The Case for the Tax Collector

Abstract

Bankruptcy may provide some relief for property owners who lose equity by tax foreclosure. If the property value at foreclosure exceeded the tax, the trustee in bankruptcy can try to avoid the foreclosure as a constructively fraudulent transfer “for less than reasonably equivalent value in exchange.” Avoidance recovers the value of the property for creditors subject to a lien in the property in favor of the tax creditor for the tax. From the tax collector’s perspective, however, a tax foreclosure transfer is a valid exercise of state power to levy and collect tax on real property which bankruptcy law should not disturb, even if the value of the property exceeds the tax. In BFP v. Resolution Trust Corp., the Supreme Court considered the conflict between state mortgage foreclosure law and the bankruptcy trustee’s power to avoid fraudulent transfers. This article considers the trustee’s power to avoid tax foreclosure transfers, an issue the Court expressly reserved in that case. It considers case law and statutory developments since BFP and makes the case for the tax collector. Due process, not fraudulent transfer law, provides the exclusive safeguard against unfair loss from a tax foreclosure transfer for property owners and their creditors in bankruptcy.

Keywords: bankruptcy, fraudulent transfer, property tax