Tax Foreclosure Sale Avoidable

Posted by NCBRC - November 17, 2021

The county’s tax foreclosure sale of the debtor’s real property was avoidable as a fraudulent conveyance, and the debtor’s annuity was properly excluded from the calculation of the debtor’s insolvency for avoidance purposes where the creditor failed to object to the debtor’s claim of exemption with respect to the annuity. DuVall v. County of Ontario, NY, No. 21-6236 (W.D.N.Y. Nov. 9, 2021).

In May, 2017, the debtor’s real property was sold to the Doe appellants in a tax foreclosure sale. In March, 2019, before title transferred, the debtor filed a chapter 13 bankruptcy petition, listing an annuity of an undisclosed amount. The debtor claimed the annuity as exempt under section 522(d)(11)(E) and proposed a 100% plan including paying off the county’s tax claim. The debtor then filed a petition to avoid the tax lien under sections 522(h) and 548(a)(1)(B). The county failed to object to the claimed exemption for the annuity but filed a motion in limine to admit evidence as to its value. The bankruptcy court denied the motion in limine, and, in a separate order, granted the debtor’s motion to avoid the lien. DuVall v. County of Ontario, 2021 Bankr. LEXIS 369 (W.D.N.Y. Bankr. 2021).

On appeal, the district court began with the bankruptcy court’s denial of the motion in limine. The county argued that the valuation of the annuity was necessary to the issue of the debtor’s insolvency which in turn was essential to the fraudulent conveyance claim under section 548(a)(1)(B).

Fraudulent conveyance requires a showing that the debtor was insolvent on the date of the transfer and that the sale resulted in the property receiving less that its reasonably equivalent value.

Exempt property is not included in the solvency calculation and a creditor’s failure to object to a claimed exemption renders that property exempt. In this case, when the creditor failed to object to the debtor’s exemption for the annuity, that property was taken out of the solvency calculation. Therefore, the bankruptcy court properly determined that evidence of the value of the annuity would have been irrelevant to the question of insolvency for fraudulent conveyance purposes.

In so holding, the district court declined to follow Wisotzke v. County of Ontario, 2011 Bankr. LEXIS 321 (Bankr. W.D.N.Y. 2011). In that case, the court held that section 522(h), which permits a debtor to avoid a transfer of property that could have been exempted, requires a court to conduct an independent assessment of whether property was properly exempted without regard to the creditor’s failure to object. The district court here found that the decision in Wisotzke failed to consider Rule 4003 and its interpretation by Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), which create a presumption that claimed exemptions are valid in the absence of a timely objection. The court found that the “County’s failure to object was its own doing, and there are consequences for that neglect.”

The court affirmed the bankruptcy court’s order denying the motion in limine.

The county next argued that BFP v. Resolution Trust, 511 U.S. 531 (1994), creates a presumption that property sold in a foreclosure auction received its reasonably equivalent value.

Like the bankruptcy court, the district court agreed with the decision in Hampton v. County of Ontario, 588 B.R. 671 (W.D.N.Y. 2018), where that court declined to apply BFP in the tax foreclosure context. The Hampton court reasoned that the Supreme Court based its decision in BFP on its finding that the foreclosure sales in question were conducted with protections in place to prevent the “draconian consequences” of strict foreclosure schemes.

The court found the same was not true of tax foreclosures under New York’s Real Property Tax Law. Under that law, the county here took title to the debtor’s property before its sale thereby divesting the debtor of all equity. The court found the debtor’s tax debt of $22,434.40 bore no “rational relationship” to the approximately $91,000.00 sale price of the property and that the difference adhered entirely to the benefit of the county. In addition, the sale lacked a competitive bidding process to ensure that it would result in reasonably equivalent value. The court found the sale in this case represented precisely the “draconian” consequences the BFP Court abhorred.

The court next addressed the issue of the debtor’s standing to launch an avoidance action under section 522(h). That section permits a debtor to avoid a transfer “to the extent that the debtor could have exempted such property.” The county argued that section 522(c)(2)(B) excepts tax liens from the claims for which exempt property cannot be liable and, therefore, that the debtor could not rely on section 522(h) to avoid a lien under section 548(a)(1)(B).

The court disagreed, finding that section 522(c)(2)(B) does not prevent property from being exempted it merely allows exempt property to remain liable for tax liens.

Finally, the court rejected the county’s argument that the tax lien should be avoided only to the extent that such avoidance benefits other creditors. The court found first that the county failed to raise the argument below and therefore waived it. It also found that if the issue were properly before it, it would affirm the bankruptcy court’s decision as avoidance of the lien in its entirety would “greatly increase the probability of a successful reorganization under the Chapter 13 plan.”

The court affirmed.

Duvall WD NY Nov 2021


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