New Jersey Bankruptcy Court Holds That Tax Sale Foreclosure May Constitute a Fraudulent Conveyance

In a decision that endorsed the Court’s previous holding of In re Berley, the United States Bankruptcy Court for the District of New Jersey again held that property acquired via a tax foreclosure judgment can be subject to attack as a fraudulent conveyance under 11 U.S.C. § 548.  See Matter of Varquez, 2013 WL 6578925 (Bankr. D.N.J. Dec. 13, 2013).  In Varquez, the Court distinguished the United State Supreme Court’s ruling in BFP v. Resolution Trust Corp., holding that BFP, which stated that the price received in a sale following a mortgage foreclosure meets the “reasonably equivalent value” standard for fraudulent conveyance purposes, was limited to the context of a mortgage foreclosure and the Supreme Court explicitly left open whether the ruling applied in tax sale foreclosures.  Because tax sale foreclosures do not encourage the same competitive bidding as a public auction relating to a mortgage foreclosure, the resulting transfer of title may not be for a reasonably equivalent value, a necessary requirement to avoid attack a transfer as a fraudulent conveyance.   The decision also runs contrary to New Jersey’s statutory scheme, as discussed in In re 2435 Plainfield Ave., Inc. 72 F.Supp.2d 482 (D.N.J. 1999), in which the Court held that tax foreclosure judgments cannot be attacked as fraudulent conveyances.  A post discussing the Berley holding can be found by clicking here.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.