Smith v. Sipi, LLC (In re Smith), Bankruptcy No. 07 B 6631.

• Decision Date: 30 July 2013
• Docket Number: Adversary No. 07 A 00239.,Bankruptcy No. 07 B 6631.
• Citation: 501 B.R. 843
• Parties: In re Keith SMITH and Dawn Smith, Debtors. Keith Smith and Dawn Smith, Plaintiffs v. SIPI, LLC and Midwest Capital Investments, LLC, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

501 B.R. 843

In re Keith SMITH and Dawn Smith, Debtors.Keith Smith and Dawn Smith, Plaintiffs

v.SIPI, LLC and Midwest Capital Investments, LLC, Defendants.

Bankruptcy No. 07 B 6631.

Adversary No. 07 A 00239.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

July 30, 2013.

Arthur G. Jaros, Jr., Richter & Jaros, Oak Brook, IL, for Plaintiffs.

Timothy A. Clark, Krockey, Cernugel, Cowgill & Clark, Ltd., Joliet, IL, Harold L. Moskowitz, Law Offices of Harold Moskowitz, Timothy S. Breems, Michael Bregman, Edward P. Freud, Scott C. Nelson, Ruff Weidenaar & Reidy Ltd., Chicago, IL, for Defendants.

MEMORANDUM OPINION

BRUCE W. BLACK, Bankruptcy Judge.

This adversary proceeding is before the court for ruling after trial on a fraudulent transfer action pursuant to 11 U.S.C. § 548. Plaintiffs Keith and Dawn Smith, the Debtors in the underlying chapter 13 bankruptcy case, filed this adversary action against the Defendants, SIPI, LLC (“SIPI”) and Midwest Capital Investments, LLC (“Midwest”), seeking to avoid the transfer of their former residence as a fraudulent transfer. For the following reasons, the Debtors may avoid the transfer of the property as a fraudulent transfer under section 548(a)(1)(B) and are entitled to recover the amount of their homestead exemption, $15,000.

BACKGROUND

Most of the facts are not disputed. The Debtors resided at 720 Fox Street, Joliet, Illinois, (“property”), the subject property of this adversary proceeding, from about 1998 to May 31, 2009. On March 25, 2004, Dawn Smith became the holder of record title when she inherited the property from her great-grandfather. At the time that Dawn inherited the property, it was encumbered by a tax lien for the non-payment of real estate taxes for the year 2000. On November 2, 2001, SIPI purchased the delinquent taxes for $4,046.26 and was issued a certificate pursuant to Illinois statutory law ¹. SIPI paid a total of $5,090.12 for the Fox Street property, including costs. The Debtors failed to redeem the delinquent taxes or pay the subsequent real estate taxes owing on the property. As a result, SIPI applied for and obtained a tax deed on April 15, 2005, which was recorded with the Will County Recorder of Deeds on May 19, 2005. SIPI subsequently sold the property to Midwest for $50,000 on August 10, 2005. SIPI executed a warranty deed in favor of Midwest, which was recorded on August 17, 2005. Midwest is the current holder of record title to the property.

On April 13, 2007, the Debtors filed a voluntary petition under chapter 13 of the Bankruptcy Code ² and simultaneously filed an adversary action against SIPI and Midwest to avoid the tax sale of the property as a fraudulent transfer pursuant to 11 U.S.C. § 548.³ In Schedule A, the Debtors listed the property with a value of $90,000 at the time of the bankruptcy filing and listed a homestead exemption in the amount of $15,000.

The District Court affirmed this court's order granting dismissal for failure to state a claim, finding that the complained of transfer was perfected upon the expiration of the redemption period on November 1, 2004, and not the issuance and recording of the tax deed on April 15, 2005. The Debtors then appealed to the Seventh Circuit Court of Appeals which reversed and remanded to this court for further proceedings. The appellate court found that the transfer was made when it was perfected under section 548(d)(1) upon the issuance of the tax deed on April 15, 2005, thus falling within the two-year “look back” period of § 548.

JURISDICTION

The court has jurisdiction over this matter pursuant to section 1334 of Title 28 of the United States Code, and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under section 157(b)(2)(H) of Title 28.

DISCUSSION

The following constitutes the court's findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.

A. Fraudulent Conveyance—Section 548(a)(1)(B)

Under section 548(a)(1)(B) of the Bankruptcy Code, a trustee may avoid a transfer of an interest of the debtor in property within two years before the petition date if the debtor received less than a reasonably equivalent value in exchange for such transfer and was insolvent on the date that such transfer was made, or became insolvent as a result of such transfer. 11 U.S.C. § 548(a)(1).

