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[.]”. 

On appeal, the District Court reversed.  First, it noted that the Supreme Court in BFP expressly limited its holding to mortgage foreclosures, stating that “considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.” Second, the Court found that the amount of the tax lien is not evidence of the property value and that the sales would result in windfalls to the County because it would receive all of the surplus funds to the detriment of other creditors.  “If this Court affirmed the Bankruptcy Court’s decision, Ontario County would receive surpluses of nearly $22,000 in one instance and more than $20,000 in another. The Appellants, on the other hand, assert that they would be homeless and unable to repay their other creditors through Chapter 13 bankruptcy.”  Thus, the Court reinstated the adversary proceedings against the County.

For a copy of the decision, please contact Michael O’Donnell at, Michael Crowley at, or Dylan Goetsch at