Doing the Splits How Many Ways Can a State Tax Foreclosure Sale Raise the Question of “ Reasonably Equivalent Value ”?
Annette W . Jarvis , Greenberg Traurig , LLP Secretary , American College of Bankruptcy
In 1994 , the Supreme Court in BFP v . Resolution Trust Corp ., 511 U . S . 531 ( 1994 ) resolved a circuit split in addressing whether the consideration received in a properly conducted mortgage foreclosure sale could be a fraudulent transfer under Section 548 of the Bankruptcy Code . The precise question was whether the consideration paid in the foreclosure sale , which was significantly less than fair market value , “ satisfies the Bankruptcy Code ’ s requirement that transfers of property by insolvent debtors . . . be in exchange for ‘ a reasonably equivalent value ’” under Section 548 ( a ) of the Bankruptcy Code . In considering ( i ) the language of the Bankruptcy Code , which uses the term “ fair market value ” in other contexts , but not in Section 548 , ( ii ) the policy that had coexisted for over 400 years between fraudulent transfer law and state foreclosure law , and ( iii ) the lack of any explicit indication in the Bankruptcy Code to change existing state law , the Supreme Court held that “ reasonably equivalent value ” for foreclosed real property is the price in fact received at the foreclosure sale , as long as that foreclosure sale complied with all of the requirements of the applicable state ’ s foreclosure law . While the Supreme Court based its decision both on a textual analysis and policy considerations , it is the policy considerations that have become the focus in the aftermath of this decision .
The Supreme Court heard BFP to resolve a circuit split ; yet , ironically , only a few months after the decision was issued , it proved to be the genesis of another circuit split . BFP addressed mortgage foreclosure sales , but the Circuits have grappled with how to apply this precedent to tax foreclosures sales . Tax foreclosure sales encompass a completely different procedure from mortgage foreclosure sales and the process differs from state to state , but the questions of what constitutes “ reasonably equivalent value ” remains an issue in these foreclosures .
The Fifth Circuit was the first to address BFP ’ s application to tax foreclosure sales with In re T . F . Stone Co ., Inc ., 72 F . 3d 466 ( 5th Cir . 1995 ). The sale was challenged under Section 549 of the Bankruptcy Code as an unauthorized post-petition transfer which can be avoided if the sale did not yield “ present fair equivalent value ,” rather than the requirement of “ reasonably equivalent value ” used under Section 548 . Failing to “ perceive a meaningful difference between ‘ reasonably ’ and ‘ present fair ’ as applied in the context of [ a ] forcedsale case ,” and even acknowledging the small consideration paid for the property in the tax foreclosure sale through its foreclosure by the taxing authority and subsequent resale , the Fifth Circuit followed BFP in determining that the tax sale continued on page 26
13