Gunsalus v. County of Ontario, No. 20-3865 (2d Cir. 2022)
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Plaintiffs owned a home in Ontario County, New York. Following foreclosure, the couple filed for protection under Chapter 13 of the Bankruptcy Code and filed a complaint seeking to avoid the loss of their home on the grounds that it was a fraudulent conveyance. The Bankruptcy Court set aside the transfer, and the County appealed, raising two questions. The first is whether the Plaintiffs had standing to bring the avoidance proceeding. The second is whether the transfer effected by Ontario County in foreclosing on the lien was entitled to the presumption of having yielded “reasonably equivalent value” under Section 548 of the Bankruptcy Code.
The Second Circuit affirmed the district court’s judgment finding that the district court correctly held that the transfer of Plaintiffs’ home to the County was not entitled to the presumption of having provided “reasonably equivalent value” under Section 548.
The court explained that the County incorrectly interprets Section 522(c)(2)(B) as barring Plaintiffs from claiming the federal homestead exemption when it merely provides that exempt property remains liable for a tax lien. They are not attempting to avoid paying the tax lien; they are attempting to avoid a transfer of the property. Accordingly, Section 522(c)(2)(B) does not deprive the Plaintiffs of standing under Section 522(h).
The court further wrote that the County’s position would produce results that are fundamentally at odds with the goals of bankruptcy law. Here, it would give the County a windfall at the expense of the estate, the other creditors, and the debtor which is precisely what the Code’s fraudulent conveyance provisions are intended to prevent.
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20-3865-bk Gunsalus v. County of Ontario In the 1 United States Court of Appeals 2 For the Second Circuit 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 August Term, 2021 (Argued December 16, 2021; Decided June 27, 2022) No. 20-3865-bk BRIAN L. GUNSALUS, GLIEE V. GUNSALUS, Plaintiffs-Appellees, v. COUNTY OF ONTARIO, NEW YORK Defendant-Appellant. * Appeal from the United States District Court for the Western District of New York No. 20-cv-6134 Frank P. Geraci, Jr., Chief Judge, Presiding. Before: * CABRANES, PARKER, and LEE, Circuit Judges. The Clerk of Court is respectfully directed to amend the official caption as set forth above. 1 1 2 3 Defendant-Appellant, County of Ontario, appeals from a judgment of the 4 United States District Court for the Western District of New York (Geraci, J.). 5 Plaintiffs-Appellees sought to set aside the loss of their home to the County as a 6 result of a tax lien foreclosure. The Bankruptcy Court set aside the transfer as a 7 fraudulent conveyance on the grounds that it was not for “reasonably equivalent 8 value.” We AFFIRM. 9 10 11 12 13 14 15 16 17 18 19 20 21 KARI A. TALBOTT (Mark Wattenberg, on the brief), Legal Assistance of Western New York, Inc., for PlaintiffsAppellees. JASON S. DIPONZIO, Jason S. DiPonzio, P.C., for DefendantAppellant. BARRINGTON D. PARKER, Circuit Judge: 22 BACKGROUND 23 This case arises from the foreclosure of a tax lien on a home in Ontario 24 County, New York, owned by a married couple, Brian and Gliee Gunsalus, which 25 resulted in the loss of title to their home. Following the foreclosure, the couple filed 26 for protection under Chapter 13 of the Bankruptcy Code and filed a complaint 27 seeking to avoid the loss of their home on the grounds that it was a fraudulent 2 1 conveyance. The Bankruptcy Court set aside the transfer, and the County appeals, 2 raising two questions. The first is whether the Gunsaluses had standing to bring 3 the avoidance proceeding. The second is whether the transfer effected by Ontario 4 County in foreclosing on the lien was entitled to the presumption of having 5 yielded “reasonably equivalent value” under Section 548 of the Bankruptcy Code. 6 We answer yes and no, respectively. 7 The property in question is a modest family home. Mrs. Gunsalus has lived 8 there her entire life and for the past fifteen years she and Mr. Gunsalus have lived 9 there with their disabled adult son. They owned the home free and clear of 10 mortgages. Due to a temporary reduction in Mr. Gunsalus’ wages, the couple was 11 unable to pay their real estate taxes, and the property became subject to a tax lien 12 in the amount of unpaid taxes, $1,290. 13 After the lien remained unpaid for a number of months, the County 14 instituted proceedings pursuant to Article 11 of New York’s Real Property Tax 15 Law (“RPTL”) to enforce the lien. See RPTL §§ 1120 et seq. The County first 16 included the property on the “List of Delinquent Taxes” filed in the County Clerk’s 17 Office. See id. § 1122. The County then filed a petition that commenced an in rem 18 tax foreclosure action. 