In re Murphy

• Decision Date: 22 July 2005
• Docket Number: Adversary No. 04-8539A.,Bankruptcy No. 04 B 20092(ASH).
• Citation: 331 B.R. 107
• Parties: In re: Loronda MURPHY, Debtor. Barbara Balaber-Strauss, as Trustee of the Estate of Loronda Murphy, Plaintiff, and Loronda Murphy, Intervening Plaintiff, v. Town of Harrison, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

331 B.R. 107

In re: Loronda MURPHY, Debtor Barbara Balaber-Strauss, as Trustee of the Estate of Loronda Murphy, Plaintiff, and Loronda Murphy, Intervening Plaintiff, v. Town of Harrison, Defendant.

Bankruptcy No. 04 B 20092(ASH).

Adversary No. 04-8539A.

United States Bankruptcy Court, S.D. New York.

July 22, 2005.

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Marc Stuart Goldberg, LLC, Co-Counsel to Debtor, By Marc Stuart Goldberg, Esq., White Plains, NY, for Plaintiff-Trustee.

Rattet, Pasternak & Gordon Oliver, LLP, By Robert L. Rattet, Esq., James B. Glucksman, Harrison, NY, for Defendant.

William F. Macreery, Esq., Granite Springs, NY, for Trustee Barbara Balaber-Strauss.

DECISION ON REAL PROPERTY TAX LAW FORFEITURE AS FRAUDULENT CONVEYANCE UNDER THE BANKRUPTCY CODE

ADLAI S. HARDIN, JR., Bankruptcy Judge.

Two important issues are presented here. First, may a duly conducted forfeiture of real property by a taxing authority under the New York Real Property Tax Law (the "R.P.T.L.") for nonpayment of taxes without a public sale be avoided as a fraudulent conveyance pursuant to Sections 548 and 550 of the Bankruptcy Code? Second, may the quantum of such avoidance be limited to the amount required to pay creditors and administrative expenses of a debtor's estate? This Court answers both questions in the affirmative.

Debtor filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code, which was converted to a case under Chapter 7. The Chapter 7 trustee commenced this adversary proceeding to avoid the tax forfeiture of residential real estate ("the Property") located at 1596 Old Orchard Street, West Harrison, New York by the Town of Harrison, New York ("defendant") as a fraudulent conveyance under Sections 548(a)(1)(B) and 550 of the Bankruptcy Code. Debtor's motion to intervene in the adversary proceeding was granted, and she filed an intervenor complaint. This decision rules on defendant's motions to dismiss the trustee's complaint and the debtor's intervenor complaint and for alternate forms of relief.

Jurisdiction

This Court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(a) and 157(a) and the standing order of reference to bankruptcy judges signed by Acting Chief Judge Robert J. Ward on July 10, 1984. This is a core proceeding under 28 U.S.C. § 157(b).

Background

The following recitation of facts is based on the parties' court papers and documents referenced therein and does not constitute findings of fact.

On June 29, 2000, debtor purchased the Property for $545,000 financed by a loan in the amount of $480,000 secured by a mortgage on the Property. Debtor did not pay any real property taxes on the Property for the entire three-year period during which she held title. On December 16, 2002, defendant initiated an in rem tax proceeding (the "forfeiture proceeding") against the Property in the Supreme Court of the State of New York, County of Westchester (the "state court") pursuant to Section 1120 of the R.P.T.L. based on $28,673.28 in unpaid real property taxes. Defendant filed and served on debtor by mail a petition and a notice of commencement of foreclosure proceeding that set a redemption deadline of May 9, 2003.

On June 5, 2003, after the redemption date had passed, defendant filed and served a motion for default judgment against the debtor. Debtor filed opposition to the motion, asserting that that she had not received the petition and notice of foreclosure and was unaware of the redemption deadline until after it had already passed. Debtor also argued that the equities favored the state court denying the motion for default judgment and allowing debtor to redeem all tax arrearages because "[i]t would be excessively harsh and inordinately unfair for my family and I to be displaced from our home for the amount due, especially when we are willing to pay all arrears and penalties to bring our tax account current." On August 26, 2003, the state court rejected these defenses and entered an order granting default judgment and awarding legal title of the Property to defendant (the "Judgment").

The Judgment denied debtor's opposition to the motion for default judgment because debtor "fails to set forth any meritorious defense" and found that "Murphy does not dispute that she has failed to pay any property taxes since 2000 and failed to redeem the property within the statutory time period, despite due notice." The state court concluded that "[a]s such, the Court is without legal or equitable authority to extend the time to redeem."

