Yourelo Your Full-Serv. Relocation Corp. v. City of Revere (In re Yourelo Your Full-Serv. Relocation Corp.)

• Decision Date: 23 November 2020
• Docket Number: AP No. 19-1140-CJP,Case No. 19-13602-CJP
• Parties: In re: YOURELO YOUR FULL-SERVICE RELOCATION CORPORATION, Debtor YOURELO YOUR FULL-SERVICE RELOCATION CORPORATION, Plaintiff v. CITY OF REVERE, Defendant
• Court: U.S. Bankruptcy Court — District of Massachusetts

In re: YOURELO YOUR FULL-SERVICE

RELOCATION CORPORATION, Debtor

YOURELO YOUR FULL-SERVICE

RELOCATION CORPORATION, Plaintiff v. CITY OF REVERE, Defendant

Case No. 19-13602-CJP

AP No. 19-1140-CJP

UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS

November 23, 2020

Chapter 11

ORDER DENYING MOTION TO DISMISS

Before the Court is the Motion to Dismiss [Dkt. No. 23] (the "Motion") filed by defendant City of Revere (the "City"), by which the City seeks dismissal of the Complaint [Dkt. No. 1] ("Complaint") in this adversary proceeding. In the Complaint, the Plaintiff and debtor-in-possession, Yourelo Your Full-Service Relocation Corporation (the "Debtor"), asserts the following claims: (1) Count I, avoidance of the transfer of the real property at 585 North Shore Road, Revere, Massachusetts (the "Property") to the City (the "Transfer") and recovery thereof for the benefit of the Debtor's estate (the "Estate") pursuant to 11 U.S.C. §§ 548(a)(1)(B) and 550(a)(1) as a constructive fraudulent transfer¹; (2) Count II, avoidance of theTransfer and recovery of the Property for the Estate pursuant to §§ 544(b)(1) and 550(a)(1) as a constructive fraudulent transfer under the Massachusetts Uniform Fraudulent Transfer Act, M.G.L ch. 109A, §§ 5(a)(2) and 6(a); (3) Count III, avoidance of the Transfer and recovery of the Property for the Estate pursuant to §§ 547(b) and 550(a)(1) as a preferential transfer; and (4) Count IV, related injunctive relief seeking to enjoin the transfer or encumbrance of the Property. The Debtor opposes the Motion [Dkt. No. 28] (the "Objection").

On September 30, 2020, the Court held a hearing on the Motion (the "Hearing") at which the Court gave tentative rulings at the beginning of the Hearing, subject to further consideration after argument. Upon considering the further argument of counsel, the Court hereby DENIES the Motion for the reasons stated on the record and adopts the tentative rulings by reference, except as refined and expanded herein, primarily with respect to denial of dismissal of the constructive fraudulent conveyance claims under § 548(a)(1)(B) and M.G.L. ch. 109A, §§ 5(a)(2) and 6(a).

Background

The City asserts that the Complaint should be dismissed as a matter of law "because there can be no constructive fraudulent transfer to a municipality in the Commonwealth of Massachusetts which follows and complies with the state's traditional 104[-]year[-]old tax title statute." Mot. 7. The City urges the Court to extend the reasoning of the Supreme Court in BFP v. Resolution Trust Corporation, 511 U.S. 531 (1994) ("BFP"), to conclude that the procedural protections of the Massachusetts property tax strict foreclosure scheme, and state interests supporting that scheme, preclude the Court from determining that the taxpayer, the Debtor, received less than "reasonably equivalent value" when its equity of redemption was foreclosed. See 511 U.S. at 545-46 (holding that that the price received at a mortgage foreclosure auction satisfied the requirement that transfers of an insolvent debtor's property be in exchange forreasonably equivalent value so long as the foreclosure sale complied with the applicable state law). Extending BFP's holding to the tax foreclosure context would result in a property (or its surplus equity) that may not be recovered from a municipality as the recipient of a constructively fraudulent conveyance if a tax foreclosure has been conducted in compliance with state law, regardless of the amount of the tax debt in relation to the value of the property. Whether the reasoning of BFP extends to tax foreclosure schemes that provide for strict foreclosure or "forfeiture," rather than an auction process that exposes a property to the market, has been the subject of conflicting judicial interpretation.² For the reasons stated below and on the record at the Hearing, the Court determines that the protections afforded a taxpayer by the strict foreclosure scheme adopted by the Massachusetts legislature, while intended to provide due process to a taxpayer, were not intended to, and in some cases may not, result in the exchange of "reasonably equivalent value" for purposes of determining whether property transferred pursuant to that scheme is a constructively fraudulent transfer in the bankruptcy context. Moreover, the state's interests in its tax collection scheme and the balance struck between the interests of the taxpayer and municipality, while strong, are overridden by the federal interests of recovery and ratable distribution embodied in §§ 544, 547, 548(a)(1)(B) and 550(a)(1) of the Bankruptcy Code.