3 1 The Gunsaluses answered the petition and the County, in turn, moved for 2 summary judgment. The Gunsaluses opposed that motion and cross-moved for an 3 extension of time to pay the overdue taxes. The Ontario County Supreme Court 4 denied the cross-motion and granted the County’s motion. In June 2016, the 5 Ontario County Supreme Court entered a final judgment of foreclosure awarding 6 the County possession of, and title to, the home. The Gunsaluses were permitted 7 to continue residing in the property pending the outcome of this litigation. 8 In May 2017, the County scheduled an auction of the property, which was 9 sold to a third party for $22,000. The unpaid taxes, as noted, had amounted to 10 $1,290. Pursuant to Article 11, the County pocketed the difference ($20,710), which 11 meant that the Gunsaluses were required to forfeit to the County all of their 12 accumulated equity. 13 These procedures, authorized by Article 11, are known as “strict 14 foreclosure.” Under “strict foreclosure,” a creditor (here the County) asks the court 15 to set a deadline for payment of a debt (here unpaid taxes) secured by the tax lien. 16 If the lien is not paid by the deadline, as occurred here, the court enters an order 17 transferring title and possession of the property to the creditor. There is no 4 1 foreclosure sale. Instead, the transfer occurs by court order and the transferee can 2 then sell the property, as the County did. 3 Approximately three weeks before the auction, the Gunsaluses filed for 4 protection under Chapter 13 of the Bankruptcy Code. To qualify under Chapter 5 13, a debtor must present a plan that, among other things, provides “adequate 6 protection” to secured creditors like the County. Moreover, under Chapter 13, the 7 County retains its lien until the tax arrears is paid in full. See 11 USC § 8 1325(a)(5)(B)(i)(I). Accordingly, the Gunsaluses’ Chapter 13 plan provided that the 9 County would receive all delinquent real estate taxes plus 12% interest. The 10 Gunsaluses have made all delinquent tax payments, and they have continued to 11 pay the new property taxes that have accrued since the judgment of foreclosure. 12 During the bankruptcy proceedings, the Gunsaluses sought to avail themselves of 13 the federal homestead exemption under Section 522(d)(1), which allows a debtor 14 to exclude a home from the bankruptcy estate. 15 Shortly after the Chapter 13 filing, the Gunsaluses commenced a proceeding 16 in Bankruptcy Court to set aside the transfer of their home to the County on the 17 grounds that it was a fraudulent conveyance under Sections 548 and 522 of the 18 Code. To establish a fraudulent conveyance, a debtor must prove, among other 5 1 things, that the debtor received less than a reasonably equivalent value in 2 exchange for the transfer. See 11 U.S.C. § 548(a). 3 The Bankruptcy Court dismissed the complaint. Relying on the United 4 States Supreme Court’s opinion in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), 5 the Bankruptcy Court held that a tax lien foreclosure proceeding conducted in 6 compliance with Article 11 of the RPTL, like the mortgage foreclosure at issue in 7 BFP, “is conclusively presumed to have provided reasonably equivalent value for 8 purposes of 11 U.S.C. § 548(a)(1)(B)(i).” App’x 121. 9 On appeal, the District Court reversed. It reasoned that the mortgage 10 foreclosure procedures at issue in BFP differed in material respects from the tax 11 foreclosure procedures in the RPTL, explaining that [t]he Court in BFP expressly stated that state foreclosure laws had evolved to “avoid the draconian consequences of strict foreclosure,” . . . but the RPTL has not. Unlike the foreclosure law in BFP and the “typical” state laws that the Supreme Court described before reaching its holding, the RPTL is a strict foreclosure regime that does not provide for a pre-seizure auction whereby the debtor may recovery equity. This difference between the RPTL and the state laws the BFP Court considered is significant to fraudulent conveyance analysis. 12 13 14 15 16 17 18 19 20 21 App’x 11 (footnote omitted). The District Court remanded the case to the 22 Bankruptcy Court for trial on the fraudulent conveyance claim, where the 23 Gunsaluses prevailed. The Bankruptcy Court found that the Gunsaluses had met 6 1 their burden of proving that the transfer of their home worth at least $22,000 in 2 exchange for satisfaction of the $1,290 tax debt owed Ontario County was, among 3 other things, not for “reasonably equivalent value.” 