County of Clinton et al v. Warehouse at Van Buren Street, Inc.

Filing 19

MEMORANDUM-DECISION and ORDER - That the October 18, 2012 order of Bankruptcy Court is AFFIRMED. Signed by Chief Judge Gary L. Sharpe on 5/15/2013. (jel, ) Modified on 5/15/2013 (jel, ).

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
________________________________
COUNTY OF CLINTON et al.,
Appellants,

8:12-cv-1636
(GLS)

v.
WAREHOUSE AT VAN BUREN
STREET, INC.,
Appellee.
________________________________
APPEARANCES:
OF COUNSEL:
FOR THE APPELLANTS:
Maynard, O’Connor Law Firm
6 Tower Place
Albany, NY 12203
FOR THE APPELLEE:
Nolan, Heller Law Firm
39 North Pearl Street
Albany, NY 12203

ROBERT A. RAUSCH, ESQ.

BRENDAN J. CAROSI, ESQ.

MEMORANDUM-DECISION AND ORDER
I. Introduction
Appellants County of Clinton and Joseph W. Giroux, as the Clinton
County Treasurer, (collectively “Clinton”), appeal from an order of the
Bankruptcy Court (Littlefield, C.J.), filed October 18, 2012, which denied
Clinton’s motion for summary judgment, and granted appellee Warehouse

at Van Buren Street, Inc.’s cross-motion for summary judgment. For the
reasons that follow, Bankruptcy Court’s order is affirmed.
II. Background
To avoid redundancy, the facts recited in the court’s prior
Memorandum-Decision and Order are incorporated herein. (See Dkt. No.
12.) By way of background, in November 2012, Clinton unsuccessfully
sought a stay of Bankruptcy Court’s order that required, among other
things, that a certain piece of real property (“the Meridian Road Property”)
be reconveyed to Warehouse by virtue of 11 U.S.C. § 548. (See generally
Dkt. No. 12.)
III. Standard of Review
District courts have jurisdiction to hear both interlocutory and final
appeals from orders of the bankruptcy court. See 28 U.S.C. § 158(a). In
exercising its appellate jurisdiction, the district court distinguishes between
findings of fact and conclusions of law; reviewing the former under the
“clear error” standard, and the latter de novo. R² Invs., LDC v. Charter
Commc’ns, Inc. (In re Charter Commc’ns, Inc.), 691 F.3d 476, 483 (2d Cir.
2012); see United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)
(“A finding is ‘clearly erroneous’ when although there is evidence to support
2

it, the reviewing court on the entire evidence is left with the definite and
firm conviction that a mistake has been committed.”). Where a finding is
mixed—i.e., it contains both conclusions of law and factual findings—the
de novo standard applies. See Travellers Int’l, A.G. v. Trans World
Airlines, Inc., 41 F.3d 1570, 1575 (2d Cir. 1994). After applying these
standards to the questions of law and fact, the district court “may affirm,
modify, or reverse a bankruptcy judge’s judgment, order, or decree or
remand with instructions for further proceedings.” Fed. R. Bankr. P. 8013.
IV. Discussion
Clinton urges the court to reverse Bankruptcy Court’s order on two
grounds. First, Clinton contends that the transfer of the Meridian Road
Property to Clinton County following Warehouse’s default in an in rem
foreclosure proceeding “does not constitute a ‘fraudulent conveyance’
avoidable under [11 U.S.C. § 548].” (Dkt. No. 4 at 11-20.) Second, Clinton
asserts that, because Warehouse defaulted before filing its bankruptcy
petition, the Meridian Road Property is not part of the bankruptcy estate,
and, accordingly, Warehouse is without “standing to challenge the transfer
in Bankruptcy Court.” (Id. at 21-23.) Because “standing imports
justiciability,” it is a threshold question that must be addressed before
3

considering the merits of this appeal. Warth v. Seldin, 422 U.S. 490, 498
(1975). Accordingly, the court first considers that issue.
A.

Standing

Fleshing out its argument that Warehouse lacks standing, Clinton
claims that, because Warehouse lost all right to the Meridian Road
Property four months in advance of filing its Chapter 11 petition, the
property was not part of the bankruptcy estate at the outset of the
bankruptcy proceeding. (See Dkt. No. 4 at 21-23.) It follows, contends
Clinton, that Warehouse lacked standing to commence an adversary
proceeding regarding property that was not part of the bankruptcy estate.
(See id.) The court disagrees with Clinton’s circular argument.
Here, the Meridian Road Property was not property of the estate at
the inception of the Chapter 11 bankruptcy because Warehouse no longer
had an interest in it by virtue of its default, see 11 U.S.C. § 541; Johnson v.
Cnty. of Chautauqua (In re Johnson), 449 B.R. 7, 10 (W.D.N.Y. 2011)
(citing Wisotzke v. Ontario Cnty., 382 F. App’x 99, 100 (2d Cir. 2010));
(Dkt. No. 15 at 32-33.) To conclude that Warehouse lacks standing
because of that fact, however, is to put the cart before the horse.
Specifically, section 541(a)(3) includes as part of the bankruptcy estate
4

