Smith, Keith v. Sipi, LLC
811 F.3d 228
7th Cir.2016Background
- Dawn Smith inherited a Joliet, Illinois home subject to unpaid 2000 property taxes; county sold the tax lien in 2001 and SIPI, LLC bought the lien by paying roughly $5,000 (taxes + costs) and received a Certificate of Purchase.
- SIPI later obtained a tax deed (2005) after no redemption; SIPI sold the property to Midwest Capital Investments for $50,000; Midwest holds record fee simple title.
- The Smiths filed Chapter 13 in April 2007 and sued to avoid the tax-sale transfer as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B) (constructive fraud: transfer for less than reasonably equivalent value).
- Bankruptcy court found the Illinois interest-rate tax sale did not enjoy the BFP foreclosure-sale safe harbor and avoided the transfer; awarded the Smiths recovery limited to one $15,000 Illinois homestead exemption; treated SIPI as initial transferee but held Midwest (subsequent transferee) protected by § 550(b).
- District court reversed on the BFP issue, holding compliance with Illinois tax-sale procedures established reasonably equivalent value; the Seventh Circuit reviews de novo and affirms the bankruptcy court.
Issues
| Issue | Plaintiff's Argument (Smith) | Defendant's Argument (SIPI/Midwest) | Held |
|---|---|---|---|
| Does BFP (foreclosure-sale safe harbor) bar § 548 challenges to Illinois tax sales using the interest-rate method? | BFP should not apply; Illinois interest-rate bidding does not reflect property value so § 548 applies. | BFP should extend to tax-sales that comply with state law to preserve title stability and tax-sale markets. | BFP does not extend to Illinois interest-rate tax sales; § 548 inquiry applies because bidding determines redemption interest, not market value. |
| Standing to assert avoidance claim (which Smiths may sue)? | Both Dawn and Keith have standing (Keith obtained title in divorce; Dawn may proceed under substitution rules). | SIPI: procedural changes and divorce undermine standing. | Both Smiths have standing; bankruptcy court properly allowed both to pursue the claim. |
| Proper measure of recovery if transfer avoided (homestead exemptions vs full value)? | Smiths seek full recovery (argue debtor/trustee powers should allow full value). | Defendants: recovery limited by Illinois homestead exemption(s) properly claimed at filing. | Recovery limited to one $15,000 Illinois homestead exemption (measured at bankruptcy filing); debtors cannot recover full property value for themselves. |
| Liability of SIPI and Midwest under § 550 (initial vs subsequent transferee defenses)? | SIPI (initial transferee) liable; Midwest argued it purchased in good faith for value without knowledge. | SIPI contends county was initial transferee or that § 550 shouldn’t apply to tax buyers; Midwest claims § 550(b) defense (value, good faith, no knowledge). | SIPI is the initial transferee and liable. Midwest, as subsequent transferee, proved § 550(b) defense (took for value, in good faith, without knowledge) — no liability. |
Key Cases Cited
- BFP v. Resolution Trust Corp., 511 U.S. 531 (Sup. Ct.) (foreclosure-sale price conclusively reasonably equivalent value when state foreclosure procedures with competitive bidding are followed)
- Bonded Financial Servs. v. European Am. Bank, 838 F.2d 890 (7th Cir.) (definition of transferee and allocation of inquiry/risk between initial and subsequent transferees under § 550)
- In re Belcher, 551 F.3d 688 (7th Cir.) (Illinois homestead exemption: title at filing controls exemption eligibility)
- In re Grandote Country Club Co., 252 F.3d 1146 (10th Cir.) (BFP applied to Colorado overbid tax-sale system that uses competitive bidding for property value)
- T.F. Stone Co. v. Harper, 72 F.3d 466 (5th Cir.) (applied BFP to Oklahoma overbid tax-sale where county temporarily took title)