Gunsalus v. Cnty. of Ontario
| Decision Date | 27 June 2022 |
| Docket Number | 20-3865-bk,August Term, 2021 |
| Citation | 37 F.4th 859 |
| Parties | Brian L. GUNSALUS, Gliee V. Gunsalus, Plaintiffs-Appellees, v. COUNTY OF ONTARIO, NEW YORK, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
Kari A. Talbott (Mark Wattenberg, on the brief), Legal Assistance of Western New York, Inc., for Plaintiffs-Appellees.
Jason S. DiPonzio, Jason S. DiPonzio, P.C., for Defendant-Appellant.
Before: CABRANES, PARKER, and LEE, Circuit Judges.
BACKGROUND
This case arises from the foreclosure of a tax lien on a home in Ontario County, New York, owned by a married couple, Brian and Gliee Gunsalus, which resulted in the loss of title to their home. Following the foreclosure, the couple filed for protection under Chapter 13 of the Bankruptcy Code and filed a complaint seeking to avoid the loss of their home on the grounds that it was a fraudulent conveyance. The Bankruptcy Court set aside the transfer, and the County appeals, raising two questions. The first is whether the Gunsaluses had standing to bring the avoidance proceeding. The second is whether the transfer effected by Ontario County in foreclosing on the lien was entitled to the presumption of having yielded "reasonably equivalent value" under Section 548 of the Bankruptcy Code. We answer yes and no, respectively.
The property in question is a modest family home. Mrs. Gunsalus has lived there her entire life and for the past fifteen years she and Mr. Gunsalus have lived there with their disabled adult son. They owned the home free and clear of mortgages. Due to a temporary reduction in Mr. Gunsalus’ wages, the couple was unable to pay their real estate taxes, and the property became subject to a tax lien in the amount of unpaid taxes, $1,290.
After the lien remained unpaid for a number of months, the County instituted proceedings pursuant to Article 11 of New York's Real Property Tax Law ("RPTL") to enforce the lien. See RPTL §§ 1120 et seq. The County first included the property on the "List of Delinquent Taxes" filed in the County Clerk's Office. See id. § 1122. The County then filed a petition that commenced an in rem tax foreclosure action.
The Gunsaluses answered the petition and the County, in turn, moved for summary judgment. The Gunsaluses opposed that motion and cross-moved for an extension of time to pay the overdue taxes. The Ontario County Supreme Court denied the cross-motion and granted the County's motion. In June 2016, the Ontario County Supreme Court entered a final judgment of foreclosure awarding the County possession of, and title to, the home. The Gunsaluses were permitted to continue residing in the property pending the outcome of this litigation.
In May 2017, the County scheduled an auction of the property, which was sold to a third party for $22,000. The unpaid taxes, as noted, had amounted to $1,290. Pursuant to Article 11, the County pocketed the difference ($20,710), which meant that the Gunsaluses were required to forfeit to the County all of their accumulated equity.
These procedures, authorized by Article 11, are known as "strict foreclosure." Under "strict foreclosure," a creditor (here the County) asks the court to set a deadline for payment of a debt (here unpaid taxes) secured by the tax lien. If the lien is not paid by the deadline, as occurred here, the court enters an order transferring title and possession of the property to the creditor. There is no foreclosure sale. Instead, the transfer occurs by court order and the transferee can then sell the property, as the County did.
Approximately three weeks before the auction, the Gunsaluses filed for protection under Chapter 13 of the Bankruptcy Code. To qualify under Chapter 13, a debtor must present a plan that, among other things, provides "adequate protection" to secured creditors like the County. Moreover, under Chapter 13, the County retains its lien until the tax arrears is paid in full. See 11 USC § 1325(a)(5)(B)(i)(I). Accordingly, the Gunsaluses’ Chapter 13 plan provided that the County would receive all delinquent real estate taxes plus 12% interest. The Gunsaluses have made all delinquent tax payments, and they have continued to pay the new property taxes that have accrued since the judgment of foreclosure. During the bankruptcy proceedings, the Gunsaluses sought to avail themselves of the federal homestead exemption under Section 522(d)(1), which allows a debtor to exclude a home from the bankruptcy estate.
