Property Tax Foreclosure: Tax Authority May Have to Pay for Equity in Property

by Pepper Hamilton LLP

Clinton County Treasurer v. Wolinsky, 511 B.R. 34 (N.D.N.Y. 2014)

A chapter 7 trustee sought to avoid a property tax foreclosure as a fraudulent transfer and then to recover damages from the foreclosing county. The bankruptcy court agreed that the transfer was a fraudulent conveyance, but awarded only about half of the damages requested by the trustee. Both the county treasurer and the trustee appealed.

Section 548 of the Bankruptcy Code allows a trustee to avoid both actual and constructive fraudulent transfers. In particular a transfer of property may be avoided if (1) the debtor has an interest in the property, (2) which is transferred within two years before the bankruptcy, (3) when the debtor was insolvent or became insolvent as a result of the transfer, and (4) the debtor received less than reasonably equivalent value for the transfer.

The county treasurer did not dispute the trustee on a factual basis, but rather relied on an argument that a tax foreclosure sale results in reasonably equivalent value as a matter of law. The district court acknowledged that the U.S. Supreme Court concluded that regularly conducted mortgage foreclosure sales result in reasonably equivalent value as a matter of law and cannot be avoided (see BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L. Ed. 2d 556 (1994)). However, the Supreme Court specifically reserved its opinion on “other foreclosures and forced sales (to satisfy tax liens, for example).” Given the differences between mortgage and in rem tax foreclosures, the district court was not persuaded that the BFP analysis was applicable to a tax forfeiture.

The court also specifically rejected the county’s argument that avoidance “injures a municipality’s right to collect unpaid property taxes in foreclosure proceedings.” Instead, the court concluded that the “general policy favoring equal treatment of creditors” meant that the county should not be “enriched to the detriment of other creditors.”

Finally, the court noted that the question of fraudulent intent was not relevant. A constructive fraudulent conveyance can be avoided regardless of intent.

Turning to the trustee’s appeal, under Section 550 of the Bankruptcy Code, if a transfer is avoided the trustee can either recover the property or the “value” of the property. Generally courts use the market value of the property at the time of transfer less any consideration. The objective is to return the value lost as a result of the transfer.

In this case the trustee sought to recover the assessed value of the property at the time of the transfer ($42,000) less the delinquent taxes, while the bankruptcy court allowed recovery of only the amount realized by the county at an auction sale held approximately two months after the transfer ($25,500 less taxes and expenses).

The district court believed that the $25,500 resulting from a public auction was more appropriate than the $42,000 assessed value. In addition, the court agreed that awarding damages in excess of what the county was able to collect would inequitably penalize the county.

Consequently, the court (1) agreed with the bankruptcy court that the trustee could avoid the tax foreclosure transfer and (2) concluded that the award of damages based on $25,500 as an estimate of market value was not clearly erroneous.

For jurisdictions where the tax authority first “forecloses” (or more accurately forfeits) property in satisfaction of outstanding property taxes, and then resells the property so that it obtains the benefit of any equity in the property (as opposed to the property owner), there is a clear risk that the tax authority could be forced to pay “market value” less the amount of the delinquent property taxes, particularly if the property owner subsequently files bankruptcy. Note that this exposure could extend for more than two years if the trustee asserts a fraudulent transfer claim under state law using its strong arm powers under Section 544.

In one sense, this is only fair. In a tax foreclosure process that exposes the property to a public auction, where the taxing authority retains the amount of the delinquent taxes and the property owner (or other parties with an interest to the property) receive the benefit of any equity, this would not be an issue. In fact, an argument can be made that a tax authority’s appropriation of the property owner’s equity in a strict foreclosure process constitutes an unconstitutional taking.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.