Hackler v. Arianna Holdings Co. (In re Hackler)

• Citation: 938 F.3d 473
• Decision Date: 12 September 2019
• Docket Number: No. 18-1650,18-1650
• Parties: IN RE: Frank J. HACKLER AND Dawn A. STELZLE-HACKLER, Debtors Frank J. Hackler; Dawn A. Stelzle-Hackler v. Arianna Holdings Company, LLC, Appellant
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

938 F.3d 473

IN RE: Frank J. HACKLER AND Dawn A. STELZLE-HACKLER, DebtorsFrank J. Hackler; Dawn A. Stelzle-Hackler

v.Arianna Holdings Company, LLC, Appellant

No. 18-1650

United States Court of Appeals, Third Circuit.

Argued on March 12, 2019

Opinion filed: September 12, 2019

Elliott J. Almanza (ARGUED), Keith A. Bonchi, Goldenberg, Mackler, Sayegh, Mintz, Pfeffer, Bonchi & Gill, 660 New Road, Suite 1-A, Northfield, NJ 08225, Counsel for Appellant.

Leonard C. Walczyk (ARGUED), Wasserman, Jurista & Stolz, 110 Allen Road, Suite 304, Basking Ridge, NJ 07920, Counsel for Appellee.

Tara A. Twomey, National Association of Consumers Bankruptcy, 1501 The Alameda, Suite 200, San Jose, CA 95126, Counsel for Amicus Appellee.

Before: MCKEE, PORTER and ROTH, Circuit Judges

OPINION

ROTH, Circuit Judge This case requires us to decide, as a matter of first impression, whether a transfer of real estate title conducted via New Jersey’s tax foreclosure procedures may be voided as "preferential" under § 547(b) of the United States Bankruptcy Code.¹ Appellant Arianna Holding Company LLC purchased a tax lien on a piece of property owned by Frank J. Hackler and Dawn Stelzle-Hackler. Arianna eventually obtained title to the Hacklers’ property via foreclosure proceedings. Shortly after Arianna obtained title, the Hacklers filed for bankruptcy and sought to void the transfer of the title as preferential. The Bankruptcy Court and the District Court ruled in favor of the Hacklers and voided the title transfer. Because the title transfer undisputedly meets § 547(b) ’s requirements for avoidance and because the federalism concerns raised by Arianna cannot overcome the plain language of the Bankruptcy Code, we will affirm.

I

The Hacklers failed to pay property tax on a parcel in North Brunswick, New Jersey. On June 25, 2013, the township held a duly advertised tax sale—a public auction for the unpaid municipal lien on the property. While mortgage foreclosures involve bidding on the actual property, at New Jersey tax foreclosures the public bids only on the rate of interest on the unpaid taxes; the lowest bidder wins.² Accordingly, the redemption amount for a tax lien certificate—the amount the property owner must pay to recover the lien and prevent foreclosure—is calculated from the accrued taxes plus interest, not from the value of the underlying property.³ At the tax sale for the lien on the Hacklers’ property, Phoenix Funding, Inc., bid the interest rate on the tax sale certificate down to 0% and paid a premium of $13,500 above the value of the lien. Phoenix paid the delinquent taxes as they became due and charged the state-allowed interest rate of 18% on the subsequent taxes.⁴

In New Jersey, tax sale foreclosures are "strict foreclosures."⁵ If the property owner does not redeem the certificate by paying the lienholder the redemption amount (the original unpaid taxes and subsequent taxes plus 18%), the certificate holder may, after two years, file for a foreclosure judgment; that judgment vests title directly in the tax lien certificate holder. After waiting the required two-year period, and after sending a notice of intent to foreclose, Phoenix filed an uncontested tax foreclosure complaint. On May 9, 2016, Phoenix assigned the certificate to Arianna Holding Company, LLC, a real estate holding company. The Hacklers did not redeem the tax lien certificate, and on October 6, 2016, final judgment in the foreclosure was entered, vesting title to the Property in Arianna (the Transfer).

On December 14, 2016, a little over two months after the Transfer, the Hacklers filed a Chapter 13 bankruptcy petition. The petition and schedules listed the value of the property at $335,000, which far exceeded the value of the liens against the property (Arianna filed a proof of claim for $42,561.21, and other liens totaled no more than $89,000). The Hacklers’ Chapter 13 plan proposed to pay Arianna’s claim in full.

