In BFP v. Resolution Tr. Corp., 511 U.S. 531 (1994), the Supreme Court held that a mortgage foreclosure sale conducted in accordance with state law was shielded from avoidance under the Bankruptcy Code’s fraudulent conveyance provision, 11 U.S.C. § 548. In the wake of BFP, the federal courts have wrestled with the question of whether tax sales—distinct from foreclosures, but similar in concept—may be avoided in bankruptcy. Two strands of analysis have emerged: whether tax sales may be set aside as a fraudulent conveyance under section 548, and whether tax sales may be attacked as a preferential transfer under section 547. In both strands, the federal courts have continued to reach divergent, and often contradictory, results.

Tax Sales as Fraudulent Conveyance?

Section 548 allows the Bankruptcy Court to set aside as fraudulent any transfer that occurred within two years preceding the petition for less than reasonably equivalent value while the debtor was insolvent. 11 U.S.C. § 548(a)(1)(B). Historically, many debtors used this section to avoid transfers such as mortgage foreclosures, tax sales, repossessions or execution sales where the property in question was worth more than the value received.

In BFP, the Supreme Court partially closed the bottle on this. BFP held that a non-collusive mortgage foreclosure sale, that was properly conducted under state law, could not be avoided under section 548. As Justice Scalia wrote for the majority, where a foreclosure sale is conducted in accordance with state law, the consideration received through that forced-sale process is, de facto, “reasonably equivalent value,” such that the transfer cannot be invalidated under section 548.

BFP only addressed the applicability of section 548 to the mortgage foreclosure context. The Court was careful to include in a footnote the caveat that “[t]he considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.” 511 U.S. at 537 n.3.

Nevertheless, in the wake of BFP, many lower courts have held that the legal reasoning and policy considerations underlying BFP apply equally to tax sales. Recently, in Tracht Gut, LLC v. L.A. Cnty. Treasurer & Tax Collector, 836 F.3d 1146 (9th Cir. 2016), the Ninth Circuit affirmed dismissal of an adversary proceeding complaint seeking to avoid the Los Angeles County tax collector’s forced sale of real property, alleging that the prices obtained at the tax sales were too low. As the Ninth Circuit held, because California’s tax sales have the same procedural safeguards as the mortgage sales at issue in BFP, the price received at “[a] tax sale conducted in accordance with California law conclusively establishes that the price obtained at that sale was for reasonably equivalent value” for purposes of section 548(a). Id. at 1155.

The Courts of Appeal for the Fifth and Tenth Circuits have similarly applied BFP to the tax sale context. Kojima v. Grandote Int'l Ltd. Liab. Co. (In re Grandote Country Club Co.), 252 F.3d 1146, 1152 (10th Cir. 2001); T.F. Stone Co. v. Harper (In re T.F. Stone Co.), 72 F.3d 466, 471 (5th Cir. 1995). Numerous district and bankruptcy courts have held the same. E.g., Crespo v. Abijah Tafari Immanuel (In re Crespo), 557 B.R. 353, 361 (Bankr. E.D. Pa. 2016), aff’d 569 B.R. 624 (E.D. Pa. 2017); Jacobson v. A1Z7, LLC (In re Jacobson), 523 B.R. 13, 22 (Bankr. D. Conn. 2014); Washington v. Cty. of King William (In re Wash.), 232 B.R. 340, 344 (Bankr. E.D. Va. 1999); 2435 Plainfield Ave., Inc. v. Twp. of Scotch Plains (In re 2435 Plainfield Ave., Inc.), 72 F. Supp. 2d 482, 488 (D.N.J. 1999), aff’d 213 F.3d 629 (3d Cir. 2000); In re Samaniego, 224 B.R. 154, 162 (Bankr. E.D. Wash. 1998); Lord v. Neumann (In re Lord), 179 B.R. 429, 436 (Bankr. E.D. Pa. 1995); McGrath v. Simon (In re McGrath), 170 B.R. 78, 82 (Bankr. D.N.J. 1994).

