL; debtors claimed federal homestead exemptions and sought to recover property value for the bankruptcy estate.
- Bankruptcy Court dismissed the adversary complaints, concluding BFP v. Resolution Trust Corp. created a conclusive presumption that compliance with state foreclosure procedures establishes "reasonably equivalent value," so no avoidable transfer.
- District Court reviewed de novo, found appellants had standing to bring avoidance actions under § 522(h), and held BFP's presumption does not automatically extend to strict tax-foreclosure regimes like New York's RPTL.
- District Court reversed dismissal and remanded for further proceedings, emphasizing the RPTL's strict-foreclosure character, the lack of a forced-sale market, and the risk of a county windfall that prejudices other creditors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to bring §522(h)/§548 avoidance action | Debtors can claim federal homestead exemption and thus have standing to avoid transfers | County: tax lien bars homestead exemption and defeats standing | Held: Debtors have standing; §522(c)(2)(B) does not bar §522(h) avoidance here |
| Whether foreclosures under NY RPTL provide "reasonably equivalent value" per §548 | Foreclosure under RPTL is a transfer for less than reasonably equivalent value because RPTL is a strict-foreclosure regime that eliminates market forces | County: BFP presumption applies if state foreclosure procedures were followed; thus value is the sale price | Held: BFP presumption does not automatically apply to RPTL tax foreclosures; factual and legal differences matter |
| Applicability of BFP v. Resolution Trust Corp. to tax-foreclosure sales | BFP expressly limited to mortgage foreclosures; RPTL differs materially (no market-driven forced-sale price) so BFP should not control | County: BFP requires only compliance with state foreclosure law, not specific auction features | Held: BFP's rationale does not control here; the Court declines to extend its conclusive presumption to NY tax foreclosures |
| Remedy / Effect of allowing avoidance | Debtors: avoiding transfers prevents county windfall, preserves debtor equity for other creditors under bankruptcy policy | County: avoiding would impede tax collection and cloud title; county retained surplus by statute | Held: Bankruptcy Code policy favoring equal creditor treatment outweighs speculative county interests; remand for merits consistent with decision |
Key Cases Cited
- BFP v. Resolution Trust Corp., 511 U.S. 531 (Sup. Ct. 1994) (held foreclosure-sale price is conclusive evidence of reasonably equivalent value where state foreclosure procedures were followed; limited to mortgage foreclosures)
- In re Harris, 464 F.3d 263 (2d Cir. 2006) (expressed concern about allowing secured creditors or tax collectors to receive windfalls under strict-foreclosure schemes)
- In re McMahon, 129 F.3d 93 (2d Cir. 1997) (emphasizes Bankruptcy Code policy favoring equal treatment of creditors)
- In re Chase, 328 B.R. 675 (Bankr. D. Vt. 2005) (discusses problems when strict-foreclosure statutes permit a creditor to take property worth far more than the debt, disadvantaging other creditors)
- In re Murphy, 331 B.R. 107 (Bankr. S.D.N.Y. 2005) (explains that tax-lien foreclosure sale price is not reliable evidence of market value where market forces are absent)