Property Purchased in Tax Sale for Less than Its Value Is Preferential Transfer

Posted by NCBRC - October 9, 2019

The Third Circuit affirmed that because New Jersey’s tax foreclosure sales are not tied to the value of the property, transfer of property worth more than what the purchaser would have received in a chapter 7 distribution may be avoided as a preferential transfer. Hackler v. Arianna Holdings Company, LLC., No. 18-1650 (3rd Cir. Sept. 12, 2019). NCBRC filed an amicus brief in support of the debtors.

Frank and Dawn Hackler failed to pay taxes on their residence. The property was sold in a tax sale pursuant to New Jersey tax foreclosure procedures under which the public bids only on the interest rate for the unpaid taxes with the property going to the lowest bidder. A tax purchaser won the bid, then sold the property, valued at $335,000, to Arianna Holding Co. LLC. for $45,000. The Hacklers filed for chapter 13 bankruptcy and the trustee sought to avoid the transfer to Arianna as a preferential transfer under section 547(b). The bankruptcy court granted the trustee’s motion and the district court affirmed (blogged here). Arianna appealed to the Third Circuit.

Under section 547(b), “a transfer may be voided as preferential if it (1) was made to or for the benefit of a creditor, (2) was made for an antecedent debt, (3) was made while the debtor was insolvent, (4) was made on or within 90 days before filing for bankruptcy, and (5) enabled the creditor to receive more than it would have received in a Chapter 7 liquidation proceeding.” In this case, it was undisputed that the transfer was made to the tax certificate holder for a debt that arose before the Hacklers’ bankruptcy petition, that the transfer was made while the Hacklers were insolvent and within 90 days of the petition, and that Arianna received substantially more than it could have obtained in a chapter 7 case. The court found, therefore, that the facts fell within the language of section 547(b) and, absent countervailing considerations, mandated the result reached by the lower courts.

Like the district court, the Third Circuit panel rejected Arianna’s argument that federalism considerations dictated a different result. It distinguished BFP v. Resolution Trust Corp., 511 U.S. 531(1994), which dealt with section 548 and involved interpretation of the language in that section that the transfer must be for “reasonably equivalent value.” In finding that the foreclosure sale of the debtor’s property complied with state law and was neither collusive nor fraudulent, the Supreme Court in BFP held that it satisfied the “reasonably equivalent value” requirement without regard to actual value. A tax sale under New Jersey law carries no such presumption and, in fact, has little relationship to the actual value of the property. Therefore, the court concluded that Arianna’s argument that BFP governs this case, “is precluded by the plain language of the statute and the differences between the mortgage foreclosure at issue in BFP and the tax sale foreclosure here.”

The court also agreed with the district court’s rejection of Arianna’s argument that the ruling violated the Tax Injunction Act by interfering with the collection of state taxes. The court found that the specific provision of the Bankruptcy Code permitting unraveling preferential transfers took effect over the more general language of the Tax Injunction Act.

The court concluded that “the statute is unambiguous. Applying its straightforward terms does not lead us to an absurd result. Thus, our reading of it ends there.”

Hackler Decision 3rd Cir. Sept 2019



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