The United States District Court for the Western District of New York recently upheld the findings of a Bankruptcy Court, which held that the in rem tax foreclosure of the subject property was a fraudulent conveyance. See Duvall v. Cty. of Ont., 2021 U.S. Dist. LEXIS 216970 (W.D.N.Y. 2021). The matter arose from the tax foreclosure of property (the “Property”) for the non-payment of taxes arising in 2015. In October 2016, the County issued a foreclosure petition and notices, advising that interested parties had the right to redeem the Property on or before January 13, 2017. The debtor did not redeem the Property or answer the foreclosure petition, and a default judgment of foreclosure on the Property was entered on March 7, 2017. The Property was sold at auction on May 17, 2017, but title was not actually transferred pending final legal resolution of the matter. The debtor filed a bankruptcy petition on or about March 1, 2019, and submitted a plan on March 13, 2019. The debtor then brought suit against the County, claiming that the foreclosure was a fraudulent conveyance. The Bankruptcy Court agreed and voided the tax foreclosure as a fraudulent conveyance.
The County appealed. Regarding the fraudulent transfer, the County argued that the Court should extend the holding of BFP v. Resolution Trust 511 U.S. 531 (1994) to this in rem tax foreclosure action. There, the U.S. Supreme Court held that a mortgage foreclosure action that has been conducted in accordance with state law is, absent a “clear statutory requirement to the contrary,” entitled to a presumption that the debtor had received “reasonably equivalent value” for their property under the Bankruptcy Code. The Bankruptcy Court here, however, relied on another Western District of New York case, Hampton v. County of Ontario, 588 B.R. 671 (W.D.N.Y. 2018). The Hampton court found that New York’s Real Property Tax Law was precisely the kind of “draconian” strict foreclosure regime that the Supreme Court had characterized in BFP as a “relic of the unenlightened past,” as it did not ensure the debtor’s receipt of a reasonably equivalent value under forced-sale circumstances. The Court here thus found that the proceeds of the forced sale of the Property resulted in a substantial windfall to the County at the expense of all other creditors, which rendered the sale a fraudulent conveyance. Accordingly, the District Court agreed with the Bankruptcy Court, finding that a state’s interests must be balanced against the Bankruptcy Code’s strong policy favoring equal treatment of creditors, and upheld the Bankruptcy Court’s voiding of the in rem tax foreclosure.