Article Courtesy of Michael Robson (Greenberg Traurig)
Lowry v. Southfield Neighborhood Revitalization Initiative, et al. (In re Lowry), 71 BCD 36, 2021 WL 6112972 (6th Cir. 2021)
Overview
As the price paid by the city of Southfield, Michigan (the “City”) to acquire the debtor’s home bore no relationship to the property’s fair market value, the United States Court of Appeals for the Sixth Circuit (the “Appeals Court”) found that (1) it could not constitute reasonably equivalent value under the BFP rule and (2) the Rooker-Feldman doctrine did not preclude the Bankruptcy Court’s consideration of the debtor’s complaint.
Full Summary
Hakeem Lowry (“Debtor”) failed to pay real estate taxes on his home for a number of years beginning in 2011 and in 2013 entered into annual payment plans with the Oakland Treasurer (the “Treasurer”) to pay his delinquent taxes. The initial agreement was extended to 2015 and each subsequent agreement stated that Debtor was required to make consistent and timely payments each month and that failure to do so would result in foreclosure. In June 2016, the Treasurer filed a petition to collect the taxes and fees owed on the property and on February 8, 2017, the Oakland County District Court (“District Court”) entered a judgment of foreclosure against Debtor’s home giving Debtor until March 31, 2017 to pay all associated taxes and fees. The District Court order provided that failure to make such payments would result in fee simple title of the property vesting in the Treasurer.
On March 31, 2017, Debtor entered into another payment plan with the Treasurer. The plan provided that it was “valid until February 2018” and Debtor began to make progress with respect to the delinquent taxes but was unable to fully satisfy the outstanding delinquent taxes from 2014 and 2015. As Debtor had not paid all required penalties on or before March 31, 2017, as ordered by the court, title in the property vested in the Treasurer. On July 31, 2017, the Treasurer sold Debtor’s home to the City for $14,496.50, the amount of outstanding property taxes, rather than the alleged fair market value of $152,000 at the time of foreclosure. The City then executed a quit-claim deed to convey the property to the Southfield Neighborhood Revitalization Initiative (“SNRI”) for $1.00. On September 29, 2017, SNRI sent Debtor a notice to quit the property by October 29, 2017 and SNRI initiated eviction proceedings after Debtor failed to vacate. On April 9, 2018, a state court granted SNRI’s motion for summary disposition.
Debtor subsequently filed for Chapter 13 relief, and then filed an adversary complaint against the Treasurer and SNRI asserting a number of claims, namely that Debtor was denied due process in the foreclosure process and that the foreclosure was avoidable as a fraudulent transfer. The U.S. Bankruptcy Court for the Eastern District of Michigan (“Bankruptcy Court”) granted SNRI’s motion for summary judgment, finding that the Rooker-Feldman doctrine mandated dismissal because the Debtor was attempting to relitigate the foreclosure proceedings from state court in a bankruptcy venue. The Bankruptcy Court also concluded that the rule in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), should extend to tax foreclosures in Michigan. In BFP, the U.S. Supreme Court held that if the foreclosing authority followed state law in a mortgage foreclosure sale, the sale price was the “reasonably equivalent value” of the property for purposes of 11 U.S. Code §548. Lastly, the Bankruptcy Court determined that Debtor could not use Section 548 to avoid the transfer because “the expiration of the redemption period following the judgment of foreclosure cuts off” the ability to challenge the tax foreclosure.
The Appeals Court reversed the Bankruptcy Court’s decision and remanded, and held that the Rooker-Feldman doctrine did not apply because the appeal did not involve a review of the merits of a state court judgment. Citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280 (2005), the Appeals Court wrote that “it is now clear that the doctrine may only be applied in cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” The Appeals Court further reasoned that Debtor’s alleged injury was not the state court foreclosure judgment, but the fact that he could not use Section 548 of the Bankruptcy Code to avoid the foreclosure as a fraudulent transfer. The Court wrote that “although the Section 548 issue is closely related to the state foreclosure judgment, that by itself does not mean that Rooker-Feldman applies.” The Court also found that BFP was inapplicable to the facts in this case and stated that “unlike BFP . . . this case involves a tax foreclosure, not a mortgage foreclosure, and in BFP, the Court explicitly declined to decide whether the rule applied to tax foreclosures.” The Court added that BFP was inapplicable because the Michigan tax foreclosure system was distinguishable from the mortgage foreclosure process addressed in BFP. Therefore, the Court reversed and remanded given the two primary arguments that the Bankruptcy Court and District Court relied upon for the dismissal of Debtor’s constructive fraudulent transfer claim were insufficient.