But other courts disagree. Most noteworthy is the Seventh Circuit’s decision in Smith v. SIPI, LLC (In re Smith), 811 F.3d 228, 234 (7th Cir. 2016). In direct contrast to the Ninth Circuit’s holding in Tracht Gut, the Seventh Circuit concluded that the sale of the debtors’ real property at a tax sale did not provide reasonably equivalent value, and was constructively fraudulent, even though the sale complied with relevant state law. The Seventh Circuit specified that, in its view, “a tax sale lawfully conducted … does not necessarily establish a transfer for reasonably equivalent value within the meaning of 11 U.S.C. § 548(a)(1)(B).” Id. at 247. The nub of the decision focused on the fact that the Illinois property tax sale procedure (which provides for downward bidding on the interest rate applicable to pay the delinquent taxes in exchange for the tax lien) bore no relationship to the value of the property and thus could not constitute reasonably equivalent value.

Other federal courts have drawn similar distinctions between state tax sales and foreclosure proceedings and, thus, have declined to extend BFP to the tax-sale context. See, e.g., Berley Assocs. v. Eckert (In re Berley Assocs.), 492 B.R. 433, 439 (Bankr. D.N.J. 2013) (declining to follow BFP because “the mechanics and procedures in mortgage and real estate tax foreclosures are distinctly different, leading to paramount substantive differences”); Sherman v. Rose (In re Sherman), 223 B.R. 555, 559 (B.A.P. 10th Cir. 1998) (Wyoming tax sales not comparable to foreclosure sales because tax sales conducted without competitive bidding).

The disagreement among the lower courts on this issue looks like it will continue for the foreseeable future. The Supreme Court declined to review the Seventh Circuit’s decision in Smith, see 137 S. Ct. 103 (denying petition for certiorari), and the appellant in the Ninth Circuit’s Tracht Gut case did not seek further appeal. Thus, the circuit split on this issue will persist for the time being.

Tax Sales Avoidable as a Preference?

The federal courts have also recently grappled with the alternate theory of whether a tax sale may be set aside as a preference under 11 U.S.C. § 547. Section 547 permits a debtor to set aside a transfer of property if the transfer was (1) to or for the benefit of a creditor, (2) for or on account of an antecedent debt, (3) made while the debtor was insolvent, (4) made within 90 days prior to the filing of the petition (or up to one year, if the creditor was an insider), and (5) enables the creditor to receive more than it would if the case were under chapter 7.

The District of New Jersey addressed this issue last month in Hackler v. Arianna Holding Co., LLC (In re Hackler), No. 17-cv-6589 (PGS), 2018 U.S. Dist. LEXIS 47594 (D.N.J. March 22, 2018). In Hackler, the debtors sought to avoid as a preference the transfer of the debtors’ property to Arianna Holding Co., which had obtained the property via judgment of foreclosure within the 90-day preference period. Arianna Holding obtained the foreclosure after acquiring the tax sale certificate on the debtors’ property, which was purchased at public auction after the debtors failed to pay municipal taxes. In acquiring the property in foreclosure, Arianna Holding received substantially more proceeds ($330,000) than it would have received in chapter 7 ($45,000 plus interest).

The District of New Jersey agreed with the debtors that the transfer of the property to Arianna could be avoided as a preference. It held that BFP did not control for several reasons. First, the Court drew a distinction between the foreclosure remedy in BFP, which implicates federalism concerns about undermining the state remedy of foreclosure, and preference liability under section 547, which concerns only whether a single creditor receives a better remedy than other creditors. Moreover, it held, there are “significant procedural differences” between mortgage foreclosure and tax sale certificate foreclosure in New Jersey, where the bidding for tax certificates focuses on the accrued taxes and interest, not the value of the underlying property. 2018 U.S. Dist. LEXIS 47594, at *10-11. Since all five elements of section 547 were satisfied, the Court allowed the debtor to set aside the transfer of the property to Arianna.

Other courts, however, disagree with the premise—central to Hackler’s holding—that there is a critical distinction between suits based on preference and those based on fraudulent conveyance. See, e.g., Veltre v. Fifth Third Bank (In re Veltre), 562 B.R. 890 (Bankr. W.D. Pa. 2017) (finding that BFP squarely applies to defeat a preference action based on a sheriff’s sale of real property).

The upshot of these decisions is that the federal courts continue to struggle with the question of whether tax sales can be avoided in bankruptcy, and have taken different views on the impact, if any, of BFP in this analysis. With no clear consensus emerging, these issues likely will continue to percolate for the foreseeable future.