By Anthony L. Velasquez, Esq.
On January 29, 2014, the Honorable Gloria Burns, Chief Judge of the U.S. Bankruptcy Court in New Jersey, issued a decision in the case In re Oyster Bay Inn, Inc., D.N.J. Bkr. Case No. 13-22624 (GMB) which may have wide spread implications for property acquisitions that have occurred by way of a tax foreclosure within New Jersey. Specifically, the Court held that a New Jersey tax foreclosure judgment resulting in a grant of title to a successful lien holder is not automatically exempt from a subsequent challenge by the prior owner (foreclosed party) in a fraudulent conveyance claw back action.
By way of background, in 1994 the U.S. Supreme Court concluded in the landmark case BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) that where a standard mortgage foreclosure sale under state law has occurred the foreclosed owner cannot maintain an action for fraudulent conveyance under the bankruptcy code section 11 U.S.C. § 548(a)(2) that mandates any transfer must occur for “reasonably equivalent value”. The petitioner in BFP had argued that the price obtained at the sheriff sale was grossly different than the fair market value of the property, and thus it was tantamount to a fraudulent conveyance in violation of this bankruptcy provision requiring “reasonably equivalent value” be paid. But the High Court rejected this argument and found that where such public sale occurred in conformity within the standard, legal provisions and procedures of the state’s foreclosure laws then the price obtained is per se a fair and proper price and automatically constitutes “reasonably equivalent value”.
This 1994 U.S. Supreme Court decision has been uniformly applied in New Jersey with regard to mortgage foreclosures, and it has essentially barred claw back actions from disgruntled prior owners under fraudulent conveyance theories. However, in New Jersey the procedures with regard to tax lien foreclosures are vastly different from the mortgage foreclosure procedures. Except under special circumstances (for example, the existence of certain federal liens), a final judgment in a tax foreclosure does not automatically send the matter to a public sheriff sale but instead vests title in the successful tax lien holder, in and of itself. The tax lien holder generally takes that final judgment and records it with the county clerk as deed and title to the property. Since this occurs in the absence of a public sheriff sale, the Court in Oyster Bay Inn, supra, concluded that there is no true determination that the price paid automatically satisfies the “reasonably equivalent value” standard. Thus, there is no automatic bar to claw back actions on fraudulent conveyance theories when title vests in a tax lien holder and is stripped from a prior owner based upon a tax lien foreclosure final judgment. This decision may pave the way in New Jersey for increased post-judgment challenges to tax foreclosure judgments. It is strongly advised that parties involved in such complex tax foreclosure acquisitions seek competent legal counsel at the earliest point available.
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