City of Milwaukee v. Gillespie, 47 B.R. 916 (E.D. Wis. 2013) –
Under Wisconsin’s strict tax foreclosure procedure, a tax authority can obtain property in satisfaction of a delinquent property tax bill without any public sale or other competitive bidding. Gillespie was one of several cases in which a bankruptcy court held that the tax foreclosures were fraudulent transfers. On appeal, the district court agreed that the tax sales could be fraudulent conveyances, but remanded the cases for further consideration.
As discussed in a prior blog on the bankruptcy court decision (Delinquent Property Tax Collection: Foreclosure May Be Vulnerable), grounds for finding that a transfer is a fraudulent conveyance include that the debtor (1) was insolvent and (2) did not receive “reasonably equivalent value” in connection with the transfer. All of the parties agreed that the only issue was whether the debtors received reasonably equivalent value.
The City contended that a regularly conducted tax foreclosure sale should be deemed to be reasonably equivalent value under the Supreme Court decision in BFP Resolution Trust Corp., 511 U.S. 531, 114 Sup. Ct. 1757, 128 L. Ed. 2d 556 (1994). However, the district court agreed with the bankruptcy court that it should not be presumed that reasonably equivalent value was received as a matter of law unless there was some form of sale or competitive bidding.
In addressing the City’s argument that a public sale is not required, the court agreed that a sale by itself was not enough to establish value, but rather an evaluation of several factors was required:
(1) whether the value of what was transferred is equal to the value of what was received;
(2) the fair market value of what was transferred and received;
(3) whether the transaction took place at arm’s length; and
(4) the good faith of the transferee.
The court emphasized that the determination was not a fixed mathematical formula, but rather a fact specific evaluation.
The facts in this case were as follows:
|Estimated Fair Market Value||$206,300||$115,900||$82,100|
|Taxes / Assessed Value||< 8%||< 8%||< 16%|
The district court concluded that it was clear that the value received was the amount of the delinquent taxes. However, although the bankruptcy court held that it could not conclude that the delinquent taxes were reasonably equivalent value, it did not make any separate conclusions of law regarding the value of the debtors’ properties. Since this was an essential element of a fraudulent transfer and it was the debtors’ burden to establish there was no genuine issue of fact in support of their motions for summary judgment, the district court remanded the case to the bankruptcy court to make findings.
As a final point, the district court rejected the City’s contention that this result “unduly impinges upon Wisconsin’s essential state interests,” commenting that ““[u]ltimately, the City’s catastrophesizing is undermined by the record.” It disagreed that the decision invalidates the use of state statutes. Rather, a strict foreclosure will be subject to a fraudulent conveyance analysis, and depending upon the amount of delinquent taxes and the value of the property some of the transfers may very well survive.
The court also commented that two of the properties were income generating properties. So the City got the benefit of rental income in addition to any equity in the properties. In Gillespie’s case, the City had already collected rents sufficient to pay off the taxes.
By all indications the delinquent property taxes were only a small fraction of the value of the properties, so it is not entirely clear why a remand was necessary. Regardless, these cases continue to illustrate that acquiring property through a tax foreclosure process that does not include competitive bidding for an amount substantially less than the value of the property may be risky.
Vicki R. Harding, Esq.