Berley Assocs., Ltd. v. Eckert (In re Berley Assocs., Ltd.)

• Decision Date: 16 May 2013
• Docket Number: Adversary No. 12–02208 (MBK).,Bankruptcy No. 12–32032 (MBK).
• Parties: In re BERLEY ASSOCIATES, LTD., Debtor. Berley Associates, Ltd., Plaintiff, v. Geza Eckert, Defendant.
• Court: U.S. Bankruptcy Court — District of New Jersey

492 B.R. 433

In re BERLEY ASSOCIATES, LTD., Debtor.Berley Associates, Ltd., Plaintiff,

v.Geza Eckert, Defendant.

Bankruptcy No. 12–32032 (MBK).

Adversary No. 12–02208 (MBK).

United States Bankruptcy Court, D. New Jersey.

May 16, 2013.

Morris S. Bauer, Esq., Norris, McLaughlin & Marcus, P.A., Bridgewater, NJ, for Debtor/Plaintiff, Berley Associates, Ltd.

Keith A. Bonchi, Esq., Goldenberg, Mackler, Sayegh, Mintz, Pfeffer, Bonchi & Gill, A.P.C., Northfield, NJ, for Defendant, Geza Eckert.

MEMORANDUM DECISION

MICHAEL B. KAPLAN, Bankruptcy Judge.

I. INTRODUCTION

This matter is before the Court by way of a Motion for Summary Judgment (“Motion”) filed on behalf of the Defendant, Geza Eckert (“Defendant” or “Eckert”), relative to Berley Associates, Ltd.'s (“Debtor” or “Plaintiff”) adversary proceeding to recover avoidable transfers under 11 U.S.C. §§ 547 and 548. In response to the Motion, Debtor filed a Cross Motion for Summary Judgment (“Cross Motion,” and collectively the “Motions”) seeking summary judgment in its favor. A hearing on the Motions was held on March 20, 2013.

After careful review of the submissions of the parties, which include post-hearing submissions, the Court determines that the transfer of title to the Defendant in a pre-petition tax sale and foreclosure context, where there was no competitive bidding, may constitute a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B), and is not barred by the United States Supreme Court's holding in BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). Likewise, the Court further concludes that the transfer at issue may constitute an avoidable preference under 11 U.S.C. § 547(b). For the reasons set forth below, the Motions are denied without prejudice.

II. JURISDICTION

The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended September 18, 2012, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(F) and (H). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The following constitutes the Court's findings of fact and conclusions of law as required by Fed. R. Bankr.P. 7052.¹

III. FACTS/PROCEDURAL HISTORY

The Debtor owned property located at 62 Speedwell Avenue in Morristown, New Jersey (the “Property”), which consists of a vacant lot. The Debtor failed to pay real estate taxes on the Property in 1999 and, as a result, the township of Morristown conducted a public tax sale on June 14, 2000. The successful bidder at the tax sale was Phoenix Funding, Inc. (“Phoenix”), which obtained a tax sale certificate and accompanying lien on the Property. Subsequently, Phoenix assigned its lien to Defendant Eckert.

The Debtor consistently failed to pay subsequent real estate taxes on the Property and, on January 19, 2010, nearly ten years after Debtor's initial tax delinquency, Eckert filed a New Jersey state court complaint to foreclose on the tax sale certificate pursuant to N.J.S.A. § 54:5–1, et seq. On September 16, 2011, the Superior Court of New Jersey entered an Order setting the time, place, and amount for redemption of the tax sale certificate. The redemption amount, as of January 10, 2011, was $244,195.99, plus taxed costs, and the last day to redeem was set as November 1, 2011. The Debtor failed to redeem the tax sale certificate and, on September 4, 2012, a final judgment was entered in the tax sale foreclosure action, enabling Eckert to obtain title to the Property.

On September 5, 2012, the Debtor filed a voluntary Chapter 11 bankruptcy petition and listed the Property with a fair market value of $500,000 in its Schedules of Assets and Liabilities. On December 10, 2012, the Debtor filed the within adversary proceeding seeking to have this Court void the final judgment, which conveyed title to Eckert, as (i) a fraudulent transfer pursuant to 11 U.S.C. § 548(a) and/or (ii) a preferential transfer pursuant to 11 U.S.C. § 547(b). The Debtor bottoms its complaint on the alleged sizeable difference between the Property's fair market value and the indebtedness owed to Eckert. On February 8, 2013, Eckert filed the within Motion seeking a favorable ruling on summary judgment grounds. On March 7, 2013, the Debtor filed its Cross Motion.

