New York Federal Court Holds County Tax Foreclosure May Constitute Fraudulent Conveyance


New York Federal Court Holds County Tax Foreclosure May Constitute Fraudulent Conveyance

New York Federal Court Holds County Tax Foreclosure May Constitute Fraudulent Conveyance


The United States District Court for the Western District of New York recently reversed a Bankruptcy Court’s dismissal of an action and held that sales arising from tax foreclosures may be avoidable as fraudulent transfers. See Hampton v. Ontario Cty., New York, 2018 WL 3454688 (W.D.N.Y. July 18, 2018). The case involves two adversary proceedings commenced by homeowners against the County of Ontario (the “County”). In each matter, the County foreclosed on plaintiffs’ homes after plaintiffs failed to pay property taxes. In one case the plaintiffs owed about $1,200 in taxes and in the other they owed about $5,200. After the County obtained a final judgment in each matter, the plaintiff homeowners filed Chapter 13 bankruptcy petitions and then adversary proceedings against the County, alleging that the taking of their homes were constructively fraudulent transfers under 11 U.S.C. § 548(a)(1)(B) due to the disparity between the value of the homes and the minimal taxes owed. The County proceeded to sell the properties—one for $22,000 and one for $27,000—under a stipulation that the sales were subject to the determination in the adversary proceedings. The County moved to dismiss the actions, and the Bankruptcy Court granted the motion. In doing so, it cited BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), where the United States Supreme Court held that a reasonably equivalent value for foreclosed property “is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with[.]”.




A tax sale was avoidable as constructively fraudulent where the state tax foreclosure sale procedures did not include notice and bidding procedures likely to result in the debtors’ receiving “reasonably equivalent value.” Hampton v. Ontario County, No. 17-6808, and Gunsalus v. Ontario County, No. 17-6810 (W.D. N.Y. July 18, 2018).

In two separate cases with substantially identical facts, the Western District of New York addressed whether the bankruptcy court improperly dismissed the debtors’ adversary proceeding seeking to avoid the transfers of the debtors’ homes in tax sales.

Gliee and Brian Gunsalus, and Joseph and Brenda Hampton, owned their homes free and clear of mortgages. When both couples failed to pay county taxes, Ontario County instituted foreclosure actions in accordance with state law, and foreclosure judgments were entered against the homeowners. Both couples filed chapter 13 bankruptcy plans proposing to pay the tax arrears in full. The homes were sold at auction and the buyers notified of the pending adversary proceeding. The surplus from the sale of the properties went to the county.



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