Legal Standard and Issue to Be Decided

While the Motion does not expressly cite to Fed. R. Civ. P. 12(b)(6), the Court construes the Motion as a motion requesting dismissal for failure to state a claim with respect to which the Court can grant relief pursuant to that rule, as made applicable to this Adversary Proceeding by Fed. R. Bankr. P. 7012(b). The purpose of a motion to dismiss under Fed. R. Civ. P. 12(b)(6) isto test the "legal sufficiency" of a complaint. See, e.g., Gomes v. Univ. of Maine Sys., 304 F. Supp. 2d 117, 120 (D. Me. 2004); Siniscalchi v. Shop-Rite Supermarkets, Inc., 903 F. Supp. 182, 186 (D. Mass. 1995). "A Rule 12(b)(6) dismissal may be based on either a lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Banco Cooperativo de Puerto Rico v. Herrera (In re Herrera), 589 B.R. 444, 451-52 (B.A.P. 1st Cir. 2018) (internal quotations and citation omitted).

To avoid dismissal under Fed. R. Civ. P. 12(b)(6), a complaint must contain "sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

A court must assume a complaint's well-pleaded factual allegations as true and construe them in the plaintiff's favor, "even if it strikes a savvy judge that actual proof of those facts is improbable." Twombly, 550 U.S. at 556; see also Iqbal, 556 U.S. at 681 (explaining "[i]t is the conclusory nature of respondent's allegations, rather than their extravagantly fanciful nature, that disentitles them to the presumption of truth."); Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55-56 (1st Cir. 2012) (concluding that courts may only consider complaint's non-conclusory and non-speculative facts). The issue is not whether a plaintiff will ultimately prevail, but whether the plaintiff is entitled to present evidence in support of his claim. See Twombly, 550 U.S. at 563 n.8 ("[W]hen a complaint adequately states a claim, it may not be dismissed based on a . . . court's assessment that the plaintiff will fail to find evidentiary support for his allegations or prove his claim to the satisfaction of the factfinder.").

The Debtor alleges in the Complaint that the City assessed real estate taxes and related interest and costs against the Property in the amount of $120,564.19 (the "Tax Obligations") as of June 20, 2017. Compl. ¶ 8. On October 3, 2019, after obtaining a judgment from the Massachusetts Land Court, the City recorded the judgment with the Registry of Deeds, which the Debtor alleges foreclosed the Debtor's equity of redemption and transferred absolute title to the Property from the Debtor to the City, constituting the Transfer. Id. at ¶¶ 13, 16, 18. The Debtor further alleges that, at the time of the Transfer, the City appraised the value of the Property at $684,100.00 and that the fair value of the Property was substantially greater than the amount of the Tax Obligations. Id. at ¶¶ 19, 38. While it may dispute some of the factual allegations in the Complaint, the City does not contend that the Debtor improperly pleaded the fraudulent conveyance claims.³ Rather, the parties appear to agree that the issue to be decided is whether, as a matter of law, the Property transferred to the City by strict foreclosure of a tax lien in compliance with applicable state law may be recovered in bankruptcy as a constructively fraudulent conveyance where it has been alleged that the value of the property significantly exceeded the amount of the tax debt at the time of the transfer.

Massachusetts Strict Foreclosure After a Tax Taking

The Commonwealth of Massachusetts and its municipalities have a substantial interest in the collection of taxes. See generally Rosewell v. LaSalle Nat'l Bank, 450 U.S. 503, 522 (1981) (characterizing the collection of taxes as an "important a local concern"); In re Murphy, 331 B.R. 107, 120-21 (Bankr. S.D.N.Y. 2005) (describing the interest of taxing authorities in securing payment of outstanding tax obligations as "very important"). The Massachusetts legislature enacted a comprehensive scheme for the assessment and collection of property taxes and other charges bymunicipalities that can result in the strict foreclosure of a delinquent taxpayer's interest in a property. See M.G.L. ch. 60, § 1 et seq. A tax taking followed by strict foreclosure is the prevailing method used to collect unpaid property taxes in Massachusetts.⁴ See, e.g., Tallage Lincoln, LLC v. Williams, 151 N.E.3d 344, 351-52 (Mass. 2020) (citations omitted) (recognizing that "[t]ax sales used to be the predominant method of collecting real estate taxes, but they have fallen out of use, except in a few municipalities, and have largely been replaced by tax takings"). Strict foreclosure, in contrast to a mortgage foreclosure, "does not involve any type of sale; rather, the foreclosure judgment extinguishes the taxpayer's remaining interest in the property—the right of redemption—and converts the municipality's or third party's tax title into absolute title." Id. at 352. One Massachusetts court...