February 13, 2015
Authored by: Beth Haden and Mark Stingley
On November 6, 2014, the United States Bankruptcy Court for the Western District of New York in Canandaigua Land Dev., LLC v. Cnty. of Ontario, ruled that an in rem tax foreclosure conducted by a county—in full compliance with Article 11 of the New York Real Property Tax Law—was capable of being set aside in bankruptcy as a constructively fraudulent transfer, pursuant to 11 U.S.C. § 548(a)(1)(B).
The County had foreclosed on a real property tract, 642-732 pdfvalued at approximately $300,000 to $425,000, in order to satisfy a tax debt of $16,595. Further, the sale was conducted only a few hours after the debtor filed its Chapter 11 petition. The debtor argued that the County’s foreclosure of its tax lien constituted a constructively fraudulent transfer because the debtor was rendered insolvent by the transfer and received less than reasonably equivalent value in exchange for the transfer of the property to the County.
The Canandaigua court distinguished the United States Supreme Court case BFP v. Resolution Trust Co. (holding that a properly-conducted, non-collusive mortgage foreclosure sale is entitled to a presumption of reasonably equivalent value) on the grounds that the tax foreclosure process did not include the safeguards provided in a mortgage foreclosure. The Canandaigua court noted that, by footnote, the BFP Court emphasized that its decision and analysis “cover[ed] only mortgage foreclosures of real estate” and that “[t]he considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.”
In the wake of the Supreme Court’s BFP decision, lower courts have reached varied conclusions when applying the BFP rationale outside the context of mortgage foreclosures. jn0-643 dumps The Canandaigua court concurred with the rationale of the majority of courts facing this question and held that taxing authorities are not entitled to a conclusive presumption of having provided reasonably equivalent value when taking title to a debtor’s property—pre-petition—as a result of an in rem or strict tax foreclosure conducted in full compliance with Article 11 NYRPTL.
Debtors should consider this case a reminder as to the possible limits of the BFP rationale when faced with a pre-petition forced sale of property.