Daily Development for
Friday, October 30, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BANKRUPTCY; FRAUDULENT TRANSFERS: Debtor's estate may avoid a transfer of a residence when debtor received title to the property from her husband without consideration and then transferred title to herself and her husband as tenants in the entirety.

In re: Gutpelet, 1998 U.S. App. LEXIS 3290 (3d Cir.).

Debtor's husband transferred title of his home to her for no consideration. The apparent purpose was so that the debtor could obtain a home equity loan on the property in her name. The husband had serious credit problems at the time. The proceeds of the home equity loan were used to resolve some of the husband's difficulties, but Debtor also applied a substantial portion of the loan proceeds to her own benefit. Thereafter, the debtor also got into serious financial problems, and, less than one year prior to filing bankruptcy, transferred the property to herself and her husband as tenants by the entireties. Some time thereafter they sold the house for substantially more than the liens against it, and deposited over $100,000 in proceeds in a bank account.

The bankruptcy estate apparently was seeking these proceeds when it claimed that the transfer to tenancy by the entireties was avoidable.

Held: Estate can claim the proceeds. Although interests held by Pennsylvania tenants in the entirety are exempted from process under bankruptcy law, the debtor's sole interest in the property before the transfer to herself and her husband had substantial value, and thus her transfer into tenancy by the entireties for no consideration deprived the estate of that value and was avoidable.

Debtor argued that since she paid no consideration for the title she received from her husband, her estate suffered no loss from the transfer back. Further, and related to the first argument, she claimed that the entire transaction from her husband to herself and ultimately back to her husband should be regarded as one transaction.

The court, however, found that it was not necessary for Debtor to give consideration for the property in order to view it as part of her estate. Her "extended and extensive dealings" with the real estate were sufficient to establish such an interest."

Although the court recognized that there is authority for the notion that where a party obtains temporary ownership of property as a "mere conduit," it might not be viewed as having held an interest subject to avoidance. But the court found that the instant transaction could not be so characterized, even though Debtor contended that she was nothing more than a "passive tool" for her husband.

BANKRUPTCY; FRAUDULENT CONVEYANCE; FAIR VALUE; FORECLOSURE: Price paid at regularly conducted, non-collusive property tax foreclosure sale will be presumed conclusively fair market value of property for purposes of fraudulent conveyance analysis under federal bankruptcy laws.

In re Samaniego, 1998 WL 540736 (E.D. Wash. 1998).

In its landmark decision in In re BFP, the U.S. Supreme Court included a footnote limiting the scope of its opinion that regularly conducted state foreclosure sales establish conclusively the fair market value of the property sold. The court indicated that the considerations for foreclosures other than mortgage foreclosures might be different, and that its opinion did not necessarily validate the result of state law foreclosures other than mortgage and deed of trust foreclosures. The Court stated specifically that it was not validating the result of all state property tax foreclosures.

But the Washington Federal District Court here takes the next step and concludes that the principles of BFP ought to apply to property tax foreclosures in Washington.

Comment: Those interested in establishing a different precedent might have selected a better case than the one before the court. The debtor had a pretty good excuse for not paying the taxes and suffering the foreclosure - he had heart surgery a few days before the sale and believed (incorrectly but in good faith) that he had arranged for a bankruptcy filing that would stay the sale. Nevertheless, the court concludes that the sale was valid and beyond attack as a matter of state law.

As to the fair value determination, the court pointed out that the property sold for substantially more than the tax claim in a vigorously contested auction. The purchaser paid $40,000 for the properties. The taxpayer argued that they were worth between $75,000 and $110,000. But this kind of difference between the price bid and the fair value if a far cry from the variances that might be found in some property tax sales.

The big difference in property tax sales is that the amount claimed by the foreclosing creditor - the County tax collector - often is relatively low compared to the value of the property. Thus the foreclosing creditor's bid does not result in a fair value auction sale as it often does in mortgage foreclosures. Such a statement is only a gross generalization of course. Some mortgage foreclosures involve a major discrepancy between the amount owed and the value of the property, and some tax foreclosures do not. But in general it could be said that the risk of an undervalue bid by the foreclosing creditor is greater in tax foreclosures.

The court here states that it has no clue what the Supreme Court in BFP meant in excepting tax foreclosures from the coverage of its ruling of fair value. It might have thought through this matter a little more aggressively had there been a huge price discrepancy, and debtor's counsel probably could have found sales demonstrating such a discrepancy had they looked.

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