The United States Supreme Court held in BFP v. Resolution Trust, that properties sold at “force-sale” mortgage foreclosure sales properly conducted pursuant to a state’s foreclosure statute are presumed to have been sold for “reasonably equivalent value” for purposes of Section 548 of the Bankruptcy Code.  511 U.S. 531, 114 S.Ct. 1757 (1994).  Accordingly, such sales generally cannot be avoided as a fraudulent transfer so long as the state statute complies with certain factors outlined by the Supreme Court as providing sufficient notice and bid procedures to maximize value. However, bankruptcy courts are split in their application of BFP to statutory “force-sale” state tax sales.

Section 548 of the Bankruptcy Code permits trustees or debtors in possession set aside fraudulent transfers.  11 U.S.C. § 548.  Transfers of property to an insolvent debtor (or which rendered a debtor insolvent) for “less than a reasonably equivalent value in exchange for such transfer” are considered constructively fraudulent and can be set aside by a bankruptcy trustee or debtor in possession.  11 U.S.C. § 548(a)(1)(B).

In BFP, the Supreme Court, noting that state governments have an interest in enforcing and carrying out their state-created real estate laws without being under a “federally created cloud” identified the following, non-exclusive factors (the “BFP Factors”) which supported its holding that [at least most] state mortgage foreclosure statutes are designed to result in sales which bring “reasonably equivalent value”:

  • Notice Requirement – notice is required to defaulting landowners;
  • Time Requirement – a substantial amount of time prior to the commencement of the action is provided;
  • Publication of Notice of Sale – requirement that the notice of sale be published; and
  • Bidding Procedures and Rules – bidders must strictly comply to bidding procedures and rules.

Id. at 544.

The Supreme Court emphasized that state foreclosure laws typically allow foreclosure sales to be set aside “if the price is so low that it ‘shocks the conscience’ or raises a presumption of fraud or unfairness” instead of on the grounds of fraudulent transfer.  Id.  Thus, there are safeguards under state foreclosure laws – as opposed to fraudulent transfer legal theories – to set aside foreclosure sales which do not render reasonably equivalent value.

Recently, the United States District Court for the Western District of New York affirmed an order from the Bankruptcy Court avoiding an in rem tax sale.  Duvall v. County of Ontario, 2021 WL 5199639 (W.D.N.Y. Nov. 9, 2021).  After recognizing that many courts have examined the applicability of BFP to state tax sales, the District Court declined to extend BFP’s “reasonably equivalent value” holding to New York’s tax sale statutes.  Id. at *3-4.

In Duvall, the Court distinguished New York’s state tax sale laws from state mortgage foreclosure laws, concluding that New York’s tax sale statutes fail to meet the BFP Factors.  First, the BFP notice requirement was not satisfied.  The County of Ontario took title to the property prior to the tax sale without providing sufficient notice to the debtor.  Id. at *5. Second, and most importantly, because the County took title to the property prior to the tax sale, there was no way for the debtor to receive any equity or benefit from the property, rendering the other BFP Factors meaningless.  Id.

Because tax sale statutes vary greatly from state to state, courts are split on this issue.  In most cases where a tax sale is upheld, the applicable state law satisfies at least one of the BFP Factors.  For example, in upholding a Colorado tax sale, the Tenth Circuit found that “the decisive factor in determining whether a transfer pursuant to a tax sale constitutes ‘reasonably equivalent value’ is a state’s procedure for tax sales, in particular, statutes requiring that tax sales take place publicly under a competitive bidding procedure.” In re Grandote Country Club Co., Ltd., 252 F.3d 1146, 1152 (10th Cir. 2001).

However, the Tenth Circuit declined to uphold a Wyoming tax sale, concluding that unlike the Colorado tax sale law, the Wyoming tax sale law did not satisfy the BFP Factors.  In re Sherman, 223 B.R. 555 (B.A.P. 10th Cir. 1998), a debtor’s residential property was sold to “a person selected in a random lottery for the amount of the outstanding taxes; in this case, less than $500. The Wyoming tax sale statutes do not permit a public sale with competitive bidding.”  Id. at 559.  The Tenth Circuit found that such a sale that lacked competitive bidding, and therefore, did not satisfy the BFP Factors.

In determining whether a state “forced-sale” statute qualifies as “reasonably equivalent value” under BFP, courts must consider whether any of the BFP Factors have been satisfied.  Since state forced sale statutes vary from state to state (even in the same Circuit as exemplified by the Tenth Circuit’s contrary holdings in Sherman and Grandote), counsel should pay careful attention to whether the applicable state tax sale statutes satisfy the BFP Factors.