The same day that they filed for bankruptcy, the Hacklers opened an adversary proceeding seeking to avoid the Transfer of the Property to Arianna as a preferential transfer under § 547(b) of the Bankruptcy Code and moved for summary judgment. Arianna cross-moved for summary judgment, arguing that voiding the Transfer would represent an impermissible incursion into the state’s essential interests in preserving the validity of real estate title and collecting real estate taxes.

The Bankruptcy Court ruled for the Hacklers, voiding the Transfer and directing that title to the Property return to them. The Bankruptcy Court found that the Transfer met all the requirements of § 547(b) and held that Arianna’s federalism concerns could not overcome the Code’s clear statutory text. The District Court affirmed, and Arianna now appeals.

II⁶

A

It is well-established that a " ‘central policy’ of the Bankruptcy Code is the ‘[e]quality of distribution among creditors.’ "⁷ In accordance with that policy, creditors of equal priority receive pro rata shares of the debtor’s property. A critical feature of this system is the ability to avoid pre-petition property transfers that benefit some creditors over others.⁸ The Code does so by allowing the unwinding of property transfers that meet certain requirements, thereby preventing some creditors from receiving windfalls at the expense of others. As is relevant to the instant petition, a property transfer may be voided as preferential under § 547 or as fraudulent under § 548. While both § 548 and § 547 permit the unwinding of certain property transfers, they serve different purposes, use different statutory language, and require different analyses.

This case involves a preferential transfer under § 547(b) of the Bankruptcy Code. Under that provision, which prevents creditors from rushing to take assets before a debtor files for bankruptcy, the trustee may avoid any transfer:

(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made--

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if--

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.⁹

The Bankruptcy Court and the District Court found that the Transfer was voidable as preferential. Thus, they did not reach the question whether the Transfer was alternatively voidable as fraudulent under § 548.¹⁰

B

Our analysis begins with the statutory text.¹¹ The parties do not dispute the meaning of § 547(b). As explained above, a transfer may be voided as preferential if it (1) was made to or for the benefit of a creditor, (2) was made for an antecedent debt, (3) was made while the debtor was insolvent, (4) was made on or within 90 days before filing for bankruptcy, and (5) enabled the creditor to receive more than it would have received in a Chapter 7 liquidation proceeding.

Nor do the parties dispute the applicability of § 547(b) to the Transfer in this case. The Transfer was made to the tax certificate holder, for a debt that arose before the Hacklers petitioned for bankruptcy, while the Hacklers were insolvent,¹² and within 90 days of their petition; it bestowed a parcel worth $335,000 on a party that would have received $45,000 in a Chapter 7 proceeding. "[W]hen the statute’s language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms."¹³ Unless there is ambiguity, we "cannot allow policy to guide our analysis."¹⁴ Here, the statute is unambiguous. Applying its straightforward terms does not lead us to an absurd result. Thus, our reading of it ends there.¹⁵

In requesting that we look beyond the plain terms of the statute, Arianna raises two separate arguments, both sounding in principles of federalism. First, the company argues that a lawfully-conducted state tax foreclosure cannot constitute a voidable preference under § 547. Arianna relies in part on the Supreme Court’s decision in BFP v. Resolution Trust Corp. ,¹⁶ which interpreted § 548 of the Bankruptcy Code and which, it claims, should also apply so that New Jersey tax sale foreclosures are exempted from avoidance under § 547. Second, Arianna argues that the avoidance of the Transfer violated the Tax Injunction Act.¹⁷ As discussed below, we find the statute to be clear and its required outcome not absurd. But even giving full weight to Arianna’s points, neither argument compels a different result. We address each in turn.

i

Arianna argues first that the tax foreclosure cannot constitute a voidable preference under § 547(b). The company relies chiefly on the Supreme Court’s decision in BFP v. Resolution Trust Corp. In BFP , the question before the Court was "whether the consideration received from a noncollusive, real estate mortgage foreclosure sale conducted in conformance with applicable state law" satisfied the requirement of § 548 that a property transfer be made in exchange for "a reasonably equivalent value," so that the transfer was protected from voidance.¹⁸ The Court held that the amount received at the mortgage foreclosure sale constituted "reasonably equivalent value." Thus, the sale could not be voided under § 548.

BFP differs from the case before us in two crucial ways. First, the Court was interpreting the fraudulent transfer provision, § 548, not the preferential transfer provision. Second, the decision involved a mortgage foreclosure, not a tax foreclosure. These are not trivial distinctions. The BFP opinion is grounded in the text of § 548, in particular the term "reasonably equivalent value," which is not...