While the parties dispute whether the Debtors were insolvent at the time of the transfer, this issue can be disposed of with ease. Under the Code, if the debtor's debts outweigh the debtor's assets when fairly valued, the debtor is considered insolvent. 11 U.S.C. § 101(32). The court is persuaded by Mr. Smith's uncontroverted testimony at trial as to the nature of the Smiths' indebtedness, as well as the bankruptcy schedules reflecting such indebtedness. While the Debtors' bankruptcy schedules provide a clear picture of their financial condition on the date of the filing of their bankruptcy petition, the court does not have a similar financial snapshot of their financial condition at the time of the transfer in 2005. In this regard, however, the deposition testimony of Ms. Smith ⁴ with respect to the Debtors' assets and liabilities establishes that if the Debtors were not insolvent at the time of the transfer, at the very least, they were rendered insolvent by the transfer. Ms. Smith testified that the Debtors never had money to pay the full amount of various large bills—including electric and gas—and paid whatever they needed to in order to have electricity and gas service in their home. The Debtors also did not have money to pay any real estate taxes on their home from 2002 through 2009. Of the various debts listed on Schedule F, Ms. Smith testified that “probably most” of those debts existed in 2005. (Smith Deposition, Defendant's Exhibit 16, pg. 53, lines 2–5). The home was the Debtors' only asset worth any significant value, as the other assets owned by the Debtors were of minimal value. Ms. Smith's deposition testimony is credible and uncontradicted. Thus, the court finds that at the Debtors were rendered insolvent by the transfer.

The critical issue in dispute is whether the Debtors received less than reasonably equivalent value for transfer of their home. The Defendants rely on the Supreme Court decision, BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), in support of their position that reasonably equivalent value was received for the transfer as a matter of law because SIPI complied with the Illinois law in obtaining a tax deed to the property. In BFP, the Supreme Court addressed the question of reasonably equivalent value under section 548 of the Code in the context of a mortgage foreclosure. The Supreme Court rejected fair market value as the benchmark for measuring reasonably equivalent under section 548 because “market value, as it is commonly understood, has no applicability in the forced-sale context....” Id. at 537, 114 S.Ct. 1757. The Court 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. at 1765. The BFP Court explicitly emphasized, however, that its opinion only covered mortgage foreclosures of real estate and stated that “[t]he considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.” Id. at 537 n. 3, 114 S.Ct. 1757.

The Defendants contend that BFP's holding extends to transfers of title as a result of tax sale proceedings because, like mortgage foreclosure sales, tax sales are “forced sales” to which market value is not applicable. The court disagrees.

Courts have generally held that BFP does not apply in the tax forfeiture context, particularly where competitive bidding is not a component of a tax sale statute. See Williams v. City of Milwaukee (In re Williams), 473 B.R. 307, 320 (Bankr.E.D.Wis.2012), aff'd in part, City of Milwaukee v. Gillespie, 487 B.R. 916 (E.D.Wis.2013); Berley Associates, Ltd. v. Eckert (In re Berley Associates, Ltd.), 492 B.R. 433, 440 (Bankr.D.N.J.2013); Balaber–Strauss v. Town of Harrison (In re Murphy), 331 B.R. 107, 118 (Bankr.S.D.N.Y.2005) (citing cases).

This court concurs with the approach taken in a recent decision by a district court in this Circuit, City of Milwaukee v. Gillespie, in which the court held that “a judgment of foreclosure, based solely upon delinquent taxes in a non-sale foreclosure proceeding, does not necessarily provide a property owner ‘reasonably equivalent value’ for real estate without a public sale offering.” 487 B.R. at 920. The Gillespie court explained that “if property is seized without a sale or competitive bidding, it cannot be presumed as a matter of law that ‘reasonably equivalent value’ was received by a debtor transferor because market forces were completely absent.” Id. Thus, “reasonably equivalent value” cannot be deemed to be received as a matter of law simply because the party that obtains a deed to real property through a state's tax sale procedure complies with state law. Id.

The Defendants' reliance on BFP is further hampered by the fact that the Illinois real estate tax sale process is not analogous to the Illinois mortgage foreclosure sale process. Unlike at a mortgage foreclosure sale, a debtor's interest in the property is not sold at a tax sale; rather, only the delinquent taxes are purchased by the winning bidder, not the title to the property. The court in McKeever v. McClandon (In re McKeever), described the Illinois tax sale process as follows:

“[T]he only purpose of a tax sale is for the taxing authority to obtain payment of its delinquent taxes at the lowest cost of redemption. There is no correlation between the sale price and the value of the property. ...