A. Defendant's Position

Eckert primarily relies upon the United States Supreme Court's decision in BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) in support of his position that compliance with the substantive and procedural requirements for the foreclosure of his tax lien bars subsequent avoidance efforts by the Debtor. Eckert further maintains that the structure of the New Jersey tax sale law provides two incentives to purchase a tax sale certificate: (i) the money earned from interest on the tax sale certificate and (ii) the opportunity to acquire the underlying property. Eckert explains that the second incentive provides the possibility of acquiring property that is worth much more than the redemption amount. Thus, it is Eckert's position that the New Jersey tax sale law, and its underlying objectives, contemplate a result in which a tax sale certificate purchaser obtains title to a property for significantly less than the actual value of the property.

In BFP, the debtor argued that the acquisition of title as a result of a mortgage foreclosure was a fraudulent conveyance because the debtor received “less than a reasonably equivalent value in exchange for such transfer.” BFP, 511 U.S. at 563, 114 S.Ct. 1757. The Supreme Court rejected fair market value as the benchmark for measuring reasonably equivalent value and concluded that “a fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State's foreclosure law have been complied with.” Id. at 545, 114 S.Ct. 1757. Consequently, the Supreme Court has clarified that, at least with respect to mortgage foreclosures, transfer of title for a value significantly less than the fair market value of the property is not a fraudulent conveyance so long as the transfer complies with state law. This was, the Court noted, because the concept of fair market value “has no applicability in the forced-sale context.” Id. at 545, 114 S.Ct. 1757. Eckert advances that the same reasoning applies to transfers of title as a result of tax sale foreclosures.

Eckert refers this Court to two prior decisions from this District which have addressed this issue in the tax sale foreclosure context. See In re McGrath, 170 B.R. 78 (Bankr.D.N.J.1994) and In re 2435 Plainfield Avenue, Inc., 72 F.Supp.2d 482 (D.N.J.1999)aff'd213 F.3d 629 (3d Cir.2000). In McGrath, the Bankruptcy Court analyzed the similarities and differences between tax sale certificate foreclosures and mortgage foreclosures. Ultimately, Judge Stripp concluded that the two types of foreclosures were sufficiently similar that the rationale of the Supreme Court in BFP should apply equally to tax foreclosures. Additionally, Judge Stripp found that “the policy considerations favoring deference to mortgage foreclosure sales [discussed by the Supreme Court in BFP ] appl[ied] with as much force to tax foreclosure sales.” In re McGrath, 170 B.R. at 82.

In Plainfield, however, Judge Stripp seems to have reversed course from his reasoning in McGrath. There, a township purchased a tax sale certificate and ultimately foreclosed and took title to the underlying property. After the foreclosure, the former owner of the property filed for bankruptcy and brought an adversary proceeding against the township alleging, among other things, that the transfer should be set aside as a fraudulent conveyance. The defendant-township subsequently moved to dismiss the adversary proceeding in the Bankruptcy Court. In his Plainfield decision, In re 2435 Plainfield Ave., 223 B.R. 440 (Bankr.D.N.J.1998), Judge Stripp takes a significant step back from his holding in McGrath, denying the defendant-township's motion to dismiss, and allowing the plaintiff-debtor's claim to proceed under both a state law fraudulent conveyance theory and an equity theory pursuant to N.J. Ct. R. 4:50–1 (which court rule provides New Jersey courts with discretionary authority to apply equitable remedies). On appeal to the District Court, however, Judge Thompson determined that the Bankruptcy Court had erred when it found that a cause of action existed under the Fraudulent Conveyance Act (“FCA”). Judge Thompson concluded that the FCA had been repealed and superseded by the Uniform Fraudulent Transfer Act (“UFTA”) and noted that “[t]he UFTA, as modified by the Tax Sale Law, prevents a court from setting aside a tax foreclosure judgment as a fraudulent conveyance.” In re 2435 Plainfield, 72 F.Supp.2d at 487. As a result, the District Court ruled that the plaintiff in Plainfield could not proceed under a fraudulent conveyance theory. Likewise, Judge Thompson found no statutory or decisional authority to support Judge Stripp's conclusion that the plaintiff held a claim for relief under an equitable theory. For those reasons, the appeal was granted and the case was remanded to the Bankruptcy Court.

Finally, Eckert disputes the Debtor's contention that the transfer of title is a voidable preference under 11 U.S.C. § 547(b). Eckert again asserts that the ruling in BFP serves as a bar to any recovery of alleged preferential transfers. Additionally, Eckert asserts that there is no equity in the Property and therefore even if the transfer is set aside, there would be no available funds for unsecured creditors.

B. Debtor's Position

The Debtor posits that the elements necessary to establish a fraudulent conveyance claim under 11 U.S.C. § 548(a)(1)(B) have been satisfied in the unique circumstances of ...