Daily Development for Tuesday, March 25, 2002

 

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

 

BANKRUPTCY; AUTOMATIC STAY; POST-PETITION TAX SALE; "PRESENT FAIR EQUIVALENT VALUE":   An innocent purchaser who paid less than 50% of the market value of real property sold at a regularly-conducted tax sale conducted in violation of the automatic stay was not entitled to defend its title under Section 549(c) of the Bankruptcy Code, because the price paid was not the "present fair equivalent value."

 

40235 Washington Street Corp. v. Lusardi, 177 F.Supp.2d 1090, 2001 U.S. Dist. LEXIS 19973 (S.D.Cal. 2001).

 

The Supreme Court's holding and analysis in BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757 (1994), which provided a safe harbor against review of price for regularly conducted mortgage foreclosures, applies to pre-bankruptcy foreclosures challenged as fraudulent transfers.

The court here concluded that the analysis should not be extended to sales conducted post-petition in violation of the automatic stay, because the policies are different.

 

Also, the court noted that  the wording in section 548 under which Bankruptcy Courts reviewed pre-petition foreclosure sales to determine whether the purchaser paid "a reasonably equivalent value," is different from the wording of section 549(c), calling for a "present fair equivalent value," and Congress can be presumed to have intended different standards to apply.

 

There is also the rule that exceptions to the automatic stay should be interpreted narrowly, and section 549(c) -- which protects certain post- petition purchasers in narrowly defined cases -- should therefore be interpreted restrictively.

 

The tax sale in this case was completed before the purchaser learned of the bankruptcy.  But the purchaser failed to obtain and record a the tax deed before a copy of the bankruptcy petition was filed in the county of sale, and that fact would also have defeated protection under section 549(c), which is a "race" statute based on the first to record.  (see note 2 in the opinion.)

 

The court also noted that a state law, Calif. Rev. & Tax. Code '3728, which required the taxpayer to pay off any tax due before a tax sale could be rescinded, could not interfere with the provisions of bankruptcy law that required the sale to be declared void under the circumstances.

 

Comment: One might argue that a good faith purchaser without notice of the bankruptcy filing is basically in the same equitable position as a party acquiring at a foreclosure sale prior to that filing.  Further, although the wording of the price test is different, it is not clear why that difference should affect whether a fair and open foreclosure sale is not the best test of true value.

 

Perhaps the best explanation of the case is that the process of bankruptcy begins with the filing, and that any exceptions to the automatic stay that accompanies that filing should be read extremely narrowly.

 

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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