“[a]ny interest in property that the trustee recovers under section . . . 550.”
Section 550, in turn, permits a trustee to avoid a transfer of property for,
among other things, “[f]raudulent transfers and obligations” under section
548, at issue below. Moreover, a debtor in possession, such as
Warehouse, has all the rights of a trustee. See 11 U.S.C. §§ 1101(1),
1107(a). The amalgamation of the foregoing demonstrates that property
recovered by a trustee—or, as is the case here, a debtor in
possession—pursuant to section 548 “is not to be considered property of
the estate until it is recovered.” Fed. Deposit Ins. Corp. v. Hirsch (In re
Colonial Realty Co.), 980 F.2d 125, 131 (2d Cir. 1992). Accordingly, it
would be illogical to hold that a debtor in possession lacks standing to set
aside a fraudulent conveyance because the property—which it could not
include in the bankruptcy estate when the Chapter 11 petition was filed—
was not originally part of the bankruptcy estate. To hold otherwise would
foreclose either a trustee or debtor in possession from relying on section
548.
B.

Section 548

Moving on to the merits, Clinton argues that Congress simply could
not have intended for a valid tax foreclosure proceeding to fall within the
5

scope of a “fraudulent transfer” under section 548. (See Dkt. No. 4 at 1120.) It further claims that, if Bankruptcy Court’s ruling is extended to other
cases, such a rule “would always result in real property tax foreclosures
[being] set aside” because “[i]nvariably, there will always be a significant
disparity between the amount of taxes due and [the] value of the property
itself.” (Id. at 12-13, 16.) Moreover, Clinton contends that: despite the fact
that the statute is disjunctive, the intent element embodied by section
548(a)(1)(A), which concerns actual fraud, should nonetheless be
considered when analyzing this case under (a)(1)(B), which concerns
constructive fraud; permitting a judgment of foreclosure to be vacated by
virtue of section 548 impinges on the County’s ability to conduct tax
foreclosure proceedings; and, finally, the court should consider the fact
that Warehouse took no steps to protect itself even though its owner was
well aware of the imminence of foreclosure. (See id. at 13-14, 15-18, 1820.)
Section 548, titled “Fraudulent transfers and obligations,”1 permits a
1

As Warehouse argues, (see Dkt. No. 17 at 8 n.1), the malfeasance
requirement suggested by the statute’s heading cannot alter “‘that which
the [statute’s] text makes plain.’” Intel Corp. v. Advanced Micro Devices,
Inc., 542 U.S. 241, 256 (2004) (quoting Bhd. of R.R. Trainmen v. Balt. &
O.R. Co., 331 U.S. 519, 529 (1947)).
6

trustee2 to avoid transfers of an interest in property within two years of the
date on which the petition was filed under certain circumstances. In
particular, as relevant here, the statute provides:
(a)(1) The trustee may avoid any transfer . . . of an interest of the
debtor in property, or any obligation . . . incurred by the debtor,
that was made or incurred on or within [two] years before the date
of the filing of the petition, if the debtor voluntarily or
involuntarily—
(A) made such transfer or incurred such obligation
with actual intent to hinder, delay, or defraud any
entity to which the debtor was or became, on or after
the date that such transfer was made or such
obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent
value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was
made or such obligation was incurred, or became
insolvent as a result of such transfer or obligation
....
11 U.S.C. § 548. An issue closely related to the instant one was
addressed by the Supreme Court of the United States in BFP v. Resolution
Trust Corporation, 511 U.S. 531 (1994). In BFP, the Court held that, as a
matter of law, mortgage foreclosure sales result in “reasonably equivalent
value” where the state’s foreclosure law is followed, and, thus, section 548
cannot be used to avoid a transfer that follows a mortgage foreclosure.
2

Pursuant to 11 U.S.C. § 1107(a), a debtor in possession has all the
rights of a trustee.
7

See id. at 545. The Court specifically reserved on extending its holding to
“other foreclosures and forced sales (to satisfy tax liens, for example).” Id.
at 537 n.3.
Bankruptcy courts have addressed one of the questions that went
unresolved by BFP, with some extending that holding to tax foreclosures,
see, e.g., Fisher v. Moon (In re Fisher), 355 B.R. 20 (Bankr. W.D. Mich.
2006); Comis v. Bromka (In re Comis), 181 B.R. 145 (Bankr. N.D.N.Y.
1994), and others refusing to do so on the premise that, under New York
law, there are substantial differences between mortgage and in rem tax
foreclosures that distinguish the two and justify their different treatment,
see, e.g., Herkimer Forest Prods. Corp. v. County of Clinton (In re
Herkimer Prods. Corp.), Bankruptcy No. 04-13978, Adversary No. 0490148, 2005 WL 6237559, at *3-4 (Bankr. N.D.N.Y. July 26, 2005);
Balaber-Strauss v. Town of Harrison (In re Murphy), 331 B.R. 107, 119-21
(Bankr. S.D.N.Y. 2005); Harris v. Penesi (In re Harris), No. 01-10365, 2003
WL 25795591, at *5 (Bankr. N.D.N.Y. Mar. 11, 2003).
On its face, the Bankruptcy Code plainly allows for “any transfer”3

