In re 2435 Plainfield Ave., Inc.
| Decision Date | 06 August 1998 |
| Docket Number | Adversary No. 98-3118.,Bankruptcy No. 98-31892 |
| Parties | In re 2435 PLAINFIELD AVENUE, INC., Debtor. 2435 PLAINFIELD AVENUE, INC., Plaintiff, v. TOWNSHIP OF SCOTCH PLAINS, Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Barry W. Frost, Teich, Groh & Frost, Trenton, NJ, for Plaintiff/Debtor.
Gary S. Jacobson, Jacobson & Brecher, Mountainside, NJ, for Defendant.
Patricia S. Roach Bruck, Skey, Dumont & Matejek, Princeton, NJ, for Better Homes and Gardens.
Michael Zindler, Markowitz & Zindler, Lawrenceville, NJ, for Mauro Checchio, Portia Checchio, Ernest DiFrancesco and Susan DiFrancesco.
This is the court's decision on a motion by defendant Township of Scotch Plains (the "Township") to dismiss a complaint filed by 2435 Plainfield Ave., Inc. (the "debtor") for failure to state a cause of action pursuant to FED.R.CIV.P. 12(b)(6) incorporated by reference in FED.R.BANKR.P. 7012 and on the Township's motion to quash six subpoenas for Rule 2004 examinations issued on behalf of the debtor. The debtor's principal argument is that the Township obtained title to the property from the debtor by fraud perpetrated in connection with foreclosure of a property tax lien. Alternatively, the debtor argues that the disparity between the taxes due and the value of the property was so great that the transfer of title should be set aside because it shocks the conscience. The court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151, and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (H), and (O). The following shall constitute the court's findings of fact and conclusions of law.
The instant dispute concerns the foreclosure by the Township of a property tax lien on real property commonly known as 2435 Plainfield Avenue, Block 4303, Lot 12 in the Township of Scotch Plains (the "property"). The debtor acquired the property on December 8, 1989. A tax sale certificate for the property was sold to the Township on December 4, 1990. The Township filed an in rem tax foreclosure complaint on October 11, 1995. The Township published a notice of foreclosure on December 30, 1995. The final judgment of in rem foreclosure was entered on August 30, 1996.
The debtor claims there were procedural irregularities in the foreclosure case which prejudiced the debtor. On January 16, 1997 the debtor obtained an order to show cause from the Superior Court of New Jersey, Chancery Division as to why the final judgment of in rem foreclosure should not be reopened. The debtor's application was denied on March 21, 1997 in a bench decision. The debtor appealed this decision and the appeal remains pending.
The debtor filed a petition for relief under chapter 11 of title 11, United States Code (the "Bankruptcy Code" or the "Code") on February 17, 1998. On March 20, 1998 the debtor filed this adversary proceeding against the Township. The first count of its complaint alleges that on January 4, 1996, prior to the foreclosure, the debtor entered into a contract for sale of the property to K. Hovnanian and Companies of North Jersey, Inc. ("Hovnanian"). The complaint alleges that on January 16, 1996 Hovnanian arranged to meet with Township representatives regarding the proposed sale. The complaint alleges that in May, 1996 the Township "amended the zoning ordinance so that the property could be developed in the application process consisting of a subdivision or site plan application to the planning board or other than as a use variance application to the board of adjustment." Complaint, at Count I, ¶ 15.
The complaint avers that Hovnanian was aware of the tax arrears and was ready and willing to pay them. The complaint alleges that Ernest DiFrancesco (presumably, on behalf of the debtor) faxed a letter to Carmen Mendiola, attorney for the Township in the foreclosure proceeding, proposing to make partial tax payments. The complaint also alleges that this proposal was never presented to the Township.
The complaint alleges that the tax arrears due as of December 31, 1996 were $93,815.36. The complaint states that the property was worth $900,000.00 at the time of the foreclosure.
The complaint argues that the debtor's property was transferred without the debtor receiving reasonably equivalent value, that the Township foreclosed on the property with the intent to hinder, delay and defraud the debtor, and that the property was conveyed to the Township for less than fair consideration while the debtor was made insolvent by the transfer. From these assertions, the complaint concludes that the transfer of the property was a fraudulent conveyance pursuant to N.J.STAT.ANN. § 25:2-1 et seq. As a result, the first count of the complaint requests that the in rem foreclosure be set aside.
