Article courtesy of Michael Robson (Greenberg Traurig, LLP)
In re West, No. 21 31047 JDA, 2022 WL 1309939 (Bankr. E.D. Mich. May 2, 2022)
In an adversary proceeding, the defendant, Shiawassee County in the State of Michigan, sought to dismiss the plaintiff/debtor’s four count complaint, which alleged that the state court judgment of foreclosure against the debtor’s residence constituted a fraudulent transfer under 11 U.S.C. § 548 of the Bankruptcy Code.
The dispute arose out of a purchase of real property located in Shiawassee County, purchased by Joseph West (the “Debtor”). In 2016, Debtor purchased real property located in Owosso, Michigan (the “Property”) for $130,000.00, free and clear of any liens. In 2018, Debtor did not pay the property taxes due and owing on the Property and, in June 2020, the Property was forfeited to Shiawassee County. The State of Michigan (the “State”), on behalf of Shiawassee County, initiated foreclosure proceedings on the Property and, on February 12, 2021, the Shiawassee County Circuit Court entered a judgment of foreclosure. Debtor did not appeal the judgement of foreclosure and it became final 21 days after entry in March 2021. Debtor did not redeem the Property and on March 31, 2021, title to the Property vested in the State. In July 2021, Debtor filed an individual chapter 13 bankruptcy petition. In the petition, Debtor (i) stated Debtor was the sole owner of the Property and valued the Property at $250,000, (ii) sought to exempt Debtor’s equity in the amount of $25,150 pursuant to the federal homestead exemption and (iii) disclosed two tax liens for unpaid property taxes on the Property totaling $13,000. Debtor’s Chapter 13 plan proposed to pay the Shiawassee County Treasurer $15,235.80 for unpaid property taxes. The proposed plan also included a non-standard provision which provided that upon confirmation, Shiawassee County would set aside the foreclosure judgment and title to the Property would re-vest in Debtor. In August 2021 the Property was sold at public auction to third party purchasers, Ryan and Ashley Van Gilder (the “Van Gilders”). In December 2021, Debtor filed a four count adversary complaint against the Van Gilders. Count I asserted that the foreclosure should be set aside as fraudulent under § 548(a); Count II sought recovery of the fraudulent transfer pursuant to §550; Count III sought disallowance of any claims filed by either the State or Shiawassee County; and Count IV asserted that any claims against the State or Shiawassee County are equally valid against the third party purchasers. A default judgment was entered against the Van Gilders because they did not file an answer to the underlying complaint. The default judgment voided the quit claim deed issued to them by the State and ordered them to re-convey the Property to the State within 30 days. The State then filed a motion to dismiss for failure to state a claim upon which relief can be granted. The State argued that (i) the Rooker-Feldman doctrine precluded the United States Bankruptcy Court, Eastern District, Southern Division (the “Court”) from reviewing or setting assign the state court judgment of foreclosure and (ii) Debtor failed to state a claim for fraudulent conveyance since the State’s actions were consistent with state tax foreclosure laws and procedures.
Examining the facts at hand, the Court found the following. First, that Debtor failed to set forth allegations sufficient to state a claim for fraudulent transfer under § 548 of the Bankruptcy Code. When a tax foreclosure sale complies with state law, and the tax foreclosure sale procedures provide at least some market forces to approximate the value of the property (i.e. competitive bidding), then the price obtained at the tax sale represents reasonably equivalent value for purposes of a fraudulent transfer claim under § 548. Second, Debtor had a claim for excess sale proceeds but failed to pursue it in a timely manner. Finally, the Court found that that Debtor failed to raise any issue as sufficient to support an amended complaint. For the foregoing reasons, the Court granted the motion to dismiss by Shiawassee County against Debtor.