3

Foreclosure of a tax lien falls squarely within the definition of
“transfer” under the Bankruptcy Code. 11 U.S.C. § 101(54).
8

within two years before the filing of a bankruptcy petition to be avoided if
the debtor voluntarily or involuntarily “received less than a reasonably
equivalent value in exchange for such transfer,” and one of the further
requirements of (B)(ii) is met, which, as relevant here, includes the debtor’s
insolvency as of a particular time. 11 U.S.C. § 548(a)(1)(B); (Dkt. No. 9 at
14-15.) Notably, the intent of the debtor is irrelevant if avoidance is
premised upon section 548(a)(1)(B).4 See Balaber-Strauss, 331 B.R. at
136 (“A claim of constructive fraud [under section 548(a)(1)(B)] does not
require misconduct or bad intent . . . .”).
Here, it is undisputed that transfer of the Meridian Road Property
occurred without any active involvement of Warehouse, and, as such, the
transfer, which followed default judgment, could not have been motivated
by an “intent to hinder, delay, or defraud” under 11 U.S.C. § 548(a)(1)(A).
Moreover, the parties agree that the outstanding tax debt owed by
Warehouse was approximately $29,000, while the bid at auction later the

4

Accordingly, Clinton’s arguments that intent and Warehouse’s
conduct should be considered are unpersuasive, (see Dkt. No. 4 at 1314), as is its assertion that section 548(a)(1)(A) is rendered meaningless
or without purpose, (see id. at 14). Indeed, aside from foreclosures, the
clause referencing intent may validly serve as a means for avoiding a
transfer of property, without consideration of reasonably equivalent value.
9

same day that the Chapter 11 petition was filed was $120,000, and that
Warehouse was insolvent at the relevant time. (See Dkt. No. 1 ¶¶ 8, 20;
Dkt. No. 9 at 14-17.)
The court finds none of Clinton’s arguments persuasive. In general,
the arguments—that Congress could not have intended a transfer following
a tax foreclosure to be “fraudulent”; intent should be considered with
respect to section 548(a)(1)(B) even though no such requirement is
articulated; and the related argument that Warehouse’s conduct is
relevant, (see Dkt. No. 4 at 11-20)—run contrary to the express language
of the statute. And, in particular, Clinton’s assertion that permitting
avoidance of a transfer that flows from a tax foreclosure impermissibly
interferes with the County’s ability to conduct tax foreclosure proceedings,
(see Dkt. No. 4 at 15-18), is unavailing. The rationale of BFP—that state
interests in ensuring security in the titles to real estate supported a
conclusive presumption that reasonably equivalent value is always the
price received at the mortgage foreclosure sale, see 511 U.S. at 544-45;
see also Comis, 181 B.R. at 150—does not, in the view of this court, apply
to tax lien foreclosures. As the Herkimer, Balaber-Strauss, and Harris
courts reasoned, “the ‘amount of a tax lien is no evidence whatsoever of
10

the property’s value’ and, thus, there [can] be no presumption that the
debtor received reasonably equivalent value” as in the BPF mortgage
foreclosure scenario. Herkimer, 2005 WL 6237559, at *3 (quoting
Wentworth v. Town of Acton, ME (In re Wentworth), 221 B.R. 316, 320
(Bankr. D. Conn. 1998)); see Balaber-Strauss, 331 B.R. at 118-19; Harris,
2003 WL 25795591, at *5.5 This interpretation does not dictate a
perennially adverse result for the taxing district because the factual
question regarding reasonably equivalent value will remain for the
bankruptcy court’s resolution.
Having resolved the legal question that section 548(a)(1)(B) applies
to in rem tax foreclosures conducted pursuant to New York’s Real Property
and Tax Law, and finding no clear error in Bankruptcy Court’s factual
finding that reasonably equivalent value was not received by Warehouse in
this case, (see Dkt. No. 9 at 16), the court affirms.

5

Moreover, the state interest must be balanced against “the
Bankruptcy Code’s strong policy favoring equal treatment of creditors.”
N.Y. State Elec. & Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93,
97 (2d Cir. 1997). Avoidance under section 548 brings the property into
the bankruptcy estate and makes it available for the benefit of all creditors
as opposed to permitting a taxing district, like Clinton, to be enriched to
the detriment of other creditors following the sale of a foreclosed upon
property. See 11 U.S.C. § 541(a)(3).
11

V. Conclusion
WHEREFORE, for the foregoing reasons, it is hereby
ORDERED that the October 18, 2012 order of Bankruptcy Court is
AFFIRMED; and it is further
ORDERED that the clerk provide a copy of this MemorandumDecision and Order to the parties.
IT IS SO ORDERED.
May 15, 2013
Albany, New York

12