The second count of the complaint realleges all the foregoing assertions and contends that the Township owed a duty of good faith and fair dealing to the debtor. The complaint avers that the Township was aware of Hovnanian's intent to purchase the property and that Hovnanian relied on the Township's actions, specifically the rezoning of the property. The complaint alleges that no one on behalf of the Township informed Hovnanian that the Township was entering a judgment of foreclosure. The complaint further alleges that the debtor attempted to resolve the tax arrearages by paying them over time but that this proposal was never presented to the Township Council. The second count concludes that the foregoing amounted to a breach by the Township of its duty of good faith and fair dealing. The complaint asserts that as a result of the alleged breach, the debtor's property was transferred for less than reasonably equivalent value and less than fair consideration, resulting in a windfall to the Township. As a result, the second count requests damages for the Township's alleged bad faith and unfair dealing.
On or about May 11, 1998 township officials including George Albanese, Thomas E. Atkins, Mauro Checchio, Rose Maccari, Joan Papen, and Irene Schmidt, were served with subpoenas for examination under FED. R.BANKR.P. 2004. The subpoenas directed the officials to appear for depositions and to produce "All documents, contracts, correspondence and memoranda regarding the municipal tax foreclosure proceedings against 2435 Plainfield Avenue, Inc."
The Township contends that the debtor's complaint should be dismissed for failure to state a claim upon which relief can be granted pursuant to FED.R.CIV.P. 12(b)(6). The Township makes two primary arguments: 1) that N.J.STAT.ANN. § 54:5-104.65 prevents the avoidance of a tax sale foreclosure as a fraudulent transfer under N.J.STAT.ANN. § 25:2-20 et seq., and 2) the Township's conduct of the tax foreclosure could not breach any duty of good faith and fair dealing since there was no privity of contract with the debtor.
In support of its first point, the Township asserts that an in rem tax foreclosure may not be avoided under New Jersey's Uniform Fraudulent Transfer Act ("UFTA"). The Township contends that a tax foreclosure and recording of judgment or certificate are expressly excluded from the reach of the UFTA by virtue of N.J.STAT.ANN. § 54:5-104.65. The Township also argues that for a transfer to be fraudulent under the UFTA, the transfer must be made by the debtor, with the intent to hinder, delay or defraud a creditor of the debtor. The Township contends that because the tax obligation was imposed by the Township and the tax foreclosure was conducted by the Township, relief cannot be granted under N.J.STAT.ANN. § 25:2-25.
The Township further contends that the tax foreclosure sale may not be avoided as a transfer for less than reasonably equivalent value. The Township asserts that it has been held in this district that the price received at a tax foreclosure sale conducted in accordance with New Jersey law is conclusively presumed to be the "reasonably equivalent value" of the foreclosed property.
The Township also argues that since the issue of the propriety of the tax foreclosure sale has been resolved by the superior court, collateral estoppel precludes the issue from being relitigated before the bankruptcy court. The Township asserts that the alleged procedural deficiencies in the foreclosure were determined in the superior court to be immaterial and to provide no basis to upset the foreclosure judgment. The Township asserts that collateral estoppel is applicable even though the state court adjudication is subject to appeal. The Township adds that the bankruptcy court is prohibited from reviewing the state court's judgment by the Rooker-Feldman doctrine which proscribes lower federal courts from sitting as effective courts of appeal for state court decisions.
In opposition to the second count of the debtor's complaint, the Township asserts that its conduct of the tax foreclosure could not breach any duty of good faith and fair dealing since there was no privity of contract between the Township and the debtor. The Township maintains that no duty of good faith and fair dealing may be imposed where there is no contractual agreement between a private party and a municipality. The Township further claims that the debtor's arguments were addressed and dismissed by the superior court and are therefore precluded as a matter of law.
The Township's second motion requests that the court quash six Rule 2004 subpoenas served upon various present and past Township officials. The Township alleges that Ernest DiFrancesco, the debtor's president, served the subpoenas personally while wearing a badge and carrying a concealed weapon to intimidate the persons served.
The Township argues that the subpoenas should be quashed because: 1) the court should not allow a Rule 2004 examination regarding matters which are the subject of a...
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