1 This appeal followed. See 28 U.S.C. § 158(d)(1). We review legal 4 5 determinations de novo. See In re Anderson, 884 F.3d 382, 387 (2d Cir. 2018). 6 DISCUSSION 7 The County seeks reversal on two grounds. First, the County argues that the 8 Gunsaluses lack standing to challenge the transfer of their property. Secondly, the 9 County argues that the District Court erred by refusing to extend the holding of 10 BFP from the mortgage foreclosure regime at issue there to the tax lien foreclosure 11 regime at issue here. 12 I 13 We first turn to the County’s contention that 11 U.S.C. § 522(c)(2)(B) of the 14 Code deprived the Gunsaluses of standing to bring the avoidance proceeding. We Both the Bankruptcy Court and the District Court conducted proceedings in the present case alongside those raised by another similarly situation set of property owners, Joseph M. Hampton and Brenda S. Hampton. Before us, the County has also appealed the District Court’s judgment in the Hamptons’ case in Appeal No. 20-3868. 1 7 1 review this issue de novo. See Bank Brussels Lambert v. Coan (In Re AROChem Corp.), 2 176 F.3d 610, 620 (2d Cir. 1999). 3 Section 522 of the Code authorizes debtors to exempt certain transfers of 4 property. See 11 U.S.C. § 522. In Bankruptcy Court, the Gunsaluses claimed the 5 federal homestead exemption, which allows a debtor to exempt a home from the 6 bankruptcy estate. See id. § 522(d)(1). The Code provides that debtors who are 7 eligible for the federal homestead exemption have standing to bring avoidance 8 actions. See id. § 522(h); Deel Rent-A-Car, Inc. v. Levine, 721 F.2d 750, 754 (11th Cir. 9 1983). 10 The Code also provides, however, that exempted property is subject to 11 certain limitations. Under Section 522(c)(2)(B), for example, certain exempted 12 property remains liable for a tax lien: 13 14 15 16 17 18 19 Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case, except . . . (2) a debt secured by a lien that is— (B) a tax lien, notice of which is properly filed. 20 the federal homestead exemption and deprives them of standing. We disagree. 21 Section 522(c)(2)(B) is straightforward. It merely requires that the Gunsaluses— The County contends that this Section renders the Gunsaluses ineligible for 8 1 who seek to avoid the transfer of their home and not to avoid paying off the tax 2 lien on that home—remain liable for the unpaid taxes even if the fraudulent 3 conveyance action succeeds. 4 The Gunsaluses’ Chapter 13 plan achieves just that result. In accordance 5 with 11 U.S.C § 1325, the plan provides that the County retains its lien until its 6 secured claim for tax arrears is paid in full. The plan affords the Gunsaluses five 7 years to pay their delinquent real estate taxes in full and, as noted, they are paying 8 off that obligation in accordance with the plan. 9 The County thus incorrectly interprets Section 522(c)(2)(B) as barring the 10 Gunsaluses from claiming the federal homestead exemption, when it merely 11 provides that exempt property remains liable for a tax lien. They are not, as the 12 County would have it, attempting to avoid paying the tax lien; they are attempting 13 to avoid a transfer of the property. Accordingly, Section 522(c)(2)(B) does not 14 deprive the Gunsaluses of standing under Section 522(h). 15 II 16 A 17 Next, the County challenges the District Court’s holding that the forfeiture 18 of the Gunsaluses’ home is not entitled to the presumption of an exchange for 9 1 “reasonably equivalent value” under Section 548(a). The Bankruptcy Code 2 empowers debtors to set aside a transfer of property if (1) the debtor had an 3 interest in property; (2) a transfer of that interest occurred on or within two years 4 of the bankruptcy petition; (3) the debtor was insolvent at the time of the transfer 5 or became insolvent as a result of the transfer; and (4) the debtor received “less 6 than a reasonably equivalent value in exchange for such transfer[,]” 11 U.S.C. § 7 548(a); see id. § 522(h). The parties agree that this case concerns only the fourth 8 element. See id. § 548(a)(1)(B)(i). 9 Of the three statutory terms—“reasonably,” “equivalent,” and value”—only 10 the last is defined. “Value” means, for purposes of Section 548, “property, or 11 satisfaction or securing of a . . . debt of the debtor,” 11 U.S.C. § 548(d)(2)(A). See 12 BFP, 511 U.S. at 535-36. To decide whether a transfer is for “reasonably equivalent 13 value,” courts consider “whether the debtor has received value that is 14 substantially comparable to the worth of the transferred property.” Id. at 548. Were 15 we writing on a clean slate, we would easily conclude that the transfer here is not 16 entitled to the legal presumption of being in exchange for “reasonably equivalent 17 value.” Common sense dictates that receipt of $1,290 for a property that was sold 18 for $22,000 fails the “reasonably equivalent value” test. But the County contends 10 1 that this approach does not resolve this appeal because in the mortgage foreclosure 2 context, the Supreme Court in BFP weighed in on the meaning of “reasonably 3 equivalent value.” 