Daily Development for
Wednesday, October 9, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BANKRUPTCY; FRAUDULENT TRANSFERS: Real property tax sale not avoidable under § 548: In re Russell-Polk, Adv. #96-4059-399, ___ B.R. ___, 1996 WL 531707, 1996 LXB 1144, Bankr. E.D. Mo. (9/4/96) Extending BFP v. Resolution Trust Corp., 114 S.Ct. 1757 (1994), the court held here that the price received at a properly conducted real property tax sale is per se a "reasonably equivalent value." Thus, such sales are not avoidable as fraudulent transfers under § 548, even though the price received is far below fair market value.

The Supreme Court in BFP held that the consideration received at a regularly conducted mortgage foreclosure sale conclusively established the value of the property for 548 purposes, but it expressly reserved the question of the avoidability of tax sales. Applying the rationale of BFP, the Russell-Polk court compard the protections applicable to Missouri foreclosure sales with those applicable to tax sales. Since both procedures require notice, competitive bidding, and provide post-sale redemption periods (two years for tax sales), the Court concluded that the price received at Missouri tax sale is a "reasonably equivalent value" under 548. (Missouri's statutory right of redemption following deed of trust foreclosures is quite limited and virtually useless - there is no post foreclosure redemption followin judicial foreclosure of mortgages).

The court indicated that other Bankruptcy courts also have applied BFP to validate tax foreclosure sales: In re McGrath, 170 B.R. 78 (Bankr.D.N.J.1994); In re Lord, 179 B.R. 429 (Bankr.E.D.Pa.1995); In re Hollar, 184 B.R. 243 (Bankr.M.D.N.C.1995); In re Golden, 190 B.R. 52 (Bankr.W.D.Pa.1995). But, cf. In re Butler, 171 B.R. 321, 327 n. 6 (Bankr. N.D.Ill.1994) (questioning, in dicta, whether BFP should apply to tax sales in Illinois since tax sale bids are in no way based on the value of the subject property).

Comment: The focus on whether the tax foreclosure sale procedure corresponds to mortgage foreclosure procedure is of some interest. Instead of emphasizing, as Justice Scaglia did in BFP, the question of state sovereignty over realization on property within its jurisdiction. This may have the consequence of making it difficult for states to move from their present systems of foreclosure of liens (tax or mortgage liens) to alternative devices. The Uniform Land Security Interest Act, for instance, provides for an alternative of a marketed sale. Such an alternative may well be preferable for the debtor, but would it place the validity of the sale in question in bankruptcy. BFP would not appear to cause difficulty, but cases like Russell-Polk suggest otherwise.

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