Tax Sale Certificate Transfer Was Avoidable Preference

Posted by NCBRC - April 24, 2018

A transfer of a tax sale certificate from the initial tax purchaser to the bankruptcy creditor was an avoidable preference where it resulted in the creditor obtaining greater value than it would have received in a chapter 7 liquidation. Hackler v. Arianna Holding Company, LLC., No. 17-6589 (D. N.J. March 22, 2018).

The chapter 13 debtors, Frank and Dawn Hackler, owned real property valued at $335,000. The property was sold in a tax sale to Phoenix Funding Inc. Phoenix sent a notice of foreclosure to the Hacklers then assigned the tax lien to Arianna Holding Company, LLC. The Hacklers filed for chapter 13 bankruptcy but that case was dismissed due to their failure to attend the 341 meeting of creditors. A month later, Arianna obtained a Final Judgment in Foreclosure vesting the property in itself. Within three months, the Hacklers again filed for chapter 13 bankruptcy listing the value of Arianna’s lien at $45,000. The Hacklers filed an adversary proceeding against Arianna seeking to avoid the transfer from Phoenix. The bankruptcy court found the transfer was an avoidable preference under section 547(b) and granted summary judgment in favor of the Hacklers. In re Hackler, 2017 Bankr. LEXIS 2437 (Bankr. D. N.J. Aug. 28, 2017).

On de novo review, the district court began with Arianna’s argument that the bankruptcy court’s decision ignored federalism concerns and ran counter to the holding in BFP v. Resolution Trust Corp., 511 U.S. 531(1994). The court disagreed. BFP involved tension between state foreclosure remedies and section 548’s prohibition of fraudulent transfers where the mortgagee sold the property at issue in a foreclosure sale for significantly less than its value. The Supreme Court held that because the foreclosure sale complied with state law and was neither collusive nor fraudulent the bankruptcy court correctly found that it did not violate section 548.

Unlike BFP, however, this case involved section 547(b)’s prohibition against preferential transfers. Under that section, a pre-petition transfer from one creditor to another may be avoided when the transfer was made:

(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made—(A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if— (A) the case were a case under chapter 7.

The Hackler court found that the transfer of the tax sale certificate between creditors does not give rise to the same federalism concerns implicated in BFP. Under New Jersey law, “the certificate is sold and then after a two-year waiting period, the certificate holder can obtain a foreclosure judgment which vests title directly in the holder without further sale.” In the case of a tax sale, therefore, the public involvement occurs at the initial stage of purchasing the tax debt and the later transfer of the tax sale certificate is a mere transfer of title rather than a foreclosure sale. For that reason, application of section 547(b) to avoid the transfer does not interfere with state foreclosure remedies.

Here, the transfer of the tax certificate met the elements of avoidable preference under section 547(b). Most significantly, as Arianna’s lien was valued at $45,000 and the property was valued at $335,000, Arianna stood to receive far more than it would receive under chapter 7.

The court rejected Arianna’s argument that application of section 547(b) violates the Tax Injunction Act which prohibits a district court from interfering with a state’s ability to collect its taxes finding that avoidance of a tax sale certificate transfer had no effect on the state’s ability to collect taxes as the tax debt was satisfied upon the initial tax sale to Phoenix.

The district court affirmed.

Hackler D NJ opinion March 2018


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