Shortly after the Chapter 13 filing, the Gunsaluses commenced a proceeding in Bankruptcy Court to set aside the transfer of their home to the County on the grounds that it was a fraudulent conveyance under Sections 548 and 522 of the Code. To establish a fraudulent conveyance, a debtor must prove, among other things, that the debtor received less than a reasonably equivalent value in exchange for the transfer. See 11 U.S.C. § 548(a).
The Bankruptcy Court dismissed the complaint. Relying on the United States Supreme Court's opinion in BFP v. Resolution Trust Corp. , 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), the Bankruptcy Court held that a tax lien foreclosure proceeding conducted in compliance with Article 11 of the RPTL, like the mortgage foreclosure at issue in BFP , "is conclusively presumed to have provided reasonably equivalent value for purposes of 11 U.S.C. § 548(a)(1)(B)(i)." App'x 121.
App'x 11 (footnote omitted). The District Court remanded the case to the Bankruptcy Court for trial on the fraudulent conveyance claim, where the Gunsaluses prevailed. The Bankruptcy Court found that the Gunsaluses had met their burden of proving that the transfer of their home worth at least $22,000 in exchange for satisfaction of the $1,290 tax debt owed Ontario County was, among other things, not for "reasonably equivalent value."1
This appeal followed. See 28 U.S.C. § 158(d)(1). We review legal determinations de novo. See In re Anderson , 884 F.3d 382, 387 (2d Cir. 2018).
The County seeks reversal on two grounds. First, the County argues that the Gunsaluses lack standing to challenge the transfer of their property. Secondly, the County argues that the District Court erred by refusing to extend the holding of BFP from the mortgage foreclosure regime at issue there to the tax lien foreclosure regime at issue here.
We first turn to the County's contention that 11 U.S.C. § 522(c)(2)(B) of the Code deprived the Gunsaluses of standing to bring the avoidance proceeding. We review this issue de novo . See Bank Brussels Lambert v. Coan (In Re AROChem Corp.) , 176 F.3d 610, 620 (2d Cir. 1999).
Section 522 of the Code authorizes debtors to exempt certain transfers of property. See 11 U.S.C. § 522. In Bankruptcy Court, the Gunsaluses claimed the federal homestead exemption, which allows a debtor to exempt a home from the bankruptcy estate. See id. § 522(d)(1). The Code provides that debtors who are eligible for the federal homestead exemption have standing to bring avoidance actions. See id. § 522(h) ; Deel Rent-A-Car, Inc. v. Levine , 721 F.2d 750, 754 (11th Cir. 1983).
The Code also provides, however, that exempted property is subject to certain limitations. Under Section 522(c)(2)(B), for example, certain exempted property remains liable for a tax lien:
The County contends that this Section renders the Gunsaluses ineligible for the federal homestead exemption and deprives them of standing. We disagree. Section 522(c)(2)(B) is straightforward. It merely requires that the Gunsaluses—who seek to avoid the transfer of their home and not to avoid paying off the tax lien on that home—remain liable for the unpaid taxes even if the fraudulent conveyance action succeeds.
The Gunsaluses’ Chapter 13 plan achieves just that result. In accordance with 11 U.S.C § 1325, the plan provides that the County retains its lien until its secured claim for tax arrears is paid in full. The plan affords the Gunsaluses five years to pay their delinquent real estate taxes in full and, as noted, they are paying off that obligation in accordance with the plan.
The County thus incorrectly interprets Section 522(c)(2)(B) as barring the Gunsaluses from claiming the federal homestead exemption, when it merely provides that exempt property remains liable for a tax lien. They are not, as the County would have it, attempting to avoid paying the tax lien; they are attempting to avoid a transfer of the property. Accordingly, Section 522(c)(2)(B) does not deprive the Gunsaluses of standing under Section 522(h).
Next, the County challenges the District Court's holding that the forfeiture of the Gunsaluses’ home is not entitled to the presumption of an exchange for "reasonably equivalent value" under Section 548(a). The Bankruptcy Code empowers debtors to set aside a transfer of property if (1) the debtor had an interest in property; (2) a transfer of that interest occurred on or within two years of the bankruptcy...
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