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Transfer of Title in Tax Foreclosure Effective on Date of Court Order: NDNY Bankruptcy Case: Onteora Associates

Following Western District of New York precedent, a bankruptcy judge in the Northern District of New York concluded that, in a New York tax foreclosure, title to real estate does not transfer from the property owner to the taxing authority (here, a village) until the entry of a court order approving the transfer. In this unusual case, it was the debtor, not the village, arguing that the transfer took place earlier, when the redemption period ran. Onteora Associates v. Village of Fleismann, Northern District of New York Chapter 11 #09-63106; Adversary Proceeding #09-80076 (Judge Davis; decision August 11, 2011; on appeal).

The property in question in the Onteora case is a movie theater, two stores and an apartment, valued on the bankruptcy schedules at $331,717, and subject to $31,820 in property taxes and a mortgage of $62,400. There would appear to be substantial equity in the property. The village filed a tax foreclosure petition December 11, 2008. Under New York tax foreclosure law, a property owner has a limited time period - three months - to redeem the property by paying off the back taxes. In this case, the redemption deadline was May 5, 2009. The taxes were not paid by then, and the village filed for a default judgment transferring title on September 25, 2009. The property owner and the mortgage bank both opposed the application; the court disallowed the debtor's objection, but agreed with the bank and, on December 14, 2009, denied entry of a default judgment transferring title.

Meanwhile, Onteora Associates filed a single-asset chapter 11 petition November 4, 2009. The initial issue of dispute was whether Onteora Associates was co-owner of the property (the tax foreclosure was prosecuted against Richard and Brian Dowd.) The parties stipulated that the village could appeal to the Third Department the December 14, 2009 order of the Supreme Court, denying the application for default judgment, and that the automatic stay of bankruptcy would not apply to this appeal. More on that automatic stay stipulation later.

In any case, the village appealed the decision, with the consent of the debtor and the bank. The Appellate division reversed the Supreme Court, and ordered the entry of the judgment in favor of the village and against the bank and the debtor. The Appellate Court entered a default order transferring the property to the village October 21, 2010.

Now we need to back up a little. The October 21, 2010 order was the first order of any court transferring the property to the village in the tax foreclosure process. But the debtor had filed a bankruptcy adversary proceeding December 2, 2009 asking to avoid a fraudulent transfer. That is, in December 2009, the debtor claimed it no longer owned the property, that it had been involuntarily transferred to the village June 30, 2009, for inadequate consideration, and, therefore, the chapter 11 debtor-in-possession was authorized to avoid this transfer under bankruptcy code section 548. I am not sure where the June 30 date came from, as the deadline to redeem the property was, apparently, May 5, 2009.

Why the debtor filed this adversary proceeding in the first place, in as much as the petition was filed before any foreclosure judgment was entered, I am not sure. I would have thought the debtor could simply have taken the position that it was the owner of the property, that the tax foreclosure was stayed by the petition, and that the debtor was entitled to file a chapter 11 plan curing the property tax default.

The debtor's position was apparently further complicated by the lift stay stipulation signed by the village, the bank and the debtor December 29, 2009. The stipulation allowed the appeal to the Third Department in state court to go forward, and for "all parties to participate to allow the appeal of the Order to proceed to judgment."

In any case, after the Appellate division ruled in favor of the village and entered a tax foreclosure default order, the bankruptcy court concluded that the state court had conclusively determined that the debtor was, in fact, a co-owner of the property, a position the village had previously contested.

But the debtor was then in an unusual position. In other bankruptcy cases, where a debtor files a reorganization bankruptcy (chapter 13) to pay off property taxes, the taxing authority has attempted to show that, on the petition date, the debtor was no longer owner of the real estate, and the debtors asserted that the property was still titled to them, and had not yet been transferred. The debtor can only cure a default on property they own; if they do not have an interest in the property, because it has already been transferred, the debtor's only option is to avoid the transfer as constructively fraudulent. See, for example, my blog August 11, 2010.

But here, it was the debtor claiming that the property had already been transferred when the petition was filed, and the village arguing the position that the property did not transfer until a year later, when the default judgment was entered. Apparently the lift stay stipulation is interpreted by the parties and the court to mean that the village was not prevented by the automatic stay of bankruptcy from receiving title to the property post-petition, by way of the October 21, 2010 state court default judgment.

The bankruptcy court followed the 2008 decision of District Court judge David G. Larimer of the Western District of New York (Rochester) in
Wisotzke v. Ontario County, 409 BR 20, which upheld Rochester Bankruptcy Judge Ninfo's decision In Re Wisotzke, 392 B.R. 39 (Bky.W.D.N.Y. 2008), as well as the Northern District of New York bankruptcy court decision Martyak v. Tioga County, 432 BR 25 (2010.) These cases hold that in a tax foreclosure, the property transfers when the court enters its default judgment, not before that.

Accordingly, the debtor's fraudulent transfer claim was denied, because the transfer took place after the petition was filed, and the lift stay stipulation apparently prevents the debtor from stopping the post-petition transfer of the property to the village.

Stopping a tax foreclosure through a chapter 13 bankruptcy action is a complicated and delicate situation, as this case shows. If you are in a tax foreclosure and wish to see if a bankruptcy can stop the process and allow you to cure the default, please see the chapter 13 page of my web site. You may also contact me for a phone consultation of your situation, at no charge.

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