“It Ain’t Over ‘Til It’s Over” The Third Circuit Channels Yogi Berra In Ruling On Tax Sale

Anyone who listens to the radio on the way to work has heard ads inviting them to free seminars in their local area at which they can learn how to make easy money buying “government secured” tax certificates.  Purchasing such certificates at tax sales conducted by local taxing authorities is big business and sales of such certificates afford taxing authorities a way to collect delinquent property taxes without having to enforce tax liens themselves.   A September 12, 2019 decision of the United States Court of Appeals for the Third Circuit adds a new wrinkle to the tax sale process.

The tax sale at issue in Hackler v. Arianna Holding Company was a New Jersey tax sale.  New Jersey’s tax sale process is similar to the process in many states.  When a property owner fails to pay property taxes, the taxing authority sells a tax certificate at a public sale.  The successful bidder pays the taxing authority what the delinquent taxpayer owes.  Once the purchaser owns the certificate, a property owner who wants to redeem the property has to pay the certificate holder what it paid to obtain the certificate plus interest at a rate of 18%.  If the property is not redeemed during a two year waiting period, the certificate holder may then file a suit to foreclose rights of redemption.  If the property is still not redeemed, a judgment of foreclosure is entered transferring title to the property to the certificate holder.

The Hacklers failed to pay the property taxes on their home.  The township in which their home was located sold a tax certificate to collect the delinquent taxes.  The Hacklers did not redeem their property within two years after the tax sale or after a suit to foreclose rights of redemption was filed against them.  Consequently, a judgment of foreclosure was entered transferring title to their home to the tax certificate purchaser. 

Within 90 days after the foreclosure judgment was entered, the Hacklers filed for bankruptcy.  They filed an adversary proceeding against the tax certificate purchaser seeking to recover their home on the grounds that the transfer of their home was avoidable as a preference under Bankruptcy Code Section 547(b).  That Section provides that a transfer may be avoided if it is:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made–

• (A) on or within 90 days before the date of the filing of the petition; or

• (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if-

• (A) the case were a case under chapter 7 of this title;

• (B) the transfer had not been made; and

• (C) such creditor received payment of such debt to the extent provided by the provisions of this title.

The Bankruptcy Court sided with the Hacklers, as did the United States District Court for the District of New Jersey on appeal.  The tax certificate purchaser then appealed to the Third Circuit.

Starting with the plain language of Section 547(b), the Third Circuit said that the transfer of the Hacklers’ home met all of its criteria because the transfer “was made to the tax certificate holder, for a debt that arose before the Hacklers petitioned for bankruptcy, while the Hacklers were insolvent, and within 90 days of their petition; it bestowed a parcel worth $335,000 on a party that would have received $45,000 [the amount the Hacklers would have been required to pay to redeem their property] in a Chapter 7 proceeding.”  Noting that “Unless there is ambiguity, we ‘cannot allow policy to guide our analysis,”” the Third Circuit said that Section 547(b) was unambiguous and that “Applying its straightforward terms does not lead us to an absurd result.” The Third Circuit concluded, “Thus, our reading of it ends there.”

The tax certificate purchaser asserted two arguments that it contended overrode the plan language of Section 547(b).  First, it argued that since the U.S. Supreme Court had held in BFP v. Resolution Trust Corp. that a properly conducted foreclosure sale could not be avoided as a fraudulent conveyance under Bankruptcy Code Section 548, a properly conducted tax sale must be immune from avoidance as well.  Second, it argued that avoiding the transfer of the Hackers’ home would violate the Tax Injunction Act which provides that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law” if a remedy exists in state court.

The Third Circuit said that BFP v. Resolution Trust Corp. was distinguishable because the Supreme Court had held that the amount paid at a properly conducted foreclosure sale was “reasonably equivalent value” as that term is used in Section 548.  The term “reasonably equivalent value” is not used in Section 547(b).  The Third Circuit also noted that the Supreme Court had said in a footnote to its opinion in Resolution Trust that “considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.”

The Third Circuit rejected the Tax Injunction Act argument summarily.  It noted that “[i]t is well established … that the Tax Injunction Act does not prevent a Bankruptcy Court from enforcing the provisions of the Bankruptcy Code that affect the collection of state taxes.”

What effect, if any, the Third Circuit’s decision will have on tax sales remains to be seen.  Perhaps the subject will be addressed at the next advertised “free seminar in your local area.”