On September 19, 2003, debtor filed a notice of appeal from the Judgment to the Appellate Division, which (inexplicably) is still pending. On September 26, 2003, the Receiver of Taxes and Enforcement Officer for the Town of Harrison conveyed the Property to defendant pursuant to the Judgment. Trustee alleges that the Property had an appraised fair market value in excess of $1,000,000 and that debtor had creditors holding claims in excess of $700,000 at the time of the transfer.

On March 1, 2004, debtor filed for bankruptcy protection. After debtor's case was converted to one under Chapter 7, trustee was appointed and commenced this adversary proceeding. Trustee alleges in the first claim for relief of the amended complaint that debtor did not receive reasonably equivalent value for the transfer under Sections 548 and 550 of the Bankruptcy Code and that the forfeiture rendered the debtor insolvent. Trustee alleges in the second claim for relief that debtor did not receive reasonably equivalent value for the transfer and that debtor was engaged in business and was left with unreasonably small capital as a result of the transfer. Trustee alleges in the third claim for relief that the forfeiture of a property worth more than $1 million to satisfy claims of less than $30,000 shocks the conscience and that the forfeiture should, therefore, be avoided under Sections 548 and 550 of the Bankruptcy Code. Trustee alleges in the fourth claim for relief that the tax forfeiture constituted a taking in violation of the Fifth and Fourteenth Amendments.

After the Court approved debtor's motion to intervene in the adversary proceeding debtor filed an intervenor complaint. Debtor's first and second claims for relief essentially mirror trustee's first and third claims for relief, respectively. Debtor's third claim for relief mirrors trustee's fourth claim for relief.

Discussion

I. Motion to dismiss trustee's first claim based on lack of reasonably equivalent value

Relying on a Supreme Court decision, BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), defendant argues that the first claim of trustee's amended complaint must be dismissed because reasonably equivalent value was received for the transfer as a matter of law under Section 548 of the Bankruptcy Code since defendant took possession of the Property pursuant to the requirements of Section 1120 of the R.P.T.L. Trustee responds that BFP was limited to mortgage foreclosures and that none of the considerations essential to the holding in BFP are present here.

In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court "must construe any well-pleaded factual allegations in the complaint in favor of the plaintiff." Sykes v. James, 13 F.3d 515, 519 (2d Cir.1993), cert. denied, 512 U.S. 1240, 114 S.Ct. 2749, 129 L.Ed.2d 867 (1994). See also Cohen v. Koenig, 25 F.3d 1168, 1171-72 (2d Cir.1994) ("When ruling on a motion pursuant to Rule 12(b)(6) to dismiss for failure to state a claim upon which relief may be granted, the court must accept the material facts alleged in the complaint as true."); Zdenek Marek v. Old Navy (Apparel) Inc., 348 F.Supp.2d 275, 279 (S.D.N.Y.2004). The motion should be denied unless the plaintiff is not capable of establishing facts maintaining the claim that would warrant relief by the court. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 811, 113 S.Ct. 2891, 125 L.Ed.2d 612 (1993); Cohen, 25 F.3d at 1172; Ricciuti v. N.Y.C. Transit Authority, 941 F.2d 119, 123 (2d Cir.1991); Zdenek Marek, 348 F.Supp.2d at 279 ("The Court may not dismiss a complaint for failure to state a claim `unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957))).

A. BFP

Section 548 of the Bankruptcy Code allows the trustee to avoid constructively fraudulent transfers of an interest of the debtor in property made within one year of the filing of the bankruptcy petition. Section 548 reads, in pertinent part:

(a)(1) The trustee may avoid any transfer of an interest of the debtor in property . . . that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily — . . .

(B)(i) received less than a reasonably equivalent value in exchange for such transfer . . .; and

(ii)(I) was insolvent on the date that such transfer was made. . ., or became insolvent as a result of such transfer . . .; [or]

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital. . . .

In BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), the Supreme Court addressed the question of reasonably equivalent value under Section 548 of the Bankruptcy Code in the context of a mortgage foreclosure. In that case, BFP took title to a piece of real property subject to the mortgage of a creditor to secure payment of a loan. Id. at 533, 114 S.Ct. 1757. After BFP defaulted on the loan payments, the creditor properly noticed a foreclosure sale in compliance with state law. Id. At...