4 In BFP, the debtor, a partnership formed to buy a home in California, 5 defaulted on its home loan payments. Id. at 533. The home later sold at a mortgage 6 foreclosure sale for $433,000. Id. at 533-34. The debtor alleged that the home was 7 actually valued at $725,000 and therefore challenged the sale as constructively 8 fraudulent because the $433,000 it received was not, in the debtor’s view, 9 “reasonably equivalent” to the $725,000 it alleged the home was worth. Id. at 534. 10 The Supreme Court rejected that argument. It held that when a mortgage 11 foreclosure sale is conducted in compliance with state law, the price received at 12 that sale is the worth of the home—and, consequently, is “reasonably equivalent 13 value.” Id. at 545. In reaching this result, the Court emphasized that over the years, 14 many state mortgage foreclosure laws had evolved from a system of strict 15 foreclosures to one of foreclosures by sale. See id. at 541-42. Under the strict 16 foreclosure regime (like that of RPTL Article 11), when a debtor had failed to make 17 past due mortgage payments, after a certain time period, his entire interest in the 18 property was forfeited, regardless of any accumulated equity. Id. at 541. By 11 1 contrast, foreclosures by sale—such as the sale in BFP—ensured that (1) 2 foreclosures would occur by sale, (2) the proceeds of that sale would be used to 3 satisfy the debt, and (3) any surplus over the debt would be refunded to the debtor. 4 See id. Foreclosures by sale, the Court noted, emerged to “avoid[] the draconian 5 consequences of strict foreclosure.” Id. “Since then,” the Court went on, “States 6 have created diverse networks of judicially and legislatively crafted rules 7 governing the foreclosure process, to achieve what each of them considers the 8 proper balance between the needs of lenders and borrowers.” Id. at 541-42. The 9 Court adverted to the protections afforded by the current mortgage foreclosure 10 laws of many states, including notice to the defaulting borrower, a substantial lead 11 time before the commencement of foreclosure proceedings, publication of a notice 12 of sale, strict adherence to prescribed bidding rules and auction procedure, and 13 perhaps most importantly, foreclosure by sale with the surplus reverting to the 14 debtor. Id. at 542. “When these procedures have been followed,” the Court stated, 15 “mere inadequacy of the foreclosure sale price is no basis for setting the sale aside 16 . . . .” Id. 17 Ultimately, the Court held that “the consideration received from a 18 noncollusive, real estate mortgage foreclosure sale conducted in conformance with 12 1 applicable state law” is conclusively presumed to be an exchange for “reasonably 2 equivalent value” under 11 U.S.C. § 548(a). Id. at 533. Critical to that conclusion 3 was the existence of an auction or sale which would permit some degree of market 4 forces to set the value of the property even in distressed circumstances. Id. at 545- 5 49. Because distressed properties that must be sold in the time and manner 6 established by state mortgage foreclosure law are, the Court reasoned, “simply 7 worth less,” “reasonably equivalent value” in the mortgage foreclosure context is 8 the foreclosure sale price itself. Id. at 549 (emphases omitted). 9 For those reasons, the Court explained, courts may not engage in the policy 10 judgment of setting aside a mortgage foreclosure sale merely because the sale itself 11 yielded a price that a court deemed inadequate. See id. at 542. The Court therefore 12 rejected the debtor’s view that the $433,000 home was actually worth $725,000. 13 Instead, because the sale was conducted in compliance with state foreclosure-by- 14 sale law, the home was worth $433,000. And because the value received by the 15 debtor was equal to what the home was “worth,” the Court held that the debtor 16 had necessarily received “reasonably equivalent value” under Section 548. 17 18 13 1 B 2 In the County’s view, BFP instructs that so long as state foreclosure law 3 provides a debtor with (1) notice; (2) ample opportunity to cure; and (3) judicial 4 oversight of the process, any foreclosure conducted in compliance with state 5 foreclosure law necessarily yields “reasonably equivalent value” under Section 6 548. Here, the County contends that the RPTL contains those elements and that the 7 transfer was conducted in compliance with the RPTL. Consequently, the County 8 argues, BFP compels the conclusion that the transfer of the Gunsaluses’ home was 9 necessarily in exchange for “reasonably equivalent value.” 10 For a host of reasons, we disagree. First, BFP itself rejects this contention. As 11 Justice Scalia noted, BFP “covers only mortgage foreclosures of real estate. The 12 considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, 13 for example) may be different.” 511 U.S. at 537 n.3 (emphasis added). That 14 admonition is dispositive because, as we have seen, the strict foreclosure 15 procedures under the RPTL offer far fewer debtor protections than the mortgage 16 foreclosure procedures at issue in BFP. See In re Smith, 811 F.3d 228, 239 (7th Cir. 17 2016) (finding that a state’s tax foreclosure protections must compare favorably to 18 the mortgage foreclosure protections in BFP in order to receive a presumption of 14 1 “reasonably equivalent value”); In re Hackler & Stelzel, 938 F.3d 473, 479 (3d Cir. 2 2019) (same). 3 Although the County eventually sold the Gunsaluses’ home, unlike the sale 4 in BFP, the sale occurred after foreclosure. The transfer of the Gunsaluses’ title, 5 equity and all their interests in the home—the transfer that is relevant for Section 6 548(a)(1)(B) purposes—had already occurred by the time the County auctioned off 7 the property. The auction was conducted solely for the benefit of the County and 8 the amount of the proceeds bears no relation to the amount of the tax debt that led 9 to the foreclosure. Moreover, under the RPTL, the County pockets the difference 10 between the tax debt and the sales proceeds and is not accountable to other 11 creditors for what it does with the proceeds. Suffice it to say that under no 12 reasonable calculus do these procedures convey to the debtor value that is 13 substantially comparable to the worth of the transferred property. See BFP, 511 14 U.S. at 548. In short, because the RPTL procedures are fundamentally different 15 from the protections in place in BFP, that case is of little assistance to the County. 16 In addition, the County’s position would produce results that are 17 fundamentally at odds with the goals of bankruptcy law. Here, it would give the 18 County a windfall at the expense of the estate, the other creditors, and the debtor— 15 1 which is precisely what the Code’s fraudulent conveyance provisions are intended 2 to prevent. See In re Smith, 811 F.3d at 238-39. For these reasons, we agree with the 3 District Court that the transfer here should not be presumed to be in exchange for 4 “reasonably equivalent value” under Section 548. 5 Finally, the County expresses concerns that our reading of Section 548 will 6 hamper its ability to collect delinquent real property taxes. We are not insensitive 7 to those concerns, but they do not carry the day on this appeal. First, Ontario 8 County’s legitimate interest in tax collection cannot overcome Congress’ policy 9 choice that “reasonably equivalent value” must be obtained for a transfer of a 10 debtor’s property in the bankruptcy context. See In re Murphy, 331 B.R. 107, 120 11 (Bankr. S.D.N.Y. 2005). As we have previously admonished, “there is a strong 12 presumption of not allowing a secured creditor to take more than its interest.” In 13 re Harris, 464 F.3d 263, 273 (2d Cir. 2006); see also In re Smith, 811 F.3d at 238 (noting 14 that one goal of fraudulent conveyance law is to avoid a “windfall to one creditor 15 at the expense of others”). Second, the County’s concerns are unfounded in this 16 case. As noted, the Gunsaluses have proposed in their Chapter 13 plan to pay the 17 County all delinquent real estate taxes plus 12% interest. The Gunsaluses have also 18 made all tax payments that have subsequently come due under the plan. Third, 16 1 even to the extent that today’s ruling could, as the County cautions, introduce a 2 degree of disruption to the County’s collection of delinquent property taxes, that 3 disruption arises from the interplay between the strict foreclosure regime of the 4 RPTL and a Bankruptcy Code fashioned by Congress to afford relief to debtors. 5 By its very nature, the Code upsets common and state law property interests and 6 recalibrates the relationship between debtors and creditors. 7 For these reasons, we conclude that the District Court correctly held that the 8 transfer of the Gunsaluses’ home to the County was not entitled to the 9 presumption of having provided “reasonably equivalent value” under Section 10 11 12 548. CONCLUSION We AFFIRM the judgment